KARACHI: The State Bank of Pakistan (SBP) has mandated banks to lend 5 per cent of their loan portfolio for housing and construction financing by December 2021. In a circular sent to bank presidents on Wednesday, the central bank also said the government needs to play its role to make this happen through passage of a foreclosure law and the computerization of land records “for facilitation of clean title for bank lending.”

The circular to the banks was issued in the wake of government’s announcement under the Naya Pakistan Housing scheme to build 100,000 houses in the country for low-income people.

The central bank has been engaged with commercial banks for almost two months now on this matter. The circular did not say what sort of penalties will apply should the banks fail to meet the stipulated target. Bankers who spoke to Dawn about the circular were not willing to say anything for attribution, but in off record conversations they said the foreclosure law has yet to pass and clean title is not something the state can realistically provide since “the vast majority of property in Pakistan does not have clear title.”

They also said making the target a percentage of a banks loan portfolio made little sense. One senior banker told Dawn that “this penalises those banks that have large loan portfolios, since their target under this scheme will be higher than those who have simply been placing their funds in government securities and running a small loan portfolio.”

When contacted, the SBP said the mortgage loans were made mandatory under the Section 25 of Banking Companies Ordinance, 1962, but did not provide specifics as to what sort of penalties will apply in the event banks fail to show due progress towards their target.

The SBP believes that several measures on the part of government will support bank financing for housing and construction-related sectors.

“These include passage of an efficient foreclosure law and its effective implementation, automation and computerization of land and property records for facilitation of clean title for bank lending and reduction in time taken in registration of title and creation and perfection of mortgages, creation of a Real Estate Regulatory Authority (RERA) to address bank concerns of ensuring adequate standards of developers and builders, and reduction in transaction cost related to property transfers,” the bank said.

The law for foreclosure is currently being reviewed in the Supreme Court and the government expects a decision in favor of the draft law. A senior banker said a constitutional amendment would be required to implement the foreclosure law since it bypasses the judicial process allowing evacuation of houses without involving judicial process; which the Supreme Court might see as a fundamental right.

Bankers said the number of pre-conditions renders the target of December 2021 unrealistic.

The central bank said the banks have remained reluctant over the years to extend mortgage financing for various reasons. So far the banks provided Rs82 billion for housing loans to public compared to Rs111bn to their own staff as housing loans. Banks said the main reason for extremely low housing is the absence of effective foreclosure law.

Banks also argue that they don’t have long-term deposits as most of the funds in the accounts are kept for less than one year while maximum time duration for deposits is five years. Banks are unable to fund for long-term housing which requires deposits for a time period of 15-25 years.

In Pakistan, bank financing for mortgages and housing construction is less than 1pc of GDP — one of the lowest in the region.

The SBP has instructed banks to present a concrete action plan within 15 working days, containing quarterly targets, development of products, media campaigns, development of technology infrastructure, and capacity building of staff, amongst other areas. Banks have also been directed to report data of approvals and disbursements against the targets on monthly basis starting from September 2020.

Published in Dawn, July 16th, 2020