December 5, 2002	Thursday	Ramazan 29,1423

KARACHI, Dec 4: A policy framework for micro-finance for housing is being developed by the State Bank to provide affordable loans to low income groups, sources here said.

According to official estimates, about 65 per cent of the country’s population of 140 million has an untapped demand for micro-credit of about Rs9 billion annually.

The sources said that the policy guidelines were being evolved on the basis of a study prepared for World Bank on housing finance and consultations with the stakeholders.

The report points out that the potential benefits of the new strategy would accrue to both the banks and the households alike, providing a breath of fresh air to a system of intermediation and credit that is “presently stuck up at too shallow level.”

A major breakthrough is designed to link macro- economic objectives for the financial sector with local reforms programme and to test innovative ways of overcoming barriers to housing finance for low and moderate income groups.

One of the approaches is to launch new housing finance product, like Home Linked Savings Account (HLSA) in a designated scheduled bank or Housing Micro Finance Bank.

Any individual, major or minor, not owning a house anywhere in Pakistan should be able to open an housing account that could earn a profit of, say, 12 per cent per annum, which could be added to the principal amount.

The rate for housing finance loans should be, say, 3-5 per cent less than the market rate for the housing loans depending on the amount.

Other features of the proposed scheme are: Instalments paid on loans shall be deductible from income tax. The lower the amount of loan, the higher should be the multiple of accumulated savings. In other words, loans up to Rs50,000 should be advanced with a saving of Rs12,500 i.e four times the savings; the accumulated savings of Rs66,000 should make the borrower eligible for a loan of Rs200,000 or three times the accumulated savings.

The amount saved can be withdrawn at any time for financing any specific activity relating to housing.

It has also been proposed that the amounts saved and the profits earned in HLSA should be exempt from all types of taxes including income tax/zakat.

Under the scheme, a minimum amount, say Rs300 per month, should be saved for at least 3-5 years. The amount saved should bear some relationship to the cost of plot, construction, addition or improvement planned by the individual. There should be no maximum limit on amounts saved.

The study has identified two forms of collateral. The saving accounts will be act as collateral, covering whatever proportion of credit is desired. And the eligibility criteria would vary according to income and size of the credit. In addition, sanads, lease documents and group guarantee, if nothing else is available, may also serve as collateral. The payment of the lease charges could also be included as part of the loan.

Presently, the traditional mortgage finance fails to reach the low income groups, accounted for by three major factors: debt servicing of a commercially built housing unit far exceeds the capacity of low-income household to pay. The property ownership is not supported by full legal title. In case of scheduled banks, small loans entail higher transaction costs and result in less revenue.

To improve the housing conditions of the low-income population, innovative approaches are being considered. First of all, loan amounts may be related to the ability of the individuals to pay, for example, for house improvement or expansion. A loan, for construction or even the purchase of materials for a room, a plot, wall or roof, may be extended for short periods of 3-5 years. Such retail business involves high administrative costs and the banks may prefer to lend through financial intermediaries such as NGOs.

The informal housing sector provides low-cost housing opportunities in squatter areas around the cities. Land in such settlements is cheap, because land occupation is informal and illegal.

Construction costs are low, because the squatters do not have to follow building rules and regulations and can make use of materials, which are readily available. If security of tenure in a squatter settlement is provided, the report says, residents would gladly invest their resources in improvement of their houses, developing the settlements into decent low-income neighbourhoods.

The report also proposes that the authorities should, however, provide infrastructure, whose absence creates environmentally hazardous situations. Such projects, the report adds, should be called sites-and-services scheme.

Under the scheme, cost savings measures can also be adopted. For example, the cost of the land can be reduced by providing small plots and locating projects on the urban fringe where land values are low.

In these areas, the cost of infrastructure and housing are low because of the quality of services required.