THE demand for housing finance is huge, but banks don’t bother to exploit it as they are making enough money by investing in government debt papers and by lending in more comfortable areas. Islamic banks, however, are trying to do a little better.

During April-June, fresh housing finance disbursement totaled Rs3.46bn. Islamic banks’ share in it was about 65.3pc (Rs2.35bn), and the House Building Finance Company’s (HBFC) was 15.6pc (Rs541m). And 27 conventional banks and a microfinance bank accounted for just 19pc of the total (Rs659m).

However, this does not mean that the conventional banks’ overall market share (based on the stock of housing finance) is as low as it looks. By the end of June, their share in housing finance was 44pc, followed by Islamic banks’ (plus Islamic banking divisions of conventional banks) at 32pc, and HBFC’s at 24pc, according to State Bank data.

This is negligible lending when, according to a conservative estimate, the demand for housing units swells by 300,000 units per year. The problem is that banks have a few priority areas of lending, such as food, chemicals, textiles, energy and consumer sector.

Generally, they avoid lending in areas that test their banking skills and where they cannot make quick bucks in the short term.

The State Bank of Pakistan encourages housing finance, but central bankers say it can only persuade or facilitate banks, and cannot dictate them over where to lend.

That was why while issuing prudential regulations (PRs) for housing finance in May, the SBP told banks and development financial institutions that in order to benefit from these regulations, they ought to align their business strategies with the needs of the housing sector.

The SBP is preparing a strategic plan to analyse the current scenario and to suggest various policy initiatives to boost housing finance, and the report is expected to come out shortly

Before May, housing finance used to be reported and regulated under the PRs of consumer finance. But two things called for issuance of separate PRs for housing finance.

First, the average tenure for a housing loan is around 10-15 years, i.e. much longer than the average tenure of consumer finance. And second, the transaction frequency in housing finance is also far lower than in consumer loans.

One pertinent question here is, if the central bank was aware of such basic differences between housing and consumer finance, why did it take so long for it to come up with separate PRs for home lending?

And now that banks have gotten separate PRs for housing finance which are helpful in better market risk management, are they ready to boost lending for house building and renovation?

“It’s not a question of being ready,” says a senior executive vice-president of the state-run National Bank of Pakistan. “It’s more of a question of willingness.”

One thing that can encourage growth in housing finance by banks is that the HBFC must keep its books clean and start lending aggressively. “But because decades of political muddling and mismanagement in the HBFC has created so much mess, it will take the new management years to clear it,” says a senior HBFC executive, while boasting of some recent good work.

Banks offer a long list of excuses for not being able to offer adequate housing finance. These include multiple titling of land, issues in foreclosure laws, unreliable valuation, poor law and order situation in most of localities from where housing demand originates, and the high rate of default.

That is why, even when they go for housing finance, they offer the bulk of it to their own employees. This, at least, ensures loan recovery and reduces non-performing loans.

Another important thing is that both conventional and Islamic banks prefer to finance outright purchase of houses, leaving the financing for construction and renovation mostly to the HBFC. Bankers say this is so also because both conventional and Islamic banks offer most housing loans to their own employees.

According to an SBP report, total outstanding housing finance stood at Rs52.7bn by the end of June. But the stock of housing finance availed by bank employees till then was even higher — Rs61.3bn. This proves two points: one, the bulk of housing loans go to bank employees, and second, these loans are recovered on time.

The SBP is preparing a strategic plan to analyse the current scenario and to suggest various policy initiatives to boost housing finance. The strategic plan report is expected to come out shortly.

One hopes that the report would also examine banks’ reluctance in providing housing finance for residential and commercial projects being developed by commercial builders. In the absence of bank financing, most builders have been relying on well-organised funding of groups of investment-hoppers.

Builders say, in most cases, only the HBFC provides the loan portion of the price of a residential flat or bungalow, though lately one or two banks have joined hands with some large construction companies as co-financers.

Published in Dawn, Economic & Business, December 22th , 2014