THE government wants the State Bank to devise a strategy to boost housing finance in the country as part of its plan to provide “dignified houses for the downtrodden” in the country. This is a laudable vision, but the State Bank might need a little help from the government in order to play its part in achieving this dream. Pakistan has amongst the lowest advances for housing finance in the world. The State Bank estimates the deficit in housing stock at nine million units in total, and each year another 300,000 units are added to this number. Banks are already reluctant to raise their exposure in housing finance, particularly for lower- and middle-income groups. Furthermore, most new housing units in the country are located in irregular settlements, where land titles are informally secured. With high levels of informality in land supply coupled with inherent reluctance on the part of banks to undertake risk-based lending, the State Bank can devise a plan on paper only. For the plan to be successful, the wider problem of informality in land supply will need to be addressed, which is difficult in the absence of local government, and bank lending behaviour will need to be modified.

Clearly, the State Bank lacks the tools to do this. Legislation that strengthens banks’ rights to foreclose on delinquent mortgages will only help in those areas where land title is secure and customers are heavily dependent on their credit ratings to generate their incomes. And bank-lending behaviour is proving a difficult challenge for the State Bank, which does not have the tools to direct lending in one direction or another. The government should be lauded for subscribing to a vision of affordable housing for the lower-income groups of society, but it might be initiating action in the wrong area by directing the State Bank to take the lead in developing a plan. The energies of the private sector must be harnessed to increase access to housing finance for the lower-income groups in society — although the private sector is stubbornly wedded to its pursuit of easy money through lending to government alone. Not just housing, but transport and the larger question of informal manufacturing and agriculture lending would benefit if the resources of the financial system were to flow towards these areas. However, making that happen will require far more than a directive to the State Bank.

Published in Dawn, May 31st, 2015

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