July 24, 2006	Monday	Jumadi-ul-Sani 27, 1427

IT has become impossible for lower income groups to build or buy their own house due to soaring property prices, surging costs of land and building materials. Home financing has become a necessity, if one can afford it.

However mortgage finance in Pakistan forms only 0.5 per cent of the GDP compared to India’s five per cent and China’s 15 per cent.

And the housing backlog is mounting— from 4.3 million, according to the 1998 census, to current projection at 6.19 million. An estimated 50 per cent of the urban population now lives in slums and squatter settlements. In order to address this problem in the next 20 years, the overall housing production has to be increased up to 500,000 housing units annually.

The National Housing Policy 2001 designed to meet requirements of the housing industry included home financing. The annual disbursement of House Building Finance Corporation (HBFC) loans has been enhanced from Rs1.2 billion to Rs7 billion. Realising that meeting the backlog is beyond the financial resources of the HBFC, the commercial banks have also been encouraged to advance loans.

Earlier, the sole domain for home financing was the government-run HBFC which provides loans for low cost housing. There are 25 banks in the housing sector but none as focused on home financing for low income groups as the HBFC, says HBFC chairman Zaigham Rizvi.

However, borrowers are often irked by the hassles involved in borrowing. The are required to pay back the money in the form of rent for the house they have built since the corporation has an Islamic financing mode.’ It is impossible to get loans without a “source”’, says a borrower, which has led some to turn to commercial banks.

In fact, home financing in the banking sector has not taken off in the real sense. Consumer loans have expanded by 29.4 per cent to Rs73.3 billion during July-April FY06. Out of this, loans for housing amounted to only Rs11.1 billion as compared to Rs25.8 billion for car purchases.

Also where banks have provided loans for housing, they have generally catered to upper and upper middle classes. Citibank usually offers loans to those earning at least Rs40,000 to Rs50,000 per month. Muslim Commercial Bank and United Bank have a minimum salary requirement of Rs18,000 and Rs15,000 respectively.

After their earlier disastrous foray in the housing sector ten years ago, a Citibank official says ‘this time around we are focusing on a niche market of a select group of individuals, businessmen and salaried people, instead of lending to all and sundry.’

The National Bank of Pakistan (NBP) however has a lower minimum salary requirement, Rs5000 for government employees and Rs10,000 for salaried class and also offers, a lower mark up rate. Even this is quite high. Suppose an applicant with a minimum income of Rs10,000 approaches the NBP for a loan. The maximum amount he can hope to receive is around Rs500,000,a reasonable amount, (a 80 sq feet plot in some existing schemes such as Surjani town,Metroville-3 and Scheme No 33 costs around Rs350,000, with further construction and infrastructure development costs). For this, he will have to pay approximately Rs5000 as monthly instalments, leaving him with only half of his income to provide for other necessities.

Also some banks such as the Habib Bank offer home financing only on floating mark up rates which most would like to avoid because no one can predict the interest rates for a longer period. Often people’s salaries don’t rise in line with the rise in mark up rates.

In addition to mark up costs, there are other expenses such as, application form fees, insurance etc. Customers often complain of ‘hidden’ costs which only come to light on close scrutiny. However the State Bank has recently instructed banks and financial institutions to disclose their charges to customers— a welcome change indeed.

Furthermore banks often require extensive documentation such as salary slips etc which those working in private households as drivers, maids do not have and so cannot obtain loans.

The housing industry not only fulfils an important social need but also provides employment opportunities, supports a variety of industries such as, cement, glass, paint, etc and leads to a higher growth rate. Home financing options for the largest segment of the population, low income groups, need to be extended.