The Naya Pakistan Housing Scheme that envisaged building five million homes for the low-income group will remain a pipedream unless fundamental changes are made to the scheme using the customer lens.

As of May 2021, while there has been traction in lending to construction companies — thanks to major tax concessions and the opportunity to whiten money — the actual number of low-cost housing loans is a paltry 610 with the disbursed amount being Rs1.3 billion for the entire banking industry.

This disappointing figure is not due to the lack of focus on part of the State Bank of Pakistan (SBP). Rather, it’s because of some fundamental issues with the programme whose creators neglected to review the primary need of the low-income group.

Banks’ experience in housing finance is limited to providing funding to their own staff or to the high-end customers in major cities

The first disconnect was the eligibility restrictions imposed by the Naya Pakistan Housing and Development Authority (Naphda) for accessing the scheme. The SBP, after consultation with the industry, has now made three major changes that should result in higher loan disbursement. The facility has now waived the requirement of the minimum one-year-old housing unit. The restriction on the first transfer has also been removed albeit temporarily. The markup subsidy has been further reduced from 5pc to 3pc while increasing the amount to Rs10m. This will allow borrowers to equate the monthly loan instalment with their existing monthly rental.

Lastly, a new tier has been added to the existing three tiers. Tier 0 has been added to help microfinance banks extend loans up to Rs2m. Microfinance banks can either use their funds or obtain funding from commercial banks. On the face of it, with a 40pc first loss provided by the government and subsidised lending by the SBP, the desired number of 5m should be achievable given the housing shortfall of 12m units. However, there are still multiple bottlenecks that need to be addressed prior to moving the low-cost housing needle.

Firstly, this is a segment of society that commercial banks have never lent to. Their experience of housing finance is either limited to providing funding to their own staff or to high-end customers in major cities. Their DNA does not easily make this transition likely.

Banks need to collaborate with grassroots origination organisations like microfinance banks, microfinance institutions and housing finance companies. Their partners can originate while banks can use their balance sheets. With the first-loss protection of 40pc, this is a win-win formula.

However, looking through the customer lens, unless funding is being provided to units in a project, the requirement of an equitable mortgage will deny funding to the bottom of the pyramid in rural Pakistan. The requirement of creating a perfected mortgage should be dropped and the ownership documents submission for loans under Rs1m should be allowed. The microfinance default experience indicates that as income levels drop, loan performance improves.

Secondly, potentially the most effective vehicle for the low-income segment would be housing finance companies created for this purpose. Housing finance companies without the burden of banks’ high infrastructure costs would be more effective for this purpose. The SBP and the Securities and Exchange Commission of Pakistan (SECP) should work together to provide the same markup subsidy and first-loss protection to these institutions as is being provided to commercial banks and more recently microfinance banks.

The inclusion of microfinance banks in the scheme is unlikely to yield material change as the current loan size is Rs40,000 and the average tenor is one year. Expecting microfinance banks’ underwriting skills to suddenly migrate to a Rs1m loan with a 15- to 25-year tenor is unrealistic. Microfinance institutions, with a few notable exceptions like Akhuwat, have even lower capabilities to underwrite this kind of risk.

The Naya Pakistan housing initiative can be a game-changer. To empower the low-income groups across Pakistan to own their homes is what dreams are made of. Building a home engages about 21 different industries and can have a significant impact on our stressed economy. Housing finance can be coupled with alternative energy solutions, general and personal insurance and clean water to make a lasting change on how the low-income group lives. However, to move this needle, good intentions are not enough and the pain points of the grassroots borrowers need to be addressed. The recent amendments are clearly a step in the right direction. Unfortunately, without the other changes, the promise of 5m units in five years will remain a pipedream.

The writer is a technology entrepreneur.

Published in Dawn, The Business and Finance Weekly, May 17th, 2021

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