To quote Citi Bank country manager Zubyr Soomro, it is the best time to kickstart the process of housing finance. A variety of factors have combined to create a window of opportunity. These listed by him are: macro-economic stability and low interest rate environment, increased flow of remittances and investment in the housing sector, rupee stability and appreciation and anti-money laundering efforts assisting in the documentation of the economy.
Housing finance is estimated at Rs2 billion per annum that accounts for around one per cent of the total volume of bank lending. For the medium term, say for 3-4 years, Zubyr Soomro reckons that an overall target of Rs180 billion could be set for housing finance. Perhaps, his forecast is based on Citi Bank’s own experience and the initiatives taken by the State Bank to boost housing finance which is being reinforced by by the World Bank support.
Housing finance is the core issue in the paradigm shift to meet the evolving needs of banking in Pakistan. “Gone are the days of plain vanilla deposit mobilization and lending to large borrowers or investing in government paper” says finance minister Shaukat Aziz. His advice to banks is to reduce cost of intermediation and to look for new and attractive avenues for lending. Housing is one of them and interest rate is a related issue.
Replying to questions at the Housing Finance Conference held on May 11 and 12, the governor of the State Bank, Dr. Ishrat Husain, rejected a proposal for subsidized credit for housing as, he said, subsidized credit is misused. Instead,he said efforts have been made to bring down interest rates.
Khalid Siraj, advisor to the SBP governor, did not favour any option to keep housing loan interest at ten per cent or to fix a ceiling on housing loans for banks. He recalled that banks preferred to pay penalty rather than follow the target for agricultural credit.
A report prepared by the World Bank consultants says that in the current economic scenario, a good part of economic revival depends on investment in housing sector. Housing can be a major avenue for bank financing and household investment and a lead factor in long-term economic growth.
In many countries, specially most of the developed economies, recovery from recession is pinned on new housing sector starts, followed by automobile and then by inventory orders for major consumer items. Local banks have also started consumer financing as, they say, the capital market has begun to take care of the long-term funding of corporates. Union Bank chairman Shaukat Tareen says that his bank has extended housing loans, started a year ago, to the tune of Rs1 billion.
And what is no less significant is that an international strategic consensus has emerged among policy-makers and bankers that” the focus of housing finance development should be the mainstream of the banking system and capital markets who have the capacity to significantly enlarge asset-backed mortgage financing both in the primary and secondary markets”, say State Bank officials.
Currently, the role of the financial system in funding housing investment is “at best marginal”.
To quote Dr Ishrat Husain, housing is the largest single asset class in Pakistan with an estimated worth of Rs1700 billion. Yet, he says, housing finance is estimated to be less than one per cent of the GDP because there is no vibrant system of housing finance. “In USA, it is 53 per cent, in EU 36 per cent, in Malaysia 21 per cent and in Iran 3 per cent.
In rich countries as a whole, where investments in housing far exceeds that in stocks and shares, individuals are estimated to own $23 trillion in equities and a reckoned investment of $40 trillion in property. Stocks suffer from price volatility, whereas property provides a steady income from capital appreciation and rents despite occasional boom and busts.
Now, policy makers say that the excess liquidity in banks needs to be channelled into productive sectors of the economy. And to quote the president of the Askari Bank Kalimur Rehman, the bankers have to get out of the mindset that housing was an unproductive sector. Finance minister Shaukat Aziz says that revival of the housing sector will generate momentum in almost 40 allied industries.
“The foremost issue”, says the conference convener, Shakil Faruqi, an advisor to the State Bank, “is how to restructure house finance so that the mainstream of the banking system and capital market plays a much larger and meaningful role than it does today” in the housing sector. Housing finance is to be re-designed to create a feasible arrangement so that households are able to leverage their savings ploughed into their residences and locked up for their lifetime until the residence or property is sold away. If this property is deemed fit as bankable long term asset and the owner is able to borrow against it in some reasonable proportion of its value for worthwhile investments, this leveraging of locked- up equity in housing could significantly boost ancillary asset acquisition such as another property or investment of a similar class of asset. There is a great potential of this type of mobilization of equity base of households currently frozen in residences they have built over the past years.
Banks are seeking a more positive enabling environment for development of housing finance. The major issues are: national housing policies, priorities, programmes, legal and regulatory framework including titles of land and repossession , tax benefits enabling infrastructure for housing such as roads, water and electricity. Whereas the State Bank is expected to play the role of a catalyst, the governance of the housing sector rests with federal and provincial governments.
Housing finance was never taken seriously by commercial banks engaged in traditional and typical core banking activities such as loans and advances against imports, exports, working capital on the short-term basis only. For this, reasons in the report prepared for the World Bank has summed up as follows:
(a) Prudential regulations limited the ceiling on housing finance to one per cent. The State Bank has recently allowed the banks to extend housing finance without any ceiling. (b) Normally, banks raise short-term deposits and long term lending is not possible with short-term resources. (c) Banks prefer to invest large sums in government securities. (d) Property documentation is complicated and cumbersome. (e) Recovery laws are not effective and efficient.
In 1990, the government invited applications from the private sector for setting up house finance companies. Out of the 24 applicants, seven were granted licence to start a housing finance company. Of these, three started operations. These are: Citibank Housing Finance Company Limited, International House Finance Limited and the LTV Housing Finance Limited. Two have been closed down and the IHFC is expected to be merged with a commercial bank. Other four companies that got the licence did not start operations because of credit risk, non-availability of funds, ineffective repossession law/foreclosure law, high cost of funds and mortgage rate and lack of expertise, according the WB consultants.
The two foreign banks, the ABN-AMRO and the Citibank, initially offered housing finance to their clients and then extended it to the employees of selected multinational organizations. They offered a floating mark-up rate of 15-16 per cent.The MCB launched its housing finance in April 2001 as a consumer banking product in Karachi only. First Women Bank also introduced house improvement loan for women in April 2001.
Other sources of house financing are as follows: Loans against provident fund for construction/purchase of house. Banks and some organizations extend housing loan to their employees at low rates ranging from 3-10 per cent.
Builders also normally accept 30-40 per cent down payment and hand over possession of the property to buyers. The balance amount is recovered in monthly instalments over 3-5 years. The mark-up of 15-18 per cent is built in the price. Builders hand over title documents only on receipt of full payment. The builders do not operate as lenders, neither directly nor via subsidiary company. One of the private banks announced housing loans at 13 per cent on Wednesday.
On a limited scale, micro credit for housing has been extended by two locals banks namely, the MCB and the FWB to very low income groups in the rural areas of Karachi, Hyderabad and Larkana. The MCB extended loans upto Rs50,000 and FWB upto Rs35,000 to individuals only for improvement of their existing housing unit at a mark-up rate of 16 per cent for five-year term. The FWB has disbursed over 500 loans with a remarkable recovery rate of 98 per cent. Bankers say that the main problem in extending credit for housing is availability of land title documents, unsatisfactory collateral,high mark up rate and insufficient delivery system.
World Bank’s senior housing finance specialist Olivier Hassler has advised banks that they may start lending to upper top income groups but emphasised the need to diversify and include other income groups.
At present, both the primary and secondary markets are weak and lack sufficient depth relative to the needs and the potentials of housing finance.
The housing loan market is the primary market for housing. The secondary market is the capital market where house finance securities are floated and traded both for the investment in housing projects or fund raising by financial institutions engaged in retail mortgage lending.
Under the proposals discussed at the Conference,the role of the capital market would be securitization of housing finance where institutional investors purchase housing securities for their portfolio investment. The securitization may be done by lenders active in the primary market through bundling first or second home mortgages, thereby reducing their exposure , spreading their risks and bridging the maturity structure on the asset and liability side of the lending institutions.
In the last two years, the government and the State Bank have taken measures to boost housing finance. The limits for mortgage finance has been raised to Rs.5 million. Interest payments on mortgage upto Rs.100,000 have been made tax deductible. New recovery law, which allows repossession of property by lenders without recourse to the courts has been enacted. But the results have not been encouraging so far.
Stakeholders in the housing and construction industry are seeking incentives like tax concessions, availability of land at low cost, provision of infrastructure and other related facilities. The chairman of the Pakistan Contractors Association says that out of Rs100 cost of construction, Rs25 goes directly or indirectly to the government as taxes and the burden needs to be reduced. Cement manufacturers want heavy excise duty to be cut. Finance minister Shaukat Aziz says that, “if you earn, you have to pay tax.”