A car is not a luxury, but a means of lending money

The boom in consumer lending continues in Azerbaijan. People borrow money to buy whatever they can: mobile phones, furniture, white goods, computer equipment... But the greatest demand is probably for credit to buy cars. Even today, as the notorious financial crisis spreads across the world, there are queues at Baku showrooms to buy cars on credit.More cars, beautiful and newAccording to information from the Azerbaijani Transport Ministry, 250,000 cars were imported to Azerbaijan from 2004-2007. At present, 773,000 cars are registered in Azerbaijan, and there were 71 cars per 1,000 people in late 2007. The explanation for the high demand for cars on credit is quite simple. And we should begin by saying that, at present, the annual income of the average Azerbaijani makes it impossible to save enough money to buy a car over the relatively short period of two or three years. For example, according to the State Statistical Committee of the Republic of Azerbaijan, the monetary income of the Azerbaijani population from January-October 2008 was AZN 16,504.2 million, which equals AZN 1,930.7 per capita. 65.2% of this income was spent on consumer goods and 9% on taxes, social security and other expenses.And because a new car, even a modest one, costs at least AZN 11,000, the saying that "a car is not a luxury but a means of transportation" does not hold for many people. True, the Russian-made VAZ-2107 is relatively cheap on the Azerbaijani market and costs AZN 7-8,000. However, the good old "sevens," which are effectively the same as in the Soviet era, do not match the tastes of modern-day buyers. Of course, roughly the same money will buy you a relatively upscale, albeit second-hand, European or Asian-made car. But then you risk spending a lot on maintenance. All these factors brought about a trend which took final shape last year: Azerbaijanis began buying increasing numbers of new cars. And the extra import duty on second-hand cars, which was introduced in late 2006/early 2007, only strengthened this trend - encouraging dealers to introduce simplified methods of lending money to consumers.In fact, the car loan, as a banking product, is a relatively young service. Just a few years ago, buying a car on credit at an acceptable rate of interest was difficult, and only a few banks issued car loans. Today, the car loan occupies top position in the list of banking services for individuals, and virtually all the showrooms offer cars on credit. Statistically, more than 60% of the cars in Azerbaijan are purchased on credit (Fineko). Given that the interest rates on car loans are offset by rising prices and inflation, the customer does not really pay over the odds for the product and monthly instalments are not particularly burdensome for the family budget. Car loans enable customers to use the car today and pay tomorrow. Incidentally, car loans are very popular abroad, and the number of cars sold on credit amounts to 70% of total sales. In the United States and Europe, credit purchase is the only way for many people to buy the model they like quickly and affordably.The demand for car loans is growing in Azerbaijan too. The joint operations of showrooms and banks, which are popular all over the world, are gaining a foothold in Azerbaijan too. Aware that they operate in a highly competitive environment, dealerships and showrooms do their best to win over new customers and keep existing ones. They offer unique buying options; sometimes the buyer gets a free insurance policy or free oil changes for one year, maintenance discounts or company souvenirs. Sometimes dealers offer loans on better terms than banks' standard loans.There is no sales slumpAs we can see, the demand for new cars and, accordingly, car loans, is high. But what is on offer? We will have to touch upon the matter of the unfortunate global financial crisis to supply the answer to this question."In October 2008, global car sales fell to a 30-year low on world markets," say early-November reports from multinational car manufacturers.The company most affected was general Motors, with a 45% fall in sales; Ford Motors reports 30%. Plummeting sales on the US market were bound to affect Japanese manufacturers too: Nissan Motors announced a 33% fall compared to last year, Honda's sales fell by 30%, Toyota Motors' by 23%.Analysts point at falling personal incomes, mass lay-offs, higher fuel prices and the sense of insecurity as the main causes of the dwindling demand.Thankfully, the situation in Azerbaijan is different. The local offices of leading manufacturers say that no fall in demand has been observed so far.In the mean time, the National Bank of Azerbaijan has instructed the country's banking sector to tighten the supervision of, and requirements for, issuing car loans, say sources in banking circles. The National Bank is trying to reduce the risks faced by Azerbaijani banks and to protect them from the effects of the international financial crisis. The banks which are most active in issuing car loans have been forced to revise loan terms, and some of them have stopped issuing credits altogether.One of the requirements of the National Bank was to reduce the repayment period from five years to three and to raise the current down payment requirement of 20%. Because of the cut in interest rates to 10% by the National Bank, interest rates for car loans should be lowered to 15%, suggests the National Bank. So, the decision to reduce the loan repayment period was the only concession to the financial crisis made by showrooms which sell cars on credit.The Toyota showroom reports that their sales personnel sell cars with loans from four banks: Nikoil Bank, UniBank, AGBank and Pasha Bank. Cars are sold on credit at an annual interest rate of 24%, with an initial payment of 30% and a repayment period of 2 years, whereas, previously, interest rates were 19-21%, with a down payment of 10% and a repayment period of 5 years. The showroom also noted that "because these banks are short of cash for loans, talks are under way with other banks."The Subaru showroom works with Bank Respublika, which issues 5-year loans at an interest rate of 21% and a down payment of 30% (before, only 20% was paid up front, and the interest rate was 22%). We were told at the showroom that "car prices can change only if the manufacturer makes appropriate changes in its policy;" this is now stable, thus no price changes should be expected.The hyundai showroom works with the Bank of Baku. The down payment here is 25%, and 3-year loans are issued at an annual interest rate of 24%. In the past, it was 20%, 22% and 5 years, respectively.The Nissan and Ford showrooms work with the NBC Bank on the following terms: down payment 20%, interest rate 23%, and repayment period 5 years. "A revision of the loan repayment period and interest rates is unlikely," the showrooms and the bank told us.Finally, Porsche showrooms work with Bank Standard, and there has been no change in either interest rates or the repayment period there. At present, the down payment depends on the cost of the car. The repayment period is 5 years and interest rates vary from 19% to 22%. However, Bank Standard told us that it has raised its car loan interest rates from 18% to 19%, the down payment requirement from 20% to 35%, and they have reduced the repayment period from 5 to 3 years. The bank said that all the terms for car loans (percentage rates and repayment periods) will be revised in the near future, although agreements already made will not be revised.The Nikoil Bank offers 1-year car loans in euros at an annual percentage rate of 20%. The bank used to issue longer-term credits, but has now suspended them.However, a number of banks have suspended car loans. These include Atra Bank, Azerbaijan Senayye Bankasi and Kapital Bank. We were told at Kapital Bank that contracts already made with customers will remain in force without revision. The bank issued credit on the following terms: 2-year loans in manats were issued at an interest rate of 13% and 3-year loans in manats were issued at an interest rate of 12%.Strategic car loansWhen the suspended car loan programmes will resume is uncertain. We should note that, for example, a number of Russian banks have also suspended their consumer credit programmes, citing "losses which these services incur during the economic and financial crisis." Other banks have tightened requirements for borrowers. Now they will focus on the reputation of the company where the potential borrower works, the field of his or her activity and the level of university education. However, Russians remain cautiously optimistic about the future of the car market, and only 30% have decided to postpone the purchase of a car. Unfortunately, we have no equivalent statistics for Azerbaijan. What we do know, though, is that the showrooms will lose profits if banks suspend all their car loan services. Rashad Aliyev, general Motors the Toyota Centre in Baku, said that, because at least 60% of the cars in the country were sold on credit, "Sales are likely to at least halve if the banks suspend car loan services." Many dealers have already announced special, discounts for payment in cash. However, in Mr. Aliyev's opinion, "it would be problematic to make up for the absence of car loans with these types of offers."There are other statistics too. In the first three quarters of 2008, almost 55,000 cars were imported to Azerbaijan and the total number of cars imported is expected to reach a level of more than 80,000 by the end of the year. Problems with sales can cause problems for the national budget too. In August alone, car imports earned the national budget $40 million in customs revenues.Obviously, neither car manufacturers, nor dealerships, banks or the government are interested in the total suspension of consumer credit services in general Motors loans in particular, especially as the changes in sales terms in the showrooms of Azerbaijan have not affected prices. However, the annual interest rates on car loans remain as high as ever and, as we may infer from the above-mentioned facts, vary between 19% and 24% despite the National Bank's recommendation to cut interest rates to 15%. Let us also note that in neighbouring Russia, you can get a car loan at interest rates from 7% a year!Average interest rates on car loans for new cars there vary from 13.5% to 17.5% a year in roubles and 9%-11% a year in dollars or euros. But there are also some truly fantastic schemes: one of the showrooms asks its customers to pay 50% of the price of a Ford Fusion or Ford Fiesta upfront and take out a loan to pay the rest at only 4.9% a year! In other words, Azerbaijani dealerships certainly have room for improvement, especially as, despite all the concerns over the liquidity crisis, many banks still consider car loans a strategic element in the development of their businesses. This means that more dealerships will enter partnerships with banks and offer good car loans, which will spur competition in the market and should eventually drive interest rates down.