Reforming Pakistan’s mortgage rules to encourage home loans

November 20, 2019

LAHORE: Most economists agree that the construction sector has the potential to reduce the unemployment quickly, but this sector is plagued with outdated rules and laws that are even impeding the...

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LAHORE: Most economists agree that the construction sector has the potential to reduce the unemployment quickly, but this sector is plagued with outdated rules and laws that are even impeding the public sector Naya Pakistan Housing Project.

Having realized that the public sector banks do not have the capacity to fully finance this project, the government is urging private banks to fund these housing schemes. The private banks are willing to come forward, but want the government to change some laws so that they are secure about the return of their loans.

In fact, housing mortgage has never picked up in Pakistan because of antiquated laws. Under prevailing laws, the banks have to fight a long legal battle to get the possession of a mortgaged house whose owner has defaulted.

We do not hear about such long drawn battles in developed economies where there is no housing shortage because of liberal financing by the banking sector. Pakistan’s formal financial sector caters to only two percent of all housing finance transactions. The mortgage to GDP ratio is a meagre 0.6 percent which is the lowest in the region.

MCB Bank Chairman Mian Mohammad Mansha said that financing housing projects would not be a problem in Pakistan if foreclosure laws were truly strengthened. He said that he was also operating a bank in Sri Lanka, which liberally provides housing finance.

“The reason is that the Sri Lankan government has passed a law called the Parate law, which equally protects the interest of the bank as well as the customers. The law allows sale of mortgaged property without going through court proceedings,” he informed.

The procedure was relatively very quick and gave the customer an opportunity to approach the bank during the interim period and settle the account.

In Sri Lanka, the bank first demands payment of its dues from the customer by issuing 14 days final notice. If the customer fails to clear the liabilities within the notice period, the bank then passes a resolution at Board of Directors level, authorising a person or an agency for sale of property through public auction.

The bank then has to public the resolution of its BOD in at least three national newspapers at least 14 days before the auction date. The copy of the notice is sent to the borrower and pasted in the vicinity of the property to be sold.

If during this period the borrower again fails to make the payment, the bank again advertises the resolution to give further time to the borrower. In total, it takes one to one and a half month in selling property through this procedure.

The BOD while passing the resolution fixes an upset price below which property would not be sold. If the auction is not successful, the bank is authorised to purchase the property at the upset price.

However, if the mortgaged property is sold, the bank is permitted to recover all its dues and any other charges from the sales proceeds and return the balance money, if any to the customer. If the bank has doubt as to whom the balance proceeds should be paid, it deposits the same in court.

The bank issues a sales certificate to the successful bidder transferring the property in his name. In case bank purchases the property, then sales certificate is issued in the bank’s favour.

The bank however, is required to re-sell the property within a reasonable time without holding it longer than it is necessary. If the bank has purchased the property, the defaulting owner may still negotiate payment of his/her liabilities for buying it back.

If any person without any plausible reason, resists, obstructs and prevents the authorised BOD to sell the property, they shall be guilty of an offence and be liable to imprisonment/fine.

In Pakistan, the provisions regarding bank’s right to foreclosure a mortgage without recourse to court are available in the Recovery Ordinance; however it remained practically ineffective because of years of long status quo orders by the courts against its implementation.

There was a need to make the foreclosure laws stricter and encouraging so that the banks might increase their exposure in the housing finance sector.

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