SIGNS of growing demand for housing finance are apparent but banks are tapping just a fraction of it. The reason is that they are making huge profits by investing in risk-free government papers instead of exploring fresh opportunities for lending to the private sector.

Lots of housing schemes are in progress and new schemes are coming up. TV and newspaper ads give an idea of how much activity is taking place in the construction of bungalows and ordinary and luxury apartments.

The surge in domestic sales of cement, iron and steel bars, paints and varnishes and household electric fixtures all point towards an uptake in housing construction.

Population growth and urbanisation are also boosting demand for housing finance.

However, banks and development finance institutions (DFIs) have tapped just a small fraction of this demand.

They made fresh house financing of about Rs4.3bn in each of the four quarters of FY15. More recent official data is not available.

Yet, this is a marked improvement over FY14 and is attributable to both banks’ increased willingness to lend as well as to the SBP’s pro-market monitoring, central bank reports reveal.

Nonetheless, the banking industry and the House Building Finance Company (HBFC) lend less than Rs20bn a year against an estimated demand of Rs300bn a year. Part of this huge demand is met by investment hoppers, well-bound rings of crowd financers and even by owners and handlers of black money.

According to SBP Deputy Governor Saeed Ahmed, Pakistan is facing a shortfall of 9m housing units and fresh demand for 600,000 units arises every year. Against this, 300,000 new housing units are built annually and the unmet need of the other 300,000 units adds to the backlog.

“Even if we assume that one housing unit is constructed at an average cost of Rs1m, Rs300bn [should] flow into the housing sector business annually,” guesstimates a former chairman of the Association of Builders and Developers.

He also suggested that the growth data for housing finance by banks should be taken with a pinch of salt, and that the lending volumes should be compared with credit demand.

Apart from low volumes, some other aspects of housing finance by banks also need to be put into perspective. Fresh financing by the HBFC accounts for one-fourth of the total house financing by banks, DFIs and Islamic banks. Being a specialised lender, the HBFC’s lead is not surprising.

“A truer picture of banks’ house finance can only be obtained by excluding the HBFC’s performance,” admits a central banker.

Similarly, Islamic banks’ fresh housing finance is over 50pc of the total and the percentage rises to about 55pc if financing by Islamic banking branches of conventional banks is included.

This is also indicative of a growing appetite for Shariah-compliant house finance. But it sheds light on the poor performance of conventional banks in house financing.

“If this pattern continues for a longer period, we will see house financing vastly tilt in favour of high-end customers who will consume the bulk of loans because this is the choicest clientele of Islamic banks,” another central banker says.

The SBP’s periodical reports also reckon that besides catering to high-end customers, Islamic banks mostly finance outright purchases of housing units at prices higher than those set by conventional banks.

Therefore, there is a need to promote housing finance by all commercial banks and DFIs at affordable rates and to ensure that the loans are available for the maximum number of borrowers for outright purchase of housing units as well as for the construction or renovation of these units.

Currently, the mark-up on housing finance ranges between 10-18pc, depending upon the lending institution and the features of the financial product, bankers say.

Whereas the HBFC remains focused on financing the construction of houses and the Islamic banks on financing outright purchases, private commercial banks are lending more for housing renovation, according to SBP reports and market information.

And the situation is quite discouraging when it comes to the number of people who manage to get house finance. By the end of FY15, overall outstanding number of house-finance seekers stood around 70,500, down from about 74,900 a year ago.

The number of new borrowers seldom exceeds 2,000 a year, bankers say.

That is why the average house loan remains almost constantly in excess of Rs5m, as per period SBP reports. As a result, the ratio of housing finance to GDP has stagnated at a low of around 0.5pc for many years.

“What all of this indicates is that the banks have to go a long way in reaching out to small- and medium-sized borrowers,” says an HBFC official. “Otherwise, the promoters of grand-scale housing schemes who obtain finances mostly from informal sources will continue to dominate the market.”

Published in Dawn, Business & Finance weekly, December 21st, 2015