Not many people know that BankIslami Pakistan, one of the smaller lenders with only a 1.3 per cent share in total assets of the banking sector, is currently the country’s single largest housing bank.

The housing portfolio of the minor-league bank within consumer financing puts to shame the biggest banks and even the good old House Building Finance Company (HBFC), the only specialised housing institution that has existed since 1952.

The housing advances of the Sharia-compliant bank stood at almost Rs15 billion at the end of March, up 11.4pc from a quarter ago.

The government is promoting home ownership by means of subsidised mortgages through commercial banks. The State Bank of Pakistan (SBP) has asked lenders to increase their construction and housing finance to at least 5pc of their total private-sector loans by December. Hardly five of over two dozen banks currently meet that criterion.

“Our average home loan size is around Rs6 million,” BankIslami Pakistan CEO Syed Amir Ali told Dawn in a recent interview.

Most of its home loans were extended before the government announced the mark-up subsidy programme that allows first-time home buyers to get subsidised mortgages at 3pc, 5pc and 7pc per annum.

BankIslami is quickly expanding its financing book, which grew 17.3pc in just three months to Rs152.7bn at the end of March

According to SBP data, consumer financing for house construction amounted to Rs97.8bn at the end of May, up 18pc from a year ago. Yet the annual growth number appears subdued given all the hullabaloo about subsidised home financing available for people belonging to the lower and middle classes.

“Conditions were too stringent initially when the subsidy scheme was announced. I tried to book a few customers myself. We approved credit. But none of them could find a house to buy,” he said while referring to the “unrealistic” property price caps of Rs3.5m and Rs6m that the government initially notified as part of the subsidy scheme but withdrew afterwards.

“Where will you find a house for Rs3.5m in Karachi? Even if it’s a modest 80 square-yard, double-story unit, its construction cost alone will be Rs5m. Add another Rs3m for land, and you have an Rs8m house that should require Rs6m financing from the bank,” he said. The government has now removed the property value cap and increased the size of the subsidised loan up to Rs10m for top-tier customers.

Mr Ali said all disbursements under the mark-up subsidy scheme have taken place in the last five months. BankIslami disbursed 47 loans of Rs221m between January and May. Industry-wide, 895 borrowers drew Rs2.2bn under this scheme during the same five months, he added.

The numbers may look unimpressive for now, but Mr Ali insists the growth rate will soon be exponential, not linear. “We have approved (but not yet disbursed) loans of Rs300m. We’ve received home loan applications of another Rs1.2bn,” he said.

Hitting the gas

BankIslami is quickly expanding its financing book, which grew 17.3pc in just three months to Rs152.7bn at the end of March.

According to Mr Ali, sudden growth in financing is partly because of the low-base effect. The bank shied away from financing in the two preceding years as it battled to improve its capital adequacy ratio in 2019 and faced Covid-19 in 2020.

The bank earned a net profit of Rs390m in the latest quarter, up 5.9pc from a year ago. However, profit before provisions declined 61pc year-on-year to Rs684.3m.

Industry-wide, total outstanding credit to private-sector businesses inched up 3.8pc year-on-year to Rs5.5 trillion at the end of last month.

Banks extended subsidised credit to private-sector firms under a number of refinancing schemes of the SBP to fight the coronavirus-induced recession. But most of these schemes — meant for fresh investment, loan deferment/restructuring and salaries — have now matured.

So the question is: with the SBP ending many of its concessionary refinance facilities, will the banks once again go back to lazily investing in government debt securities? “Lending is an outcome of investment in capital goods. Capital investment depends on the investor’s outlook on the economy, not the interest rate,” Mr Ali said.

As an example, he referred to the Temporary Economic Refinance Facility (TERF) that expired in March with approved financing of Rs435.7bn. So many letters of credit or LCs have been opened and most of these projects will likely happen in 2021-22, he said. “Once these projects are up and running, they will need working capital of almost the same amount. So in the next two years, banks will generate working capital of about Rs500bn.”

Its latest quarterly accounts show BankIslami has done financing of Rs93m under TERF. However, the CEO said the number is “understated” because the bank has opened but not yet disbursed LCs worth as much as Rs9.5bn.

“A company may have borrowed Rs2bn today to set up a plant, but it will need another Rs2bn in working capital to run that plant tomorrow,” he said, emphasising that banks expect a sustained credit offtake on a long-term basis.

Published in Dawn, The Business and Finance Weekly, June 28th, 2021

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