Appropriate shelter is a basic need. Unfortunately, Pakistan is facing a severe housing crisis with a backlog of 10 million units. The situation is getting worse owing to a rising population and rapid urbanisation.

The government shies away from long-term planning while administrative inefficiencies continue to weigh housing development down. The government issued the National Housing Policy 2001 and revised it in 2013 to reflect the shift in its preference for the provision of housing finance through the free market and stakeholder empowerment.

In 2007, the State Bank of Pakistan (SBP) supervised a report prepared by the Housing Advisory Group (HAG). It articulated a set of 10 challenges and proposed recommendations and an action plan. Major issues range from access to finance to the weak enforcement of foreclosure laws, lack of standardisation in land titling, onerous stamp duties and the availability of low-cost housing.

Housing shortage

According to a World Bank report, the estimated housing shortage is up to 10m units. About 40pc of it is in urban areas. Over the next 20 years, the annual urban population increase is expected to be about 2.3m (around 360,000 households at 6.50 individuals per household). A decline in the size of a typical family and increased household formation rates are expected to further add to housing demand.

The gap continues to increase by roughly 350,000 units per year as new housing fails to match the pace of household formation while existing units become obsolete. The quantitative housing shortage is exacerbated by qualitative deficits such as overcrowding, low quality and continuous deterioration.

Around 47pc of urban households live in substandard housing often located in informal settlements called katchi abdis, which lack basic urban infrastructure and have poor health conditions. The existing housing stock is also extremely overcrowded.

Customer preference

With the support of UK Aid and the Department for International Development (DFID), the SBP conducted a study to understand the customer preference in Pakistan. It said 94.5pc of the respondents who have banking relationships believe in the prohibition of interest. About 88.4pc of them believe conventional banking practices are based on interest and, thus, prohibited owing to religious reasons.

In the unbanked segment, over 98pc of the respondents believe in the prohibition of interest while over 93pc considered the interest charged and paid by conventional banks as prohibited.

This customer preference is also reflected in the recent SBP statistics. According to an SBP report released in September 2019, outstanding housing finance by banks and development finance institutions (DFIs) was Rs103.64 billion with 59,423 customers. The report said Islamic banks witnessed a rapid increase in their market share that stood at 52.5pc.

Overall housing finance is merely 0.5pc of our GDP while the figure is almost 10pc in India. This shows the untapped potential.

House Building Finance Company (HBFC) is a prominent player in the domestic market. However, its appeal has gone down over time because it does not offer Shariah-compliant financing.

Islamic banking institutions like Meezan Bank, Dubai Islamic Bank and Bank Islami are now leading the market. Keeping in view the strong consumer preference, a large conventional bank and a foreign bank operating in Pakistan have taken the decision to offer housing finance to their customers only through the Shariah-compliant mode of finance.

Shariah-compliant housing finance

In Pakistan, diminishing Musharakah or declining co-ownership partnership is the most widely used method that Islamic banking institutions offer for housing finance. The arrangement consists of three simple steps.

One, the bank and the customer jointly purchase a property and become co-owners in proportion to their contribution towards the purchase price.

Two, the bank provides its share in the property to the customer on an agreed rent for a specific period of time.

Three, the customer periodically purchases the bank’s share in the property, which results in his or her increased ownership while reducing the rental amount over time. Eventually, the customer becomes the owner of the complete property.

Policy direction and recommendations

In order to boost housing finance, policymakers and the relevant ministries should consider the following recommendation.

  1. The role and structure of HBFC need to be reviewed as it can play an active role for the promotion of low-cost housing. To increase its acceptability, the company must offer financing solutions that are based on Islamic financing modes.

  2. The regulator and the government should encourage all financial institutions to offer housing finance under Islamic modes only.

  3. The low-cost housing scheme should be based on the Shariah-compliant Islamic mode of finance.

  4. The Naya Pakistan housing initiative should be offered to the public with the facility of Shariah-compliant housing finance schemes.

  5. The government needs to create an enabling environment for the sector by improving foreclosure laws, establishing fast-track recovery courts, rationalising duties and taxes and digitising property records.

A prudent housing policy designed in view of the customer preference will not only fuel growth in the housing sector but also act as a stimulus to more than 200 allied industries, resulting in overall economic growth and prosperity.

Published in Dawn, The Business and Finance Weekly, January 13th, 2020