August 21, 2003	Thursday	Jumadi-us-Sani 22, 1424

KARACHI, Aug 20: The Governor, State Bank of Pakistan (SBP), Dr Ishrat Husain, has asked the World Bank and the International Finance Corporation (IFC) to consider giving Pakistan a reimbursable long-term credit in rupees for lending on at adjustable rates to the banks that participate in housing finance programmes.

“We can begin modestly with $15 million or Rs1 billion and gain experience, sort out teething problems, remove snags and see if this makes sense and there is a demand for this product”, the SBP Governor suggested for setting up a Refinance Window at the central bank.

He was addressing here on Wednesday at the inaugural session of the two-day “Housing Finance Workshop”, organized by the IFC and World Bank. Leading housing finance experts from India, Bangladesh, Thailand and other countries are participating in this workshop.

The SBP governor also made an alternate proposal that the World Bank and IFC can come with partial credit risk guarantee for extending the maturity from 10 to 20 years. “But, the cost benefit ratio of this intervention should be such that it leads to sustainability rather than providing artificial crunches for a limited period,” he stressed.

Housing finance, he said, is gradually gaining ground in Pakistan and during last quarter April-June 2003, banks lend Rs600 million more than before. He attributed this trend to a visible improvement on supply side as banks are awashed with liquidity, steps have been taken to regulate demand side and a direction has been given at the policy level.

Dr Ishrat reminded the audience of the workshop of the emphasis being laid on housing finance by the government and the steps taken in the last budget on recommendations of an Advisory Group to promote housing construction business in Pakistan.

He urged the World Bank and IFC “to adopt entirely different approach” in interacting with and providing assistance to this Advisory Group.

He asked the World Bank and its affiliate International Finance Corporation to guide the Advisory Group on funding the housing finance portfolios of banks through a secondary mortgage mechanism. He made a specific query whether European Model of on-balance sheet through issuance of Mortgage Bonds or the US model of off-balance sheet financing through securitization wherein banks will be able to churn their mortgage loans through issuance of Mortgage Backed Securities by creation of Special Purpose Vehicle were appropriate for Pakistan in terms of cost and benefit.

For this he suggested the two international institutions to respond quickly to the queries of the Advisory Group rather than adopting the traditional way of sending a consultant who would meet people and prepare a report of recommendations.

“I know this is not the way the World Bank or IFC are organized”, he observed while recalling his 20 years association with the World Bank but urged that they have to change their ways to respond to the clients needs.

Dr Ishrat also made a proposal to the government for the benefit of small savers who have been hit hard by sharp fall in deposit rates and those of National Saving Schemes (NSS). He proposed that the government should consider to allocate long-term funds mobilized under the NSS which are in excess of budgetary requirements to commercial banks for housing finance.

This, he pointed out, will limit government borrowing to its anticipated requirements, small savers will continue to earn a reasonably high rate of return on their long-term savings and, thirdly, the savings would be utilized for productive purposes.

He also called for setting up of a private pension fund as countries where such a fund is set up also encourage mutual funds and insurance funds that has led to dramatic increase in their domestic savings. He asked the finance minister to invite external experts from World Bank and Asian Development Bank to help Pakistan in launching of such a pension fund.

For long, he said, housing finance was considered a non-productive activity but now it is being realized that it leads to increase in domestic saving. He said that favourable developments in last three years are facilitating the origination of primary mortgage market. He pointed out liquidity in the banks, falling interest rates and banks being forced to look alternate lending opportunities. “Housing finance provides an attractive opportunity as both profit margins and recovery rates on average are higher for mortgage finance than project and corporate lending.

But banks are still selective in their approach and at present are focussing on outright purchase or renovations loan mainly to upper income groups for unlocking their equity investments in housing properties. But the SBP Governor expressed confidence that as banks develop expertise in origination, underwriting, appraising and monitoring housing loans then construction finance for middle income groups would be the major focus of the banks.

Dr Ishrat urged the provincial, district and local governments to play a major role in developing housing finance by allocating land and approval of housing schemes in their respective jurisdictions. He also called for a reduction on rates of duties and fees but commended that rates of stamp duties have been brought down in Sindh and Punjab.

He urged the developers to organize themselves in private and public limited companies with proper accounting and good governance practices and should allow themselves to be rated by independent credit agencies.