Pakistan – Housing Finance Quarter Review
Rapid urbanization in Pakistan has resulted in increasing the deficit of housing units. As per World Bank1 studies in year 2009, there was a backlog of 7.5 million housing units in Pakistan which is accumulating by 0.3 million per year.
Studies indicate that most of the housing finance is arranged through personal sources. The formal financial sector caters to only one to two percent of all housing transactions in the country, whereas informal lending caters to 10-12 percent of such transactions.
Although Pakistan has laws for land registration and transfer, the process is cumbersome at times, because of number of institutions involved. The reforms in the property title and land administrative procedures including improvements of the legal provisions, standardization of processes, and computerization of all relevant revenue records will help in enhancing financing from the formal sector.
Currently, land records are manually maintained leading to errors and omissions especially in rural and some urban areas. Resultantly, they have modest commercial value for the mortgagee financial institutions. The lack of efficient and reliable system of ascertaining the bona-fide of property titles has forced banks to limit the access of housing finance to a certain number of urban localities within the urban centres.
Majority of builders and developers are working as sole proprietorships or in partnerships with limited capital and informal corporate governance structures, which gives rise to illegal construction, unreliable building permits, and legally unprotected advance purchase of units.
The unstructured and unsupervised nature of business of real estate brokers/agencies, which could serve as natural arrangers for provision of financial services, is also a significant constraint to the provision of housing and housing finance. Consequently, it is difficult for financial institutions to verify the character, capital, and capacity of potential clients.
Risk assessment and portfolio valuation is also fragile, which is another factor for the lenders’ caution. As a result, financial institutions are reluctant to enter this market, which in turn causes scarcity of finance and constraints in the supply of housing. Housing Advisory Group (HAG) Recommendations, initiated in 2007, were a commendable way forward for the housing sector in Pakistan.
These recommendations were drafted keeping in view the issues discussed above. SBP, realizing its role in market development, has been making efforts to ensure effective implementation of these recommendations. As a result, separate Housing Finance (HF) PRs have been issued to give boost to housing finance.
Developer Finance Guidelines have also been issued to structure and streamline the Large-Scale Developer Finance (LSDF). Moreover, Mortgage Refinance Company (MRC) is now in its final phase of being incorporated.
Establishment of Housing Observatory is being pursued on priority basis. Also, SBP is actively involved in capacity building of HF industry through various workshops and training programs, which are being conducted throughout Pakistan.
At present, twenty-seven commercial banks, House Building Finance Company Limited (HBFCL) and one microfinance bank are catering to the housing finance needs. HBFCL is the only specialized housing bank in the country providing housing finance since 1952, while commercial banks entered the mortgage business in 2003. HBFCL is still the only institution with mandate to cater to the lower-middle and low-income groups.
Major Trends – Gross Outstanding
The gross outstanding finance as on June 30, 2014 of all banks and DFIs stood at Rs. 52.7 billion (Figure 1), compared to Rs. 52.2 billion as on June 30, 2013, showing an increase of Rs. 0.4 billion (0.79 percent) over the year. Of the total outstanding as of June 30, 2014, commercial banks accounted for Rs. 40.1 billion.
Private banks reported Rs. 19.9 billion followed by Islamic banks at Rs. 13.8 billion, public sector banks at Rs. 6.1 billion and foreign banks with Rs. 0.3 billion. The outstanding loans of HBFCL were Rs. 12.4 billion; down by 0.9 percent over the last year. Other DFIs had a meagre share of Rs. 0.1 billion in outstanding loans.
The data confirms that primary housing finance market in Pakistan is at nascent stage, which needs to be developed by creating enabling environment and initiatives by public and private sector.