The World Bank (WB) and the International Finance Corporation (IFC) arranged a two-day workshop in Karachi on August 20/21, 2003 on the subject of: “house finance”.

This matter has gained much importance in the banking circles in the post-9/11 era because banks in Pakistan are awash with liquidity on account, mainly of, heavy inflow of remittances from Pakistani expatriates through official channels and lesser off-take of credit by the government on the one hand and industrial activity not picking up on the other.

Banks were, therefore, compelled to divert their lending portfolios from short-term to medium-term facilitating individuals to purchase consumer durables like cars, and electric/electronic items. The interest rates have also been much lowered.

Banks are also now considering launching of long term lending programmes for house finance. The State Bank of Pakistan (SBP) and the government are encouraging banks in this aspect of their lending operations and a number of measures were announced in the budget for the current fiscal like reduction in the excise duty on cement, etc. It is another thing that the cartel of businessmen/industrialists has not so far allowed the benefit of the fiscal concessions given by the government to the common man as the prices of cement and steel products required in the construction of houses are rather increasing.

During the deliberations at the workshop, a question was raised that the resource base of banks comprises short term deposits while the lending in the housing sector will be very long-term ranging between 15 to 20 years. Thus there will be asset-liability mismatch on their balance sheets— borrowing short/lending long. Therefore, when house-finance market gathers momentum, banks will have to look for alternative ways and means to finance housing sector loans.

To this end, banks can float long term bonds to match their housing loans. As a corollary to this, it was also suggested that the special purpose vehicles may develop pools of mortgage backed securities (MBS) which can be traded in the market and off-loaded from the balance sheets of the originating banks.

Two things strike one’s mind about the proposal of floating of long-term bonds by banks for acquiring long-term funds for lending in the housing sector. Firstly, banks have currently been forced to enter into house financing arena because they do not find investment opportunities for deploying the huge liquid funds available with them. Otherwise, this is not the normal commercial banking function. There may be specialized organizations to cater to this job. However, if banks are to acquire separate long-term resources from the public, how banks’ acute problem of the current excess liquidity will be resolved? The proposal obviously does not offer solution to the problem.

Secondly, it is true that bonds floated by banks for raising long-term funds for deployment in the housing sector will be traded in the market and special purpose vehicles may develop pools for the purpose but what is not understood is that how the liability can be off-loaded from the balance sheets of originating bank?

For all practical purposes, such instruments will appear as liability in the balance sheet of the issuing bank once the bonds have been issued and the cover realized. This liability will continue to appear in the books of the bank till such time as repayment is made by the concerned bank to the holders of the instruments whosoever they may be- the original purchasers or the purchasers thereof from the secondary market.

The issuing bank cannot also obviously show this liability as off-balance sheet item like guarantees or the letters of credit which create contingent liabilities for the bank and the bank’s actual liability thereunder arises only in the event of its concerned client’s failure to meet obligations as and when they arise.

A possible alternative may be that the issuing bank may after some time buy back these instruments to off-load the same from the balance sheet.Then the question will arise: what is the need of this rigmarole of issuing long-term mortgage bonds? Because in such an eventuality, payments will be made from the short term deposit base and the question of asset-liability mismatch will crop up again.

The question of taking out the liability (long term mortgage bonds) from the balance sheet of the issuing bank [through the medium of special purpose vehicles] as discussed in the work-shop is a technical accounting matter. Will some professional accountant or the Institute of the Chartered Accountants furnish the considered opinion through the press in the event my interpretation given above is counted as incorrect.

The concept of creation of special purpose vehicles seems to have relevance only viz-a-viz take-over of banks’ infected assets. Such SPVs take over banks’ infected assets (infected advances) at a discount and realize the amount either from the borrowers or through the sale of the tangible assets held by the banks against such advances and transferred to the SPVs as part of the deal. For making payment to banks, the SPVs may realize funds from the public by issuing bonds. But the chances of public purchasing such bonds issued by SPVs are very far-fetched because the cash flow of these SPVs would not be assured because the defaulters of the banks are very influential people and would not repay to SPVs when they are not repaying to the original lenders and disposal of assets acquired by the SPVs from banks would also have its own problems. It is for this reason that no SPV has so far emerged for acquiring the banks’ infected advances portfolio. The Corporate Industrial Restructuring Corporation (CIRC) was set up for the purpose in the sector but it has not achieved notable success.

The need of seeking assistance from the multilaterals in the shape of “technical assistance” as well as “financial assistance” was also deliberated upon in the workshop. Here one thinks: Do we really need foreign help in the housing sector? Have we not matured enough during the last 56 years to ourselves look after this sector?

The housing sector is a very simple sector and hardly needs any technical assistance from abroad as we do possess the required know-how for undertaking the construction work. Our engineering companies, off and on, get the contracts of the sizable value from outside the country not only for civil constructions but also for electrical engineering works. They also get the sub-contracts from the main contractors constructing mega projects in Pakistan.

So far as financing is concerned, all the required in-puts i.e cement, steel, wood, paints, labour, engineers, etc are available within the country. No amount of foreign exchange is required to be spent for acquiring these inputs. Then what is the justification for seeking foreign loans for the purpose? Will it not be unjustified to add to the country’s foreign exchange liabilities for meeting the local currency cost?

This is what had happened in 1980s and 1990s when we financed rupee expenditure by borrowing overseas which brought the country in debt trap. The current policy of the government is to reduce the quantum of indebtedness—whether internal or external. The external borrowing for financing the housing sector will run counter to the policy of reducing indebtedness and particularly the external. The proposal of the SBP opening a refinance window for housing finance with the lines of credit from the World Bank and the IFC is, therefore, wholly untenable.

The whole idea of involving the banks in the long-term lending in the housing sector was to enable them to find new avenues for deployment of their surplus liquidity. If the finance is ultimately to come from the multilaterals, then how the purpose of the banks’ deploying their idle funds is likely to be achieved? To solve the banks’ problem, there seems to be no need for the SBP opening any refinance window either out of finance from the multilaterals or from its own resources.

It may be mentioned here that about one/ one and a half decade back, USAID had made available a loan for house financing. It is not known in what manner those funds were utilized.

During the last two decades, we have developed a habit of saying “yes” to any proposal received from the multilaterals notwithstanding whether we need their relevant advice/finance or not. I would here quote an example- even though it is not directly relevant with the present topic- of the refinance window for exports opened by the SBP with the advice/ finance from the Asian Development Bank (ADB).

This is also tantamount to incurring foreign exchange loans for financing expenditure which is predominantly rupee oriented and if at all foreign exchange is required, our banks can well manage the same from out of the part of the country’s foreign exchange reserves held with them. The scheme is almost “failure” but it continues because we have lost the habit of saying “no” to the multilaterals.