“Housing Finance Constitutes Less Than One Percent Of The Gdp Mainly Because Of Weak Legal Protection”
KAZIM ALAM: What is the size of DIB’s housing portfolio?
JUNAID AHMED: We have been in the mortgage business since the inception of the bank in 2006 and we remained in the business even during those years (2008-2009) when mortgage financing was limited. Our total portfolio of private-sector finances is Rs 180.8 billion and the share of housing and construction finance is 7.76%, so in absolute terms, it is Rs 14 billion.
KA: What is DIB’s portfolio in terms of the government’s mark-up subsidy scheme for housing finance for the low-income population?
JA: We have received financing applications worth Rs 1.712 billion (292 applications) since the start of this scheme. So far, our disbursements under the scheme amount to Rs 92.4 million. One of the challenges is the availability of housing units; we have to check the documentation, legal papers and ownership status before extending any financing. I think Punjab has done a better job in this regard, because affordable housing schemes on Lahore Development Authority (LDA) land have clean titles. These conditions do not exist in the southern region. We have asked the Sindh Government to allocate a portion of the land owned by the Karachi Development Authority (KDA) to low-income housing projects. We have lined up eight to 10 mid-tier developers and assured them that if they want to construct a housing project as per the given guidelines, we will finance the end users. In this way, developers have the comfort of knowing that they will easily find buyers as DIB already has potential home buyers with approved financing.
KA: Why are the Islamic banks ahead of their conventional counterparts in housing finance?
JA: It is not a new phenomenon. Total housing finance in Pakistan is about Rs 110 billion, which is very low – a drop in the ocean in terms of the share of the banking sector’s overall financing of Rs 18 trillion – and over 55% of that Rs 110 billion is financed by Islamic banks and the Islamic windows of conventional banks. Islamic banks had trouble finding investment avenues. Unlike conventional banks, we cannot invest in Pakistan Investment Bonds (PIBs), which is why conventional banks barely have housing finance as part of their portfolios. That is because you need substantial human resources to expand housing finance; you require both back-end and front-end staff and large financing processing and collection teams. Islamic banks did all this because they did not have other avenues to deploy their liabilities.
KA: Are you satisfied with the existing foreclosure laws and their enforcement?
JA: We have so many pending cases in courts. Although the Supreme Court has ruled in favour of banks on Section 15 of the Financial Institutions (Recovery of Finances) Ordinance 2001, which deals with foreclosures, a few borrowers have obtained stay orders from the banking courts. This is preventing banks from repossessing mortgaged properties when borrowers default. This is a big challenge. Housing finance currently constitutes less than one percent of the GDP mainly because of such systemic issues.
“Islamic banks had trouble finding investment avenues. Unlike conventional banks, we cannot invest in Pakistan Investment Bonds (PIBs), which is why conventional banks barely have housing finance as part of their portfolios.
KA: Is the newfound enthusiasm among banks for house financing a direct outcome of regulatory pressure and will the credit off-take in housing continue at the current pace if the government withdraws or reduces the scope of subsidy mark-up schemes?
JA: I tend to agree that the enthusiasm among banks has increased and the State Bank of Pakistan (SBP) is continuously supporting them by streamlining policies and procedures to support this area of financing. For banks, this is a segment that gives a three to four percent spread above the interbank rate as well as offering secure financing. Our non-performing financing loans (NPLs) are just four percent of our total financing – despite the fact that we have been carrying this portfolio for a decade and a half. The low NPLs are because we have a robust collection team. Even four percent is high to me. If Section 15 is enforced properly, the rate will come down significantly. Borrowers will repay the financing to save their equity if they know for sure that the bank will foreclose the property in case of a default.
KA: What are you doing to increase your capacity to process and approve the increasing number of low-ticket house financing?
JA: We have outsourced the function of checking the creditworthiness of financing applicants in all the 68 cities we operate in, so mobilising human resources is not an issue. We have a back-end office that approves financing applications. We run multiple checks; we run applicant names by the credit bureaus and the National Database Registration Authority. Automation has made the entire process efficient and less time consuming. Yes, we are facing increased pressure on our resources due to the higher levels of demand in recent months, but we have the expertise because of our long history in this business segment, including sales, credit verification, collection and legal units.
KA: What income proxies do you use to process house financing for the lower-income segment?
JA: We also use expense-based income proxies as directed by the SBP. This is a fairly technical process. We apply a multiplier on certain expenses, such as school fees, to assess the income level of a financing applicant. There are many such proxies that banks use. At the moment, most of our housing finance applicants are able to produce regular pay slips, but as we expand our reach, we will start using more and more proxies to assess the creditworthiness of our customers.
KA: Has the Pakistan Mortgage Refinance Company (PMRC) helped in accessing liquidity at cheaper rates?
JA: We have signed a three billion rupee agreement with PMRC. This will give us liquidity at a fixed rate for low- and middle-income housing finance.
KA: Has the Naya Pakistan Housing Development Authority (NAPHDA) helped increase your housing portfolio?
JA: It will help us grow our portfolio if NAPHDA brings inventory to the housing market. It should identify land and approve developers.
KA: In international markets, particularly the UAE, banks offer off-plan financing. Will DIB be offering this product in Pakistan?
JA: In Dubai, DIB is a major player in home finance and this includes off-plan financing products as well. We are working with leading developers in Pakistan and expect to launch this product shortly after the necessary approvals.
Kazim Alam is a staff member at Dawn. firstname.lastname@example.org