It is estimated that there is a shortfall of 12 million housing units and this number is growing. From a financing perspective, banks have been reluctant to create a housing finance portfolio. Currently, the total customer housing finance lending is a paltry Rs88 billion. The banks lending to their own staff stands at Rs111bn. If we assume an average loan size of Rs1.5 million, then the total mortgage-based loans account for 27,333 customers.

Although demand exists across income segments, banks are reluctant to lend as firstly, they have no desire to move away from the gravy train of government securities earnings, and secondary, clean title, repossession laws, match funding, customer acquisition and product profitability have been serious challenges. Any solution proposed by the public or the private sector would need to address customer affordability as well as the challenges faced by banks.

Recently, the government announced its Naya Pakistan Housing Programme. Its ambition is to build 5m homes for the low-income group with 100,000 units to be delivered by December 2021. The programme adequately addresses the challenge from the construction industry perspective but partially for the banking industry. Unfortunately, the customer lens (affordability, location preference) seems to have been taken a back seat.

If the Naya Pakistan Housing scheme targets Rs430bn in the first year, the subsidy required makes it a pipe dream

From the construction industry perspective, major concessions have been made from a tax angle, provision of land and construction finance. The biggest break being that no questions will be asked from the construction companies as to their source of funds. From the Banking perspective, the State Bank of Pakistan (SBP) has now mandated that by 2021 all banks must have 5 per cent of their lending portfolio in mortgage-based lending. This translates to the lending of Rs430bn from the current Rs88bn and using an average loan of Rs1.3m translates into above 330,000 new customers within 12 months.

To facilitate lending, the government will provide interest rate subsidies so that an up to five-marla house will have a cap of 5pc while a 10-marla house will have an 8pc cap. The objectives set by the Naya Pakistan Development Authority as well as the SBP have good intentions but are highly unlikely to be met. Let us examine the challenges from the banks’ perspective and then, more importantly, from the customer lens.

The commercial banks have been mandated to add 330,000 customers in the next twelve months. An easy enough number on the face of it. However, when we peel the onion, the number becomes unrealistic. This is a segment that most banks have not had any dealings with before (a low-income segment with a monthly household income of Rs30,000 or less). They would have to create a separate sales force and underwriting criteria to accommodate these customers.

The government plans to take care of the defaults and long-term funding through the newly created Pakistan Mortgage Refinance Corporation (PMRC) with a 40pc loss cover on a portfolio basis and up to 25 years of funding. The clean title could be managed if the funding was limited to planned developments, hence the default/ repossession/clean title risk is covered.

However, two main challenges remain. Until the banks build up their portfolio the default risk is theirs and the product profitability model is not sustainable.

The typical cost of managing a mortgage portfolio would be 5pc operational cost (customer acquisition, collections and maintenance), 5pc cost of funds, 1.5pc portfolio guarantee fee and assuming a 2pc return, the customer lending rate would be 13.5pc. As the government cap is 5pc, this means an annual subsidy of 8.5pc.

If the lending is to be Rs430bn in the first year, the government would need to subsidise Rs36bn for it. The 5m housing ambition then becomes a pipe dream given the subsidy required. Banks will end up paying the penalty for not meeting their 5pc lending target as opposed to creating a loss-making portfolio as neither the PMRC nor the government has the means to cover 5m units.

From the customer lens, the challenge is even higher. Assuming a plot of 80 square yards (720 square feet), with a built-up area of 520 sq ft (2 bed, 1 bath, 1 kitchen and 1 hall) the house would cost Rs900,000 at Rs1,700 per sq ft cost of construction. Assuming a land cost of Rs1m (plotted, allotted, all no-objection certificates), add stamp duty and relocation costs, the financing amount would be Rs1.8m. In a best-case scenario with the customer paying 15pc down payment, with a 5pc interest rate for a 25-year loan the monthly instalment would be Rs8,900 per month. This translates into a household income of Rs30,000. Any increase above this amount starts to make the house unaffordable for the low-income segment.

This is why the low-income segment usually likes to build its houses on an incremental basis as typically it owns the land and is looking for just construction finance. They also do not like to move far from their place of employment. This is the reason one can see unoccupied flats all over Karachi. Any solution must be viewed from the needs of low-income customers. Indication of a desire to own a home in response to a National Database & Registration Authority questionnaire is not enough to understand their pain points.

The government’s Naya Pakistan Housing scheme has good intentions. However it fails to address the sustainable business model from the commercial bank perspective and the affordability and location challenge from the customer perspective. Unless these bottlenecks are addressed, the Naya Pakistan Housing scheme is unlikely to succeed regardless of its good intentions.

The writer is a technology entrepreneur

Published in Dawn, The Business and Finance Weekly, October 5th, 2020