House Financing is Improving in Pakistan but There’s Room for Improvement [Analysis]

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When it comes to building a house, it is considered a distant dream for a middle class salaried person particularly in Pakistan but a segment of public who use commercial banks for this purpose – thanks to low-interest rates and inclination of banks for offering this product more actively – is increasing in numbers.

According to the State Bank of Pakistan (SBP), the commercial banks and House Building Financing Corporation (HBFC) have extended a handsome amount of loans or financing of Rs. 13.72 billion (from Sep 2016 to 2017) to the customers of various income brackets across the country.

In the previous year, banks and HBFC recorded an amount of Rs. 7.8 billion in housing financing from Sep 2015 to 2016. This showed a good rise in customers using banks for housing finance. On a year-on-year basis, a 44% rise was recorded in the lent amount which also reflected the number of increasing borrowers and units of houses in Pakistan.


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State of Housing Finance in Pakistan

Islamic banks are aggressively taking part in housing finance because this is one of the major services these institutions could offer as per Sharia injunctions, however, the public considers that their margins are too high.

Overall, commercial banks are charging up to 11% interest and profit rate from customers depending on the size of loans and its repayment period.

The loan/ financing portfolio of the banking industry stood at Rs. 75 billion by September 2017. Not only did the loan value increase in this sector but Non-Performing Loans also decreased to Rs. 10 billion from Rs. 12.4 billion.

It is an encouraging trend but the slow pace is a result of various factors which are not conducive to banking and housing sectors.

The population growth, rapid urbanization and increasing family system is increasing the demand of housing sector across the country, though low purchasing power and unavailability of financing facilities are causing a shortage of housing units in Pakistan.

House financing to GDP ratio in Pakistan is currently less than 1% compared to South Asia’s average of 3.4%. This is one of the lowest in the world. The backlog housing units stands at 7.5 million in 2009, which is increasing by 300,000 units annually in Pakistan, according to World Bank’s report.


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Issues and Challenges

The sector faces the following issues and challenges at the moment:

  • Tough conditions of commercial banks regarding security in case of default.
  • The complicated process of banks which needs to be simplified.
  • Bank’s margins are higher than expected along with various charges.
  • Housing societies are not well documented in many cities.
  • The process of transfer, leasing and change of ownership are slow and complicated.
  • Volatile property prices in major cities.
  • Lack of interest/ awareness among the public.
  • Controlled marketing by banks.
  • Flaws in property valuation by the provincial governments.
  • High taxation rate and duties.

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What Should be Done Next?

Banks are apparently increasing their controlled marketing due to the risk involved in the lending and financing despite the fact that they get handsome margins.

These institutions should aggressively market their products though the provincial and federal governments should announce housing schemes in different parts of the country to meet the housing needs of the public.

Besides, the central bank should set a yearly target for the commercial and microfinance banks for lending and financing houses to the public. Collaborations with builders and developers could also work in this direction provided transparency is ensured.

A step has been taken by the State Bank of Pakistan (SBP) by setting up Pakistan Mortgage Refinance Company in 2016 with the support of the World Bank that is expected to provide housing finance worth Rs 9 billion to middle and low-income groups in the first year of its commercial operation in 2018.

As per plan, the new company will provide funding to banks and financial institutions at a fixed rate to enable them to offer funds to long-term borrowers at a fixed rate. The salaried class may acquire loans for up to 25-30 years instead of 15-20 years now. And this will make loan repayment affordable for them.

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