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Vehicle leasing grows on higher showroom prices

Friday, March 15, 2024 — updated on August 22, 2024 - 3 min read

Isuzu East Africa Managing Director Rita Kavashe (left) and Co-operative Bank of Kenya Retail and Business Banking Director William Ndumia addressing journalists on March 13, 2024 at Isuzu East Africa company in Nairobi. PHOTO | LUCY WANJIRU | NMG

By Patrick Alushula

Business Reporter

Nation Media Group

Thank you for reading businessdailyafrica.com

Businesses are increasingly turning to vehicle leasing as an escape route from the elevated prices of buying new units to run their operations.

Isuzu East Africa Managing Director Rita Kavashe says the environment of rising interest rates has applied brakes on demand for new vehicle purchases given that nearly 95 percent of the acquisitions are dependent on asset financing.

She said vehicle demand from sectors such as public transport, agriculture and education is beginning to rebound but clients are preferring leases as opposed to outright purchasing.

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In leasing, a client pays a regular amount for a specified number of years and returns the vehicle to the dealer at the end of the term. The contract may or may not cover related services such as repairs, maintenance and insurance. One of the biggest advantages of leasing is that it allows a client to spread out the spending on transport costs over a number of years, improving cash flows and avoiding the upfront cost of outright vehicle purchases.

“PSV [public service vehicle] sector for example has been depressed for a long time but now we are seeing customers begin to renew their fleets. But they are opting not for outright purchases. Because of economics, they are preferring to go for the leasing model,” said Ms Kavashe.

Read: Co-op Bank relaxes loan terms in deal with automaker Isuzu

“We think this (preference for leasing) will go on for some time when you look at the cost of loans. Interest rates have been very high and many of our customers have not been able to access funding.”

Ms Kavashe said many banks are charging interest rates of between 18 percent and 25 percent when customers go searching for asset financing deals.

New motor vehicle dealers registered a 14.84 percent drop in sales last year when rising interest rates and the weakening of the Kenya shilling made it more expensive for customers to make showroom purchases.

Data from the Kenya Motor Industry Association (KMIA) shows that the dealers, including Isuzu, CFAO Motors and Simba Corp, sold 11,370 units in the local market in the year ended December 2023. This was down from 13,352 units sold the year before. The formal dealers battled one of the toughest business environments last year when the shilling depreciated by 21.19 percent against the US dollar.

Isuzu’s sales declined to 5,340 in the review period from 5,968 in 2022. The dealer, which sells its namesake commercial and sports utility vehicles, however, raised its market share to 46.96 percent from 44.7 percent.

Read: Isuzu grows footprint with UD trucks dealership

This indicates that other companies registered a larger decline in sales. The business environment has improved slightly in recent weeks, with Kenya shilling rebounding to a nine-month high after the government announced that it had issued a $1.5 billion (Sh206 billion) Eurobond to settle part of the $2 billion (Sh275 billion) Eurobond that is maturing in June.

The Central Bank of Kenya data showed the shilling closed Wednesday at 139.49 units against the dollar, being its highest level since May 19 last year. Since the start of the year, the shilling has gained by 12.1 percent.

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