September 18, 2006	Monday	Sha'aban 24, 1427

IN recent months, doubts have been expressed about the benefits of economic growth trickling down to the masses. There are indications that in countries with huge populations (China, India, Indonesia, Pakistan, Mexico, Bangladesh, etc.) that has been the case.

These doubts were expressed by agencies monitoring growth patterns in various countries, and their disclosure has obliged administrations there into initiating remedial action. Belated though, a beginning in this direction should be welcomed.

Perhaps, banks haven’t been undertaking these low-yield, but socially high-priority activities at scales that can ensure that the benefits of growth flow (not trickle down) to the less privileged. This feeling is not wholly unfounded. The limited coverage of the vast untapped microfinance market and the high mark-up rates charged on lending to small borrowers indicate that banks need to achieve far more than their current success rate.

The PM has expressed his satisfaction at the fact that private (rather than public) sector had accepted the challenge of setting up these essentially social support institutions. Believing that Pakistani entrepreneurs shared the vision of the founder of Grameen Bank was overoptimistic. Not surprisingly therefore, a satisfactory level of success has not been achieved by privately owned return-conscious microfinance banks.

Pakistan’s private sector did not produce many visionaries who could see the bigger picture – higher and more evenly distributed purchasing power fuelling turnover and profit growth buoyed by high production efficiency and lower prices.

Given their vision problems, private sector microfinance banks will deliver only if (like on export re-finance) they too get funding support and mark-up subsidy. In the absence thereof privately owned micro-finance banks won’t produce the results the state urgently needs.

In the context of expanding the level of economic activity to generate micro and SME business, the one scheme which can immediately be implemented by SBP on subsidised mark-up basis is housing finance for the simple reason that it will consume almost 75 per cent of the industrial sector’s output and continuous construction of houses and their subsequent use and maintenance will create sustained growth in demand for goods and services. In the US, treating the weekly housing starts figure as the key economic indicator, is not without good reason.

The logic for subsidising housing loans is further supported by a worrisome discovery of research in the UK, which indicates that by 2030, nearly 50 per cent of the world’s population will be living in urban areas and the largest chunk of population migration from rural to urban areas will take place in developing countries like China, India, Indonesia, Pakistan, Mexico and Bangladesh pointing to the need for making housing finance a major business line for banks and specialised housing finance or mortgage companies.

The research results are reflected in the fact that, according to current estimates, Pakistan’s growing population requires yearly addition of half a million houses to the existing stock but the growth is not even 100,000 houses per year.

This annually expanding gap is pushing up property rentals and house prices beyond the reach of the lower middle class. Conditions are worse in bigger cities where influx of migrants from villages and small towns has resulted in population rise far exceeding the national average.

Housing can be promoted by offering subsidised credit because the subsidy offered will not form even a fraction of the gains that will be made in terms of investment in industrial and service sectors, creation of employment, and tax revenue.

However, SBP should not re-finance housing for everyone. To be truly purpose-oriented in alleviating poverty (by channelling benefits of growth to the under-privileged) and upping the living standard of the huge lower middle class, the subsidised housing loans should be only for the lower middle class.

Keeping in view the present prices of two-bed room houses and apartments, the maximum limit for a loan should not exceed Rs1.5 million. However, the loan amount for each borrower should be fixed on the basis on monthly instalments that form no more than 20 percent of the monthly take-home incomes of the borrowers. To be a safe financing proposition, banks must be required to establish the current take-home pay of the borrowers on the basis of a SBP-specified calculation format.

Next, SBP should devise a basis for equitably distributing its targeted annual outlay on housing finance for the lower middle class among the commercial banks. The idea is that subsidised housing finance should not seem to favour one bank over another that leads to the creation of an uneven playing field. The basis should be arrived at through a consultative process that gives every bank a voice in the discussion that leads to drawing up the portfolio distribution mechanism.

Secondly, the bulk of these loans, say 65 per cent, of the total for each bank should be allocated to construction or acquisition of houses in smaller cities and towns. The idea is to encourage expansion of the smaller towns and cities and to arrest the excessively damaging expansion of just four or five large cities.

Neglect in monitoring this aspect has resulted in the big cities becoming unmanageable not only in terms of civic amenities and essential services but also from the point of view of maintaining law and order.

The definitions of “big cities” and “small cities and towns” should be based on the current population of those locations in relation to the total population of the province.

Provincial administrations should be consulted on future developments in small towns and cities that could significantly increase their population in foreseeable future.

Finally, the basis of allocating subsidised housing finance must ensure proportional representation of the provinces with Balochistan receiving a special allocation in addition to its share, to speed-up its development.

Besides devising the basis for allocating the housing finance target to provinces and banks, SBP must also decide whether it should fund the subsidised housing loans and (unlike export-refinance) should it also share the loan losses. SBP can fund the loans partially or fully and, depending on the risk assessment, monitoring and insurance coverage arrangements that the SBP lays down, it could look at the possibility of sharing loan losses subject to banks’ verifiable compliance with risk assessment, monitoring, and insurance coverage mechanisms.

Of crucial importance will be the risk assessment and insurance coverage arrangements, a credible basis for valuation of the properties being financed, and loan documentation. No less important will be the procedure for post-disbursement monitoring. These are issues that can be worked out, and processes and procedures devised there for based on expert advice and recent experiences. Recent positive developments in the legal framework governing bank lending also strengthen the case for supporting housing finance.

Although Sec. 15(12) of the Recovery Ordinance empowered the banks to auction properties of their defaulting borrowers, Sindh High Court verdict in KASB Bank vs. Al-Madina Trading case has greatly strengthened banks’ position by barring courts in Sindh from issuing stay orders against auction of defaulting borrowers’ mortgaged properties. Although the verdict applies only to courts in Sindh, as a precedent for seeking relief anywhere in Pakistan the verdict has greatly increased the chances of recovery from delinquent housing loans.

It would be hard to deny that, in a developing country, subsidised housing finance can open up countless venues for economic growth provided, of course, such financing is for the benefit of the masses – the lower middle class – and risk is managed with purpose-oriented mechanisms. Surely, banks and the SBP have the capacity for achieving these objectives. This hope builds a strong case for state-subsidised housing finance.