Bank financing for under-construction projects allowed

Published September 3, 2021
In this file photo, laborers work at a building construction site in Karachi. — Reuters/File
In this file photo, laborers work at a building construction site in Karachi. — Reuters/File

KARACHI: The State Bank of Pakistan (SBP) has allowed buyers to get bank financing for under-construction housing units aiming to bring about growth in the construction and housing sector in line with the government’s policy.

“To facilitate buyers of under construction housing units in obtaining housing finance, the central bank has issued guidelines to banks and DFIs that allow them to extend loans for under-construction projects,” said the SBP on Thursday.

The SBP said that currently banks are reluctant to provide such financing which limits the options of home buyers that need financing to complete units.

“The SBP’s new guidelines provide a complete framework with necessary risk mitigation elements for the banking industry to support this area of housing financing,” it added.

Essentially, the financing risk of banks will be secured through mortgage of project land based on specific arrangements with builders.

“The payments to builders will be routed through a specially created account (known as an escrow account) with no direct access to the seller until completion of construction milestones as agreed between financing banks and builders,” said the SBP.

The purchasers of housing units availing finance will be able to enjoy a number of benefits, said the SBP, adding that the purchasers will get housing units in under-construction projects which are relatively low-cost compared to fully constructed units. The strong monitoring and oversight by the banks will facilitate timely completion and transfer of possession to the purchasers while housing units are new. The purchasers may bear lower maintenance and renovation costs for initial few years.

“These benefits are expected to create incentives for buying underconstruction houses creating demand for the construction industry,” said the SBP.

Banks are reluctant to offer finance for purchase of housing units in under-construction projects as compared to completed projects. The prevalent market practices is that builders allow the purchasers of housing units to make periodic payments when construction begins against allotment letters which is a convenient process in enabling home ownership.

However, banks do not provide housing finance against allotment letters. As a result, buyers are deprived of the opportunity to avail housing finance from banks and hence owning affordable housing units in the under-construction phase of projects.

In addition, builders also complain that non-availability of housing finance from banks for the under con-struction projects reduces demand and slows development of new projects. ‘With an increase in financing after issuance of these guidelines, such concerns will be addressed,” said the SBP.

The SBP guidelines are a major step forward and are in line with State Bank’s ongoing efforts to spur economic development through promotion of activity in housing and construction sectors, it added.

“It is expected that housing finance of banks will see a significant growth in near future. Apart from providing an opportunity to the borrowers to avail housing finance under ‘Mera Pakistan Mera Ghar’ in underconstruction projects, this will also help builders enhance stock of new apartments or flats across the country,” the SBP said.

Published in Dawn, September 3rd, 2021

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