HBL accelerates efforts to promote low-cost housing finance

KARACHI: Habib Bank Limited, the country’s biggest bank, has geared up efforts to participate in government-subsidised low cost house financing program with some losses expected in the beginning as the market adjusts to a normal loss range like any other product, its Islamic Banking Head Afaq Khan said during an interview.

Q: How do you see the potential of shariah-compliant mortgage pertaining to the low-cost house financing scheme?

A: Islamic banks, including the shariah-compliant windows of the conventional lenders, have a majority in the mortgage business in Pakistan. They own over 50 percent share in mortgage financing. HBL only provides Islamic home financing options, including low-cost mortgages to customers as it had stopped offering conventional mortgages.

Q: Are there credit risks involved?

A: Pakistan Mortgage Refinance Company (PMRC) will cover defaults on these loans up to 40 percent of the portfolio subject to certain conditions. If banks face losses on low-cost housing loans, despite conducting a proper due diligence of the customers, PMRC will cover 40 percent of the first loss on a portfolio basis. We are pretty hopeful that banks will be able to control losses on such mortgages and they will not need to avail the PMRC’s loss protection facility. However, in the beginning, banks can see some losses as the market adjusts to a normal loss range like any other product.

Q: Are there any other challenges?

A: Demand for the low-interest housing and construction finance is high but its supply is low at present. The private sector is now planning to launch large projects to cater to this demand which will obviously take some time. This is a long-term strategy that’s very positive for the banking industry and the property market as well. It’s very prudent from an economic perspective. We need to do mega projects as this will get prices down in the property market for the end user.

Q: How do you see the foreclosure laws?

A: The Lahore High Court (LHC) issued a judgment related to the matter of mortgaged property earlier this year. According to the decision, banks are not needed to obtain a decree from the banking court to sell mortgaged properties for recovering defaulted loans. This decision has now been upheld by the Supreme Court as well in its latest judgment. We believe this will give significant positive momentum to the mortgage market in Pakistan.

Q: How has been the HBL’s response to the scheme so far?

A: At present seven commercial banks have formed a consortium for financing two projects under the umbrella of Naya Pakistan Housing and Development Authority and Association of Builders and Developers. We are a part of that. HBL is directly pitching, and have submitted proposals, to three potential parties that will build new residential and commercial projects including low cost housing in the country. Negotiations are at different stages of finalisation.

HBL Islamic banking has signed an agreement with Kings Construction to finance a 320-unit apartment building in Gulistan-e-Johar, Karachi. This new project will help boost the local economy, create around 500 jobs in the construction sector and deliver more homes for the middle and low income masses. This would also increase demand for sectors associated with property such as iron, steel and cement, thus creating more jobs in these sectors as well. We are going to kick-start this project soon.

HBL Islamic Banking has started disbursing low-cost housing loans. We have issued facility offer letters to two customers who will use the financing to build homes on plots of lands they own or buy a new built property.

Q: Who are the potential customers?

A: Appetite for the normal mortgages has picked up due to decline in interest rates. However, we see more demand for mortgages coming from the business community as opposed to salaried class. This was because of the initial impact of the COVID-19 pandemic leading to concerns around job security. However, the situation is improving and we see more interest building up from the salaried class.

The government and the SBP have directed banks into low-cost residential mortgages in a very planned and organised way. The SBP has mandated banks to disburse 5 percent of the loan book in the housing sector. It has also introduced a cash reserve requirement incentives and penalties for the banks for fulfilling, exceeding and facing shortfall in their quarterly housing loans targets.