Boost for banks as car buyers flock to auction yards

Kenyans put off by a sharp rise in car import prices due to a severely weakened shilling are flocking to banks’ auction yards for cheaper units repossessed from loan defaulters, handing a boost to the lenders hoping to recoup their debt.

The prices of used cars have jumped on weak shilling and fresh taxes, speeding up deals at auction centres as buyers rush to benefit from bargains of up to 25 percent.

Auctioneers and bankers said there has been increased demand for used cars on the back of market prices of models such as Land Cruiser V8, Mercedes Benz C-Class, Subaru Outback, Nissan X-Trail, Mazda Demio (Petrol), and Toyota Vitz jump by nearly 50 percent since January.

Read: KRA will allow used car importers to defer taxes

This has presented an opportunity for banks and auctioneers, many of whom are seeing a glut of repossessed property, to sell cars of customers who have defaulted on loans.

“The vehicle market is doing much better for repossessed vehicles attached for debt compared with immovable property. This has to do with the value,” says Joseph Gikonyo, the proprietor and manager at Garam Investments which has been in business since 1994.

“People are holding onto their vehicles longer due to the rising prices and so there is demand for vehicles being sold through auction. If you are looking for a vehicle and go to the open market, the prices being quoted are ridiculously high so you are bound to end up in an auction where you will get a bargain.”

The increased car deals at auction centres are in contrast with that of immovable properties such as residential houses, land, and industrial buildings where auctioneers say they are not getting buyers as fast as banks are repossessing.

Increased car auction deals present a win for banks in an environment of rising defaults among borrowers, which is a reflection of the struggles facing households.

Top banks, including KCB, Co-operative Bank of Kenya, and NCBA, this week put on auction 113 vehicles in a race to cash in on the increased demand. The vehicle’s combined reserve price, which is usually 75 percent of the market price, was Sh339.9 million.

NCBA is auctioning 38 vehicles valued at Sh126.68 million while Co-op has put on sale 47 vehicles with a combined value of Sh126.1 million. KCB is targeting Sh81.16 million from auctioning 28 vehicles.

“Cars are moving and we are finding better performance on auctions these days than historically. Imported cars have become very expensive and so auction cars have become quite attractive,” said John Gachora, chief executive at NCBA Group who also chairs the Kenya Bankers Association.

Several car dealers were by April quoting Land Cruiser V8 at Sh16.5 million compared to December’s Sh11.5 million, translating into a 43.5 percent jump. Nissan X-Trail prices were up 17 percent to Sh2.8 million.

The prices are set to maintain an upward trend as the shilling continues to slide against the dollar, making imports more expensive.

Central Bank of Kenya data is quoting the shilling at 147.14 units to the dollar, meaning that it has shed 19.3 percent since the year started.

The cost of servicing loans has been going up, with banks having raised their base lending rates for the seventh straight month to close June at 13.31 percent, putting borrowers on the edge.

Borrowers are also grappling with new deductions such as a 1.5 percent housing levy and increased pension contributions.

The Kenya Revenue Authority (KRA) on November 1 hit used car importers with a fresh round of tax increments after capping the maximum depreciation rate at 65 percent of the value of the vehicle from the previous 70 percent.

Read: 193 cars among goods to be auctioned on Tuesday in Mombasa

The new development has set the stage for another round of increases in prices of second-hand vehicles, which account for more than three-quarters of cars on Kenyan roads after import duty was raised to 35 percent from 25 percent in July.

The directive has seen taxes rise by more than 14 percent for vehicles manufactured in 2016 – largely imported by dealers currently because of Kenya’s eight-year age limit for used cars.

An importer of a Toyota Premio with an average retail selling price (CRSP) of Sh3.27 million is, for example, required to pay an estimated Sh1.096 million in taxes, up from Sh939,221 previously.

This is a rise of Sh156,537, or nearly 14.29 percent, in import, excise, and VAT charges, excluding import declaration fees and railway development levy. The additional costs are being passed onto buyers, according to dealers.

The above value assumes the car’s engine capacity is 1800cc as the excise duty ranges between 20 percent and 35 percent of the customs value and import duty based on the size of the engine.

→ (email protected)