Home » Laws & Taxes » State Bank of Pakistan’s Low Cost Housing Push: A Year Later
Back in July 2018, when Prime Minister Imran Khan was just about to be sworn into office, the State Bank of Pakistan (SBP) came up with a comprehensive policy draft for low-cost housing finance. The draft addressed housing finance market in Pakistan by highlighting its growing need and underscoring its importance in offsetting the huge housing deficit.
The draft was sent out to stakeholders, as well as the public, to solicit their views and get feedback. However, when the policy was finalized and published in March 2019, the new version was found wanting in key areas that were part of the previous draft.
The policy underlined the factors hindering the growth of housing finance in Pakistan, and offered a range of products to facilitate end-consumers, financial institutions as well as the often-ignored developers. It also emphasized the SBP’s role as the chief regulator in pushing for low-cost housing. This eventually also coincided with the much touted Naya Pakistan Housing Program (NPHP) that was (or rather, still is) all set to facilitate building of 5 million houses across Pakistan, that is nearly half of the existing housing shortage, over the span of 5 years.
The policy identified various reasons behind banks’ averseness to mortgage assets such as unclear titling of assets, asset-liability mismatch, weak contract enforcement and the existing foreclosure laws that do not give banks the authority to foreclose on properties in case of default. The central argument was that the more prominent lacking is in the area of transferring of reliable property rights, which is the key ingredient in making housing finance a safe business for banks. Entitlement issue is so complex and grave that most banks do not consider mortgaged property a reliable security.
Following were some of the policy recommendations: (a) help the government implement the amendment under Section 15 of FIRO Amendment Act 2017 which will empower banks to foreclose mortgaged properties directly in the case of defaults, while also ensure implementation of Section 20 of the Act that has made willful defaults a non-bailable offence; (b) provide targets to banks for low-cost housing finance; (c) relax general reserve requirements for those financial institutions that are providing low-cost housing loans; (d) encourage banks to offer more innovative products[1]; (e) upscale finance limits for microfinance banks; (f) promote and develop housing finance companies.
The final policy however did not encompass the first recommendation, though it did ensure that general reserve requirements for financial institutions were relaxed, and finance limits for microfinance banks upscaled. However, the major aim, where SBP was to introduce a subsidized financing facility to provide refinance up to Rs1 million or 50 percent of loan amount at a rate of 1 percent to banks/DFIs, and to bring the end borrower rate down to 5 percent, never really materialized.
Another major recommendation was the proposed model for land utilization. Since land makes up for a substantial portion of the total housing cost, the SBP proposed that—in an open-bid project—large parcels of government and institutional vacant land could be offered free of cost to the developers undertaking housing projects, comprising at least 50 percent houses/apartments in the low-income category. The rest of the land could be utilized upon the builder’s discretion with 10 percent commercial use. This would have significantly reduced the cost of housing projects.
Again, this product never appeared in the final document. However, what did make the final cut was a low-cost policy for special interest groups in low-income segments including widows, children of martyrs, special persons, transgenders and persons in areas severely affected by terrorism. Essentially, SBP substantially reduced the scope of its refinancing product.
The original draft policy also expressed the Central Bank’s aims to increase outstanding housing finance from Rs. 88 billion (at the time) to Rs 250 billion, and to increase the number of borrowers from 62,000 (at the time) to 200,000 by June 2021. In September 2019, housing finance stood at Rs103.64 billion (up 17%) while the NPL ratio for banks and DFIs decreased from 13 percent to 11 percent, which indicates that some progress has been made. But, the number of borrowers has decreased to around 59,000 with majority of the loans in the size range of within Rs1 million.
Simultaneous
with the introduction of the draft policy, the Pakistan Mortgage Refinance
Company (PMRC) had come into action. With funding support from the World Bank, PMRC
was well placed to refinance some of the loans issued to financial institutions
and House Building Finance Corporation (HBFC). This would lengthen the tenure of the mortgage
loans and provide a stable source of funding to housing finance providers.
Since PMRC was all set to take on a more influential role in housing finance,
it seemed reasonable for the SBP to only function as a regulator and facilitator,
which is what eventually became apparent.
This is evident from SBP’s final policy document as well, which states: “The government is already taking measures to facilitate adequate housing for all segments of the society. State Bank has decided to introduce regulatory and policy initiatives which will also complement efforts of government for housing industry”.
The latest increase in housing finance is most likely a reflection of the new products being introduced, specially by HBFC, but the coverage under PMRC has remained limited. The hope would be to keep non-performing loan ratios at their minimum so financial institutions are more open to availing the refinancing.
[1] They can be: a) Availability of fixed/hybrid rate (floating and fixed) b) Availability of specified Interest-only period products to make regular home loans affordable c) Step-up payment option wherein initial installments are lower and repayment schedule is linked to expected growth in borrower’s income d) Discounted rates for borrowers through institutional arrangements with various public/private sector entities e) Availability of flexible tenures and maximum loan tenure as allowed under Prudential Regulations for Housing Finance f) Products with no prepayment penalty option
