AFFORDABILITY is the key factor keeping the low-middle-income households from owning a house. In order to address this gap, the government last year launched a subsidised housing finance scheme under which banks have been directed by the State Bank to lend up to Rs10m to first-time homeowners. The banks have also been asked to increase their lending for the housing and construction sectors to at least 5pc of their total private sector advances by December 2021. A part of their monthly housing finance disbursements, however, must include ‘small-ticket’ loans for aspiring homeowners with monthly income as low as Rs25,000 for the construction or purchase of low-cost homes under the Mera Pakistan Mera Ghar initiative. In order to ensure the success of the scheme, the central bank assigns the banks every month rolling housing finance targets according to the size of their private sector credit portfolios. The failure to meet these targets attracts punitive action from the State Bank. Yet, lending for low-cost housing is painfully slow. The latest data shows that banks’ combined disbursements for low-cost housing remain as low as Rs18bn.

There are valid reasons for the slow pace of approval and disbursement of bank loans. First, the appetite for housing finance is drying up with disposable incomes being squeezed as low-middle-income households grapple with the rising cost of living, land and construction. Second, the supply of low-cost housing units in the market is almost non-existent. But a more important factor relates to the banks’ aversion to risky lending. It isn’t without reason that the mortgage finance market in Pakistan is only 0.3pc of GDP. This compares with an average of 3.4pc for the rest of South Asia. In developed economies, this ratio is often as high as 95pc. Pakistani banks shy away from lending for housing primarily because of the absence of effective foreclosure laws that would allow lenders to repossess a property without any judicial interference in case a borrower defaults on his payment. Given the infection ratio of up to 18pc or more for individual banks, this hesitance is justified, particularly when pressure from the State Bank to meet their monthly targets for small-ticket loans could impair the quality of their housing credit portfolio. Therefore, the government should introduce effective foreclosure laws at the earliest if it wants the mortgage industry to expand and flourish to provide people access to finance for buying or building homes.

Published in Dawn, November 16th, 2021