How to finance your vehicle fleet in Africa and the Middle East
Accessing finance to fund a fleet in AME is challenging. Leasing products are scarce anywhere other than South Africa and the UAE. Not many banks offer car finance and if they do, in Africa at least, interest rates are high.
In the Middle East, cars are still seen as a status symbol and people want to own them. Leasing goes against the grain. Banks operating across the Middle East must offer Sharia-compliant finance products, which includes automotive finance. Under Sharia law, lenders are not permitted to charge interest as it goes against the principle that money must be earned through effort. The closest equivalent to a leasing offer is “ijara”, which is based on part of the payment going towards the final purchase and there are Sharia compliant equivalents to operating leases, hire purchase and personal contract purchase.
The Middle East is characterised by a divergence of economic and socio-politically territories with three primary regions: the GCC (Gulf Cooperation Council), the Levant (Syria, Lebanon and Jordan) and ROM (simply referred to as the “Rest of the Middle East”. Toyota and Hyundai are the most popular car brands in the region, followed by Nissan. Luxury brands like Mercedes and Bentley also feature prominently.
Car dealerships rule in the Middle East
Throughout the Middle East, the dealership remains the primary source of contact for fleet customers on leasing deals. Dealer franchises are controlled by a handful of families and usually on an exclusive basis.
Company car schemes are common in the UAE where Western and foreign companies operate and 90% of customers are expatriates on fixed-term work contracts. Companies prefer to pay monthly allowances for cars so as to not carry large amounts of assets on their balance sheets. Allowances are paid through salary, which goes under expenses.
In Oman, where fleet cars make up 40% of the market, Orix Oman offers financing for new and used cars and commercial vehicles. Leaseplan has a presence in the UAE but not a large one. Contracts are typically open with no real end of contract charges or excess mileage. In 2018, the GCC, UAE and Saudi Arabia launched VAT and other countries have followed. Cars, vehicle rental and fuel are all included within what attracts the 5% VAT rate.
Africa’s promise has yet to flourish
The trade body representing organisations involved in car and truck rental or fleet management in South Africa (SA) is SAVRALA (the Southern African Vehicle Rental and Leasing Association). Its leasing members include: Absa Bank, Avis Fleet, Bidvest Bank, Eqstra Fleet Management (including Amasondo Fleet Services, Eqstra Corporation’s black economic empowerment division), Fleet Africa, Isipho Capital Holdings, Liquid Capital, Nedbank/Nedfleet, Pace Fleet Services and WesBank. Between them, these companies operate around 600,000 vehicles and buy almost 20% of all new vehicles sold in SA every year.
In North Africa, including the MAGHREB countries of Algeria, Libya, Mauritania, Morocco and Tunisia, are more mature markets for leasing, with some companies like ALD and Arval being present next to captive companies from OEMs, mainly Renault, Volkswagen and Peugeot and Stellantis. Algeria used to be the second largest car market in Africa (second to SA) but the government’s 2014 banning of the import of vehicles to push manufacturers to build factories in the country skyrocketed the price of new cars. The ban has now been lifted and imports have resumed, thus prices are starting to fall again.
Elsewhere in Africa, high taxes - on imported vehicles (sometimes as high as 220%) and new vehicle purchases - along with high interest rates makes accessing vehicles for the general public virtually impossible. There are few leasing products available and some countries have government bans on personal leasing schemes.
Vehicle financing is available in Nigeria but it’s expensive. Owing to a lack of domestic vehicle production, Nigeria is dependent on imports to meet domestic demand. Only 10% of vehicles imported are brand new, 90% are second-hand. Some banks have recently introduced promotional offers, in partnership with selected vehicle dealers, enabling customers to access finance at a discounted rate for certain vehicles and models.
In terms of leasing and rental, fleet owners options are limited to a handful of providers including AVIS International franchises.
Some OEMs were starting to put captive finance models together in partnership with banks in Nigeria and Ghana, for example, but the success of these schemes has been thwarted somewhat by the pandemic.
So, it’s up to the disruptors to step in and offer a lifeline to small businesses. Such as FlexClub, for example, which offers a membership subscription Drive-to-Buy scheme for drivers operating a small business on a digital platform like Uber (currently only available in South Africa and Mexico). Africa is home to some of the fastest growing economies in the world with young populations and growing middle classes. These characteristics alone make it a land of opportunity.