Accessing finance to buy cars in Africa

Accessing finance to buy vehicles for fleet owners and individuals in most African countries is difficult. Banks are reluctant to lend and when they do it’s at punitive interest rates – as high as 30% in some cases.

In a 2018 Deloitte & Touche report: Navigating the African Automotive Sector, the management consulting firm called Africa “the final frontier for the global automotive industry”. A rise in income levels, the emergence of a middle class, growing population size and positive economic outlooks make it an attractive materialising opportunity – if only the access to finance conundrum can be solved.

In Ethiopia, Kenya and Nigeria, 8 out of 10 imported vehicles are second-hand. Fewer than 22% of adults in Ethiopia have an account at a financial institution. In Kenya over 55% (55.2%) do and 44.2% in Nigeria.

Automotive Industry Sector Leader of Emerging Markets & Africa at Deloitte, Dr Martyn Davies, explained what needs to happen for the automotive sector to emerge properly:

“You have to cut second-hand importation and put a better regulatory regime in place to manage it, otherwise you’re just going to kill any new car sector. OEMs must be incentivised to come in on the promise of sales. Those sales aren’t going to take place without a full ecosystem and part of that is finance.”

Ethiopia’s appreciating assets

In Ethiopia, vehicle financing is not readily available and there is currently a ban on personal leasing schemes. The country has a population of around 100 million, making it the second largest population (after Nigeria). Interestingly, second-hand vehicles appreciate in value because of high import duties and limited supply.

Vehicle affordability is further prohibited by high vehicle taxes of sometimes more than 220%, depending on engine size. Imported vehicles can cost as much as three times the retail price of the same vehicle outside of the country. Illegal imports are common.

Driving the sales of motor vehicles in Kenya

Vehicle financing is available in Kenya to a small extent. A healthy, continued increase in GDP per capita between 2000 and 2020 has resulted in an increase in private consumption and driven the sale of motor vehicles.

The volume of imported cars and motorcycles has been on the increase due to the availability of attractive credit from financial institutions and the rise of the middle class.

It’s estimated that 80% of Kenya’s total vehicle fleet is second-hand with the average age of those vehicles being 15 years. This has resulted in high levels of pollution, frequent breakdowns and the development of a large, bogus spare parts industry.

Expensive borrowing in Nigeria

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. According to Deloitte’s report, there is no culture of maintenance; people drive their cars until they break down and then fix them.

Through recently introduced promotional offers by banks, in partnership with selected vehicle dealers, customers can access finance at a discounted rate for certain vehicles and models.

Davies says: “Maybe the OEMs will put their own captive finance models together, or partner with a bank, which will help matters. I think you’ll see some movement in this respect in Nigeria and Ghana in the near future.”

There are alternative schemes emerging, such as FlexClub, which offers a membership subscription Drive-to-Buy scheme for drivers operating a small business on a digital platform like Uber but it’s currently only available in South Africa and Mexico. CEO and Co-founder Tinashe Ruzane says that while they don’t have any current plans to open in other African countries, it remains a possibility.

Until that happens, the options drivers face are expensive loans (if they can get them), costly daily rental or borrowing from friends, family or classified ads.

In light of Africa’s industrial assembly capabilities, there’s a willingness to strengthen its automotive sector. Coupled with a growing keenness among citizens and businesses to own vehicles, the polar opposite to what’s happening in the rest of the world, Africa truly is the final frontier for the automotive sector.

Image: traffic in Addis Abeba, Ethiopia, February 2020 (copyright: Shutterstock)