Volkswagen sees boost in Kenya car sales from cost of loans cap

German automaker Volkswagen says the recent regulatory cap on cost of loans could boost sales of its locally assembled cars.

The Wolfsburg-based carmaker — which plans to start local assembly of its Polo Vivo units in Kenya by the end of this year — reckons that the interest rates regulation is likely to make its cars more affordable than it would have been when the rates were free floating.

Volkswagen says the Kenyan facility will have a production capacity of up to 5,000 units per year.

“With the Kenyan government topping the maximum interest rates that banks may charge this will help with affordability,” Volkswagen said in response to queries from the Business Daily.

“Our partner DT Dobie who distribute the cars for us will also explore all feasible financing options.”

The Banking (Amendment) Act 2016, which commences tomorrow, sets the floor for deposit rates at 70 per cent of the Central Bank of Kenya base rate and a ceiling for lending rates at four percentage points above the benchmark rate.

The new law effectively reduces the cost of loans from highs of up to about 24 per cent to about 14.5 per cent based on the current Central Bank Rate.
Commercial Bank of Africa has based its cost of loans on the Kenya Banks Reference Rate, meaning their effective cost of loans is 12.9 per cent.
The high cost of loans has been a major drag on the new cars market in Kenya, as it pushes their cost above the repayment ability of most potential customers.

READ: Volkswagen makes comeback in Kenya car assembly

DT Dobie Kenya, the franchise holder for Volkswagen in Kenya, already has partnerships with local banks to develop tailored customer auto financing solutions.

The firm is part of the Toyota Tsusho family and holds other brands such as Dodge, Jeep, Mercedes, Chrysler, Greatwall, and Jeep.
It has been importing Volkswagen vehicles fully built from markets like South Africa.

Volkswagen South Africa CEO Thomas Schafer last week said the German multinational will later this year start assembling some of its models at Thika-based Kenya Vehicle Manufacturers plant, having stopped local assembly in the 1970s.

Uptake of asset financing remains low in Kenya due to high interest rates, forcing most small and mid-sized businesses to depend on short-term loans, according to a survey.

“The preferred source of financing for a large number of SMEs is overdrafts despite the fact that banks have introduced several trade finance and asset finance products designed for the SME market,” says the World Bank-backed FinAccess study published in September 2015.