This article first appeared in Wealth, The Edge Malaysia Weekly on February 26, 2024 - March 3, 2024

New motor vehicle sales hit an all-time high of about 800,000 units in 2023, which is good news for car manufacturers, distributors and banks.

However, what many may have overlooked are the fast-growing used-car business and the auto financing industry’s underserved market. The underserved largely comprise fresh graduates and small business owners who cannot get bank financing as they lack a track record or collateral.

If done well, better access to financing for used cars can advance the national agenda of financial inclusion, which is aligned with the main goal of digital banks. But how these parties will work together remains to be seen.

Unsurprisingly, contributing factors to the surge in used-car sales are access to financing and car affordability. The latter could be partly due to the lower interest rates in recent years.

Ian Wong, founder and CEO of licensed financial planning firm Uno Advisers, says new car prices could be too high for those in the underserved segment. So, they opt for used cars and do not mind paying a higher interest rate.

“Inflation in Malaysia has been largely kept under control, so I don’t think it has affected car prices too much. But global inflation has affected raw material costs, causing car manufacturers to increase prices,” he adds.

Technology is another factor that has fuelled the growth of the used-car market. This is reflected in the emergence of online platforms such as MyTukar and Carsome, which have greatly enhanced the user experience and the used car sales process. They also provide financing to buyers by leveraging alternative information, such as transaction data.

There isn’t much information online on the rather fragmented used-car market. The available data include statistics provided by India-based market research company Mordor Intelligence.

Citing Datuk Tony Khor Chong Boon, president of the Federation of Motor and Credit Companies Associations of Malaysia, Mordor Intelligence pointed out that 347,000 used cars were sold between January and May 2021, seemingly on a par with the new car market in terms of volume. It also said Malaysia’s used-car market was valued at US$25.14 billion that year and was expected to hit US$35.25 billion by 2027, or a compound annual growth rate (CAGR) of 5.4%.

Another India-based market research firm, Ken Research, expects the market to grow more aggressively at a CAGR of 8.5% from 2022 to 2027. It added that the most desired price point for used cars was less than RM30,000, while the most popular brands are Perodua, Proton, Honda, Toyota and Nissan.

Teoh Seng Hee, executive director and chief finance officer at a non-bank lender with a focus on the used-car market, ELK-Desa Resources Bhd, says the demand for used-car financing has been huge as many people need financing to buy cars but are not eligible for a bank loan.

“The demand for used-car financing solutions remains very high, far outstripping supply. It is an area underserved by the financial institutions and the market is large enough that hire purchase financing solution providers like us can carve out a niche and thrive,” he adds.

Ernest Chew, chief financial officer at Carro, the parent company of online used-car platform MyTukar, resonates with Teoh’s view, saying that the used-car market largely consists of underserved and unbanked customers, many of whom are without a credit history.

He adds that online platforms are not competing with banks. Both parties work together to reach out to customers with different credit histories.

“Banks focus on the premium mass market. If anything, alternative financing options like us that leverage technology can help banks extend [loans] to previously underserved markets. We broker most loans on our platform to banks, and have shown how we can partner with banks to help serve the underserved,” says Chew.

He adds that the trust established between Malaysian consumers and online used-car platforms is strong. MyTukar, for example, sold 350 vehicles in three days during its AutoFair weekend from Jan 12 to 14 this year. “About 30% to 40% of them bought used cars without seeing the car itself. They trusted us.”

If done properly, used-car financing can enhance financial inclusion as it allows more people to access financing solutions to buy a much-needed vehicle for their own use. “It provides an opportunity for people who otherwise may not get the financing they need to own a car and thus, improve their socioeconomic well-being,” says ELK-Desa’s Teoh.

Industry players point out that some progress has been made in this space. But more could be done. For instance, Carro’s Chew says there still isn’t a proper e-hire purchase and digital shariah-compliant products for used cars in Malaysia, despite a sizeable market waiting to be tapped.

An e-hire purchase solution would allow consumers to apply for a loan to purchase a used car online, thus providing them with more convenience and accessibility.

An interesting solution in the used car market is the personal contract purchase (PCP). Compared to a conventional hire purchase loan that comes with standard loan terms, PCP comes with diverse terms and structures for the vehicle that allows ownership flexibility, including a buyback option, balloon payments and leasing feature, says Effendy Shahul Hamid, CEO of group consumer and digital banking at CIMB Group Holdings Bhd.

“It gives consumers a wider range of choices to select products that best suit their financial situation, preferences and vehicle ownership goals. This collaborative model not only allows both parties to play to their own strengths, but also enhances product diversification for consumers,” he adds.

Effendy says banks and PCP providers or car manufacturers can collaborate to create innovative financial solutions, such as white-label financing. In this case, car manufacturers could manage the distribution, supply and purchasing terms of their vehicles, while banks offer support by providing financing through their established credit risk management and loan collection or repayment infrastructure.

He adds that the use of modern technology and digitalisation will elevate the way financial services are designed and offered, and expects to see disruption in how auto financing is accessed and distributed in the near future. “The consumer private vehicle industry has traditionally been a physical one, but we’ve started seeing it becoming more digital in recent years, as automobile-related platforms and ecosystems become more prominent.”

ELK-Desa manages risk by concentrating on the small-value used-car sector, where the company caps its financing at RM35,000 per hirer.

Prior to the pandemic, ELK-Desa’s non-performing loan (NPL) ratio was below 1%. Having said that, Teoh says its NPL ratio saw an increase during the Movement Control Order period as a result of the company’s decision to allow some accounts to transition to non-performing status, leading to higher impairment amounts and, consequently, an elevated NPL ratio.

“It’s important to note that, unlike banks that provide financial assistance to borrowers through mechanisms like moratoriums, our accounts were classified as non-performing. Nonetheless, our collection has remained stable and our NPLs are on a healthy downtrend,” he says.

Carro’s Chew says MyTukar manages risk partly by determining interest rates based on risk-adjusted pricing, market demand and customer target segment.

“Our NPL is generally below 2%, [similar to that of] typical Malaysian commercial banks. That’s because fundamentally, we understand cars. From pricing, residual value, vehicle conditions, cost of insurance, cost of maintenance to even typical borrowers’ repayment behaviour, we use all these data to help us assess credit risk,” he adds.

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