BANKS’ reluctance to finance housing projects is expanding the backlog of required housing units, which now exceeds nine million.

Latest State Bank statistics show that gross outstanding credit by banks and development finance institutions (DFIs) to the construction industry shrank by 1.9pc to Rs51.6bn at end-March, from Rs52.6bn at end-March 2013.

This seems to be part of a bigger problem. After the global financial crisis of 2007-08, banks have been investing heavily in government debt papers, rather than lending to productive sectors of the economy.

By December 2008, banks’ net investment and net advances were equal to 25.8pc and 75.2pc respectively of their total deposits. But by this June, their investment-to-deposit ratio had almost doubled to 51.4pc, whereas their advances-to-deposits ratio plunged to about 48pc.

The irony is, even when banks lend to private sector businesses, their priority sectors are the ones that they find easy to deal with or where the business interests of those in the power corridors lie, builders say.

Individuals and families are pooling money to book flats being built by well-known companies. Once they get possession, they sell, recover their principal amount and distribute the profit. Or they rent out the flat and begin sharing the rent

Bankers say lending to the construction industry is undoubtedly difficult due to lack of implementation of foreclosure laws, problems in land valuation, multiple and fraudulent titling, and high loan infection ratio.

How much demand for housing finance is being neglected is evident from the fact that the stock of housing loans forms just 1.7pc of the stock of banks’ financing to private sector businesses.

Successive governments come up with so-called low-cost housing schemes, expecting banks and DFIs to finance them. These hurriedly stitched schemes are often rejected by builders. The current government’s Apna Ghar scheme is an example.

“Instead of spurring growth in construction activity, such schemes end up nowhere and not even the HBFC [state-run House Building Finance Company] bothers to finance them, to talk nothing about banks,” says a Karachi-based builder.

The Apna Ghar scheme, announced in the FY14 budget, aimed at providing 500,000 housing units to poor people, but not even a fraction of the targeted number of units has been built so far.

In private sector housing schemes, the builders’ interest remains supreme. But banks ignore most of these schemes “primarily due to a very high percentage of non-performing loans, currently 31pc,” says a senior executive of the state-run National Bank.

Despite the formulation of exclusive and elaborate prudential guidelines by the SBP, banks have not been able to slash their housing loan infection ratios. Central bankers say the SBP can only persuade banks to increase lending in this area, but can’t force or penalise them.

Regardless of banks’ and DFI’s indifference to housing finance, the construction industry has lately rebounded.

Market surveys show, and the chairman of the Association of Builders and Developers Akbar Sheikh confirms that hundreds of high-rise apartments are being constructed in Karachi and Islamabad. Meanwhile, builders are busy developing residential plots in Lahore.

Private sector housing schemes, once stalled for one reason or the other, have also been revived. New housing schemes launched earlier in Gujranwala, Sialkot and Multan are also progressing well, and the innovation of housing units by individuals seems to have picked up in urban centres like Karachi, Islamabad and Lahore.

A big evidence for all this can be found in increased local sales of cement, iron bars, paints and varnishes, electrical wires and other construction materials.

So, the question is, where are the finances coming from? “Individuals and families are pooling money to book flats being built by well-known companies. Documentation is done in the name of one person, but we know that the booked housing unit belongs to half a dozen people,” says the owner of a well-known construction company that is active in Karachi.

“Once they get possession of these units, they sell them, recover their principal amount and distribute the profit. Or, they rent out the flat and begin sharing the rent.”

On a wider scale, builders have started depending on informal investors — who invest tens of millions of rupees in a project, keep receiving return on it for years, and once the project is completed, get a few units registered in the name of their front-men, industry people say.

As long as banks refuse to do real banking, parallel funding will thrive. And rising volumes of cash coming back home from overseas Pakistanis, as well as undeclared assets of wealthy people and companies and out-of-bank savings of top professionals will continue to keep such investment and financing alive.

The HBFC still caters to more than 50pc of fresh applicants for housing finance. But its loan disbursement makes up less than 20pc of total bank financing, SBP statistics reveal.

However, a silver lining is not absent altogether. Defying the banking industry’s general trend, Islamic banks are making some fresh housing loans. Gross housing finance by Islamic banks swelled by 17pc to Rs15.49bn in March, from Rs13.22bn a year ago.

Published in Dawn, Economic & Business, Sep 15th, 2014