KARACHI: The housing and construction finance grew by a meagre 1.33 percent in the fiscal year that ended in June 2023, as high interest rates and a weak economy deterred banks from expanding their lending portfolio.
The outstanding amount of housing and construction finance increased to Rs456.8 billion rupees by the end of June 2023, from Rs450.8 billion a year earlier, according to the State Bank of Pakistan’s (SBP) Governor’s Annual Report.
Construction and housing have the potential to revive economic activity, create jobs, and improve living standards. The SBP undertook various initiatives to promote and develop housing finance in Pakistan. These include the issuance of separate prudential regulations for housing finance, ongoing capacity building of stakeholders, and implementation of the standardised loan documentation.
“The SBP assigned indicate targets for housing and construction finance, advising banks to increase their housing and construction portfolio to 7 percent of their private sector advances by the end of FY2023,” the report said.
“However, owing to rising interest rates, and overall tough economic conditions that contributed to sharp deceleration of economic growth, housing finance didn’t grow substantially during FY2023," it added. The fiscal year 2023 was extraordinarily challenging, with a host of external and domestic shocks, amplified by lingering structural weaknesses, contributing to persistently high inflation amid a contraction in economic activities, according to the report.
The SBP responded to these challenges by maintaining a contractionary policy stance, raising the policy rate by a cumulative 825 basis points during FY2023, in addition to the 675 basis points increase in FY2022, the report noted.
The SBP kept the policy rate unchanged at a record 22 percent at its last monetary policy review meeting in December.
In October 2020, the government introduced the Government Markup Subsidy Scheme, commonly known as Mera Pakistan Mera Ghar (MPMG) Scheme. Available in both conventional and Islamic modes, this scheme enabled banks to provide financing for the construction and purchase of houses at very low financing rates for low to middle-income segments of the population.
However, the International Monetary Fund's loan programme, which promotes targeted budget subsidy schemes for the vulnerable segments of the population, was the primary reason for the scheme's discontinuation in August 2021.
The IMF, in its previous staff reports, had urged the Pakistani authorities to discontinue the mandatory housing lending targets for banks introduced in 2020 and recommended a stronger focus on addressing long-standing structural deficiencies to support private sector lending.