SBP sees housing finance increasing to Rs250bln by 2021

KARACHI: The State bank of Pakistan (SBP) on Wednesday said it aims to bolster the mortgage book of financial institutions from current Rs83 billion to Rs250 billion by June 2021, along with increasing the number of borrowers with access to the home loans to 200,000 from the current 68,000.

The central bank published a draft policy on low-cost housing finance to ease housing shortage in the country.

According to the 2017 census, Pakistan’s population has reached 208 million, growing at an average of 2.4 percent annually since 1998. The growing number of households implies an increase in the demand for housing.

It is estimated that annual demand for new homes is approximately 700,000 a year, whereas, only about half of this demand is met. Overall, the housing deficit is estimated at 10 million units and growing.

In its draft policy, the SBP revealed it will introduce a subsidised financing facility for low-cost housing by providing liquidity to the financial institutions at subsidised rate.

“SBP will provide refinance up to Rs1 million or 50 percent of loan amount at a rate of 1 percent to banks/DFIs (Development Finance Institutions) and the end borrower rate will be 5 percent,” its draft said.

“The remaining 50 percent of the loan/financing amount shall be provided by the banks/DFIs from their own sources at fixed rate of up to 12 percent or variable rate of 1 year KIBOR plus risk premium up to 4 percent.”

The facility will be provided for both individual house borrowers and housing builders/developers.

Similar financing facility will also be provided through the Islamic financial institutions, according to the draft document.

The SBP sets a definition of low cost housing financing in Pakistan to be adopted as loan amount of up to Rs2 million with the property valuing up to Rs2.5 million. The maximum monthly income of a low cost housing finance borrower should be up to Rs60,000.

Microfinance banks will be allowed to increase housing finance amount up to Rs1 million from Rs500,000.

Pakistan, like other developing countries, has been facing shortage of housing units; and this basic human need is felt more profoundly at the bottom-of-the-pyramid comprising of the poor and financially under-served segments of the society. One of the key constraints hampering supply of housing units is the unavailability of financing.

The formal financial sector has been failing to provide adequate and affordable housing finance to a large segment of the population.

The combined volume of outstanding housing finance from banks and the House Building Finance Company Limited is equivalent to only 0.5 percent of the gross domestic product. This ratio (referred to as mortgage depth) is low in comparison, not only to advanced economies but also to regional developing economies of India and Bangladesh.

The housing finance market has been marred by both supply and demand side challenges. Key supply side issues faced by the industry are: ineffective foreclosure laws, uncertainty of title deeds, bank’s general preference for investment in government securities, and risk of maturity mismatch due to unavailability of long-term funding.

Similarly, key issues related to demand side are escalating property prices, dearth of financing products, unavailability of formal financial services and volatility in interest rates.

The SBP also invited comments from general public on policy for promotion of low cost housing finance.

Public comments received within a period of fifteen days will be considered before finalising the policy.