Pakistan housing finance sector, Birth, Growth and Scope

Yousuf Ibnul Hasan
Director Metropolitan University Karachi.

The last seven decades are witnessing the transformation of the basic characteristic of Pakistan from rural to an urban country. Since independence in 1947, the population of Pakistan is showing tremendously an upward trend. In 2018, the figure has reached to almost over 200 million people within the boundaries of Pakistan. Accordingly, to reasonable approach, a paper is written in 2000, expecting the direction towards greater labor, intensity production and the market-oriented the economy would gain momentum to provide much higher employment, focused in the urban area.  Regrettably, it is upturned adverse due to non-governance of state affairs in which nation priorities were superseded to self-priorities by the state managers. This increase is seen in the unemployment, political instability, inflation, anarchy and abuse of human rights. Since the mid of 2008 non-economic in general and socioeconomic issues, in particular, were dripped for democratic priorities in view of the stability of the democratic government. Thus the entire situation created chaos, mess and crimes.
Pakistan’s being the agro base country, accomplishing the economic growth since 1958 through the export of agro products. Now the export oriented economy has shifted on import bases.  Urban populated part of Pakistan thus started facing fast-growing densities in decaying large cities particularly Karachi and Lahore and springing up of squatter areas (Katchi Abadies). The great majority of growth in large cities during the last decade has been in their slum areas. About 40% of the total population of Karachi and Lahore and other big cities live in Katchi Abadies.
Housing Finance Sector
Since 1974 Housing Finance sector in the state priorities was practically absence as an organized “Shelter Delivery System” to the population. Particularly all housing finance activities were casual.  The only source of mortgage credit was available from the state-owned House Building Finance Corporation (HBFC) which was technically declared as bankrupt at the end of 1990 and today as one of the most difficult and dissolute facilitators in the respective field. HBFC was finally planned to operate on commercial lines in June 1992. But this evolution in 2018 is still not seen justifying optimism and is seen a well decorated “Glass House with loose nuts and bolts”. As a result since 1988 the backlog of housing piled up with the passage of time and figure in 2018 it is around 3 million now with an annual increase estimated to 15% to 20%.
The beginning of 2000 Pakistan is facing and tolerated natural disasters that put a part of the population to live without a roof.  It is also abortive of the government which never bothers to update the need and supply gap with authenticating figures that could guide the private sector to enter with their resources as a field of investment. Going back to the year 1993 when a formal private house building industry exists only in Karachi. But construction finance was scarce and informal. Delays in completion and escalation in prices were quite frequent. Despite the facts stated, informal provisioning of housing had been quite dynamic.
Beginning of Housing Finance
The housing finance started to take a shape and legal framework for the establishment and operation of HBFCs were laid down in the early ’90s. Regulatory mechanisms in the form of Prudential Regulations were been formulated and notified by State Bank of Pakistan.
But how did the HFC concept emerge in Pakistan? Or why the government overlooked this socioeconomic activity to be run as NBFI since the independence of Pakistan? It is dilemma that HFC sector ignorance was the incompetency of democratic governments. It is still ignored and not much importance is given, while the HFC concept was an initiative taken by a Military General in 1986. The purpose was to bring private HFC’s in competition to improve the government sponsor HBFC and to regularize the Mortgage law. In addition to bringing growth in the industrial sector to attach to HFC as due to the Afghan war, Pakistan economy was needing industrial intensification.
USAID for Pakistan’s HFC’s.
To bring the concern of government to HFC sector one cannot ignore the significant role played by USAID under its Shelter Mobilization Program.  HFC idea was initiated by USAID by bringing a comprehensive study, carried out by ANZ Grandlays Pakistan at the cost of USAID. On the basis of this report, the US $50 million was granted to Government of Pakistan in 1989 to introduce HFC’s in the private sector. Disappointedly these funds were kept un-utilized for a very long period and no significant importance was given to benefit the Pakistan Shelter Mobilization Program. Finally USAID called off the funds and ask the government its winding plans to the program in Pakistan.
USAID the decision put the competence of the government gone into the stake.  Finally “the dream comes true” and in 1991 government put all its efforts to approve the National Housing Policy in one night under the supervision of Dr Sartaj Aziz. Finally, Housing Policy was approved in a hurriedly called cabinet meeting, a day before the maturity of USAID warning. Just after the sunrise and on the same day, out of two dozen applicants of HFC’s, eleven applicants were given license of HFC on the condition that these HFC’s arrange their capital from their own resources, but remain operative as private sector housing finance institutions under NBFI status. Due to the innovative concept and high loan cost, only Citi Housing of Citibank Pakistan in December 1992 and International Housing Finance Limited (IHFL) in October 1993 with the support of Cresbank, PICIC, IFC and CDC started their operation.
USAID in shelter program was the blessing on Pakistan and its assistance to the government in regularizing and supporting of shelter program in coordination with leading international housing institutes. USAID arranged professional training workshops for the staff of private and government HFC at Philippines, Malaysia and in the USA through the Thomas Jefferson Scholarship Program by awarding pass outs with Certificate in Home Financing & Recovery. This scholarship program on Housing Finance was joined by Home Development Financing Institute of India and around 123 professionals from Pakistan was trained.

Home financing a consumer financing product
Pakistan financial market realizes the importance of consumer finance at a common consumer level, bringing the housing loans as a consumer product in 2001. Experience of International Mortgage market motivated commercial bank to add the housing finance on their shelf as one of the financial product.  This witnessed the new trend for individuals when the private banks allocated their funds for Mortgage Financing.
A mortgage which is still regarded as one of the most secure financing, the private banks in Pakistan aggressively entered in home financing. Some of the banks started   offering the financing facility to the limit of Rs.2.5 million to Rs.10 million for individual borrowers with the same criteria of 25% equity and 75% financing for various categories like the purchase of property, renovation, modernization, expansion and exchange or property.
HFC scope
HFCs in its beginning were at a distinct disadvantage in relation to other NBFIs and commercial banks in their competition for mobilization of resources. Market-oriented housing finance was only in its early years and had to establish its credibility for attracting deposits and funds. HFCs do not have any branching network to generate deposits, which would offer a lower cost of funds and provide capital for financing. Commercial banks have a much lower cost of funds and the government had the largest volume of funds and offers six month Treasury Bills at around 8% and Federal Investment Bonds, around 7% to 8%. The cost of funds for HFCs, therefore, was around 14% to 16%.
Difficulties of HFC in Fund Resources
1.       The above HFCs were not allowed to have access to Pass Book Savings Account.
2.      Since the HFC was under Security and Exchange Commission of Pakistan there was no Bank of Last Resort to bail HFCs from short-term liquidity problems.
3.      By the incredibly nature of the industry, there is an inherent mismatch of funds, lending for the long term and borrowing short term.
4.      There was no access to interbank borrowing and foreign exchange deposits.
5.      It was almost impossible for HFCs to structure debt instruments that can be underwritten, and traded in the capital market.
6.      HFC had no capacity to issue mortgage-backed securities or bond instruments to raise capital.
7.      HFC was in an urgent need to provide for long term liquidity needs through some type of discount or refinance window which lower both the interest and liquidity risks and provides a greater level of matching funds at a lower cost for long term lending at affordable rates.
HFC Operations at start
In the beginning housing finance companies concentrated their operations in Karachi, Lahore, Islamabad, Quetta, Rawalpindi and Faisalabad but the introduction of Home Financing by the private banking sector expanded the area of operation to Multan, Sargodha, Gujarat, Murree, Sialkot, Gujranwala, Peshawar, Kohat etc. The data in respect of housing investment and housing finance for these cities is not available with SBP, SECP, Ministry of Housing and other competent authorities and regulators on this market.
Opportunities housing finance in the Islamic financial system
In all the prevailing economic systems as well in the developing or in the third world countries the Shelter Program always being the government priorities and in the Islamic system, it is more clarified and practicable as Shelter, Food and Clothing, the basic right for the common man. Today all over the world home development program is known as Shelter Mobilization, but in Islamic financing system this program provides an individual to develop saving conduct by way of purchasing assets through the gross monthly income. This system convert’s monthly expense into monthly saving at higher side whereas monthly expense on the lower side with additional premiums and privileges.  The system justifies right of the citizen on the state to have shelter within its means and affordability and it guide the affordability criteria too.  Islamic financial system effectively develop the home financing sector and guide in developing saving and upgrading the living standard through miracles of Ijarah financing and magnificent Morabaha financing. The two dynamic modes keep the balance of benefits for both the financier and Sarif (user) and give them opportunities to design a number of the products which provide the financing structuring in tailor-made rather be custom made, keeping the choice and affordability of Sarif. The two-mode provide 100% risk covered on financing with an efficient repayment plan and better the profitability of financier.
Products of HFC
“Save for House and make it home”: The house that is built, home where we live and the homeland where it is located. One save to have their own home and this saving is for the socioeconomic development of the homeland.  The more citizens enter into ownership of their homes through their savings, more industries related to construction grow and ultimately prosperity depends on the way leads to success. This innovation is the perfect workout as Riba free that eliminates the interest from the financial dealings in all respect.
When a common man earns Rs.20, 000 that include house rent then the house rent he pays as rent only return him or her to live under a roof. House in which he lives is not his home as it is a constant worry for the future rental payments. He opts for “Save for Home” and look for a suitable and affordable home to live in. At between 25 years, the estimated affordable level of income is spread to 300 months and with Rs.8000 affordability of rental, he is he can have Rs.2.4 million from his financing partner who tailors his facility on 20: 80 participation bases.
Then individual select a house for a value of Rs.1 million and contribute Rs.200,000 as equity. The financier finances him Rs.800,000 and buy a house for an individual and allow him to live in it by paying the amount that makes him or her the owner of the property and the rent to use the house. His instalment is the saving part and rental is the expense part that equal to monthly repayment.
On the maturity he found the value of his property increased at an approximately 30%. The gain on property value is the premium that compensates the expenses he paid and if the government allows housing finance as tax-free the individual enter into a “Positive Saving” condition.
Impact on Economy:
State cannot provide the home for each and every citizen, but the state can give the special attention to the financial resources by allowing into participation. The resources generated through the participation give an enhancement to the industrial sector as the entire funds that shall be generated for home saving shall ultimately go for acquiring material. A single home is back by 17 small and big industries that produce the material that makes a single home and the 17 industries accommodate millions of employment. Production for supply for the development of home brings million direct and indirect employment that eliminate the crime in the society.

Target Group:
The target group for home development program:
1         Employees of companies, organizations, institutions and multinationals who have a gross monthly income that specifies the home allowance in their salary package.
2        Business income group with verifiable income either by way of tax record or by banking account activities.
3        Self-employed Businessmen Professionals who have sufficient and continuous business operations for the last 3 years having a minimum income of Rs. 6000 per month.
4        Companies who want to build a house or a colony for the accommodation of their employees.
5        Businessmen and professionals for purchase of space for setting up of Office. Facilities can also be advanced for the purchase of shops for the establishment of Business.
6        Proposals for the up gradation of end improvement of existing properties.
7        Bridge financing to developers as well as for the Sarif to move from existing property to a better option by keeping the value of the existing property as equity contribution to the better property.
Home financing products on financing shelf
1.       Purchase of Ready Property.
2.      Self Construction
3.      Home Improvements
4.      Financing to Companies / Organizations for the construction of houses/colonies for their employees.
5.      Bridge financing to developers.
Resource Mobilization:
To encourage HFC sector and control increasing budget deficit, liberalization of financial sector, consistent monetary policy and phase-wise movement towards open market operations, it has become evident that the environment for the development of capital markets by interfacing with the housing finance sector, in particular, is an evolutionary process and shell stabiles the financial system and provide basis for functioning and improvement of capital markets to assist the development of housing industry and meet its liquidity requirement, by going into following incentives for HFC’s
1.       Saving, Term, Fixed Deposit schemes can serve as a source to propose various land and home purchase schemes. It could be seen as a growing source of capital for mortgage financing in neighboring countries and almost every developed HFC is allowed to avail this opportunity to seek low-cost funds from the market.
2.      Every Pakistani living or working aboard need a second home in their own country. HFCs should be allowed to facilitate these Pakistanis to get the financing on their Net Verifiable Income at their place of employment or business outside Pakistan and to have a house which can be owned by way of instalment remittance in foreign exchange. Such scheme defiantly is a great source of foreign exchange earnings for the country as the large part of the incoming foreign exchange help in the country’s foreign exchange requirements.
3.      HFC’s to be allowed to get low-cost funds from State Bank of Pakistan similar to the export financing, BMR or LLM schemes. An average return at 5% for Housing Market with 1% addition of HFC share can generate the housing trade and reduce the backlog of constructed properties remain unsold. These properties can be sold to medium and low-income class and generate further movement in the construction industry. This encouragement ultimately provides revival to sick industries associated with the housing and construction industry that develop employment growth and reduce the crime level.
4.      HFCs is seen capitalized in the early years of operation as no lender of last resort. A refinance window would serve as a channel for the establishment and expansion of the housing finance industry and shall motivate the home financing business. To meet liquidity requirements for HFCs and establish secondary mortgage market a refinance window at State bank of Pakistan to be the first important step. This step shall provide an interim arrangement until such time that an apex institution is established. This shall facilitate the setting up of infrastructure for the apex institution by ensuring standardization of mortgage documents, procedures and mechanism of HFCs. Underwriting and financing contract and documentation for which standards shall be laid down for the industry to which mortgage portfolio shall confirm. This would also sure a strict credit appraisal, monitoring and recovery system.
5.      Mortgage Insurance particularly Government sponsored mortgage insurance can be greatly instrumental as a means of promoting financial integrated. Institutions and private investors unfamiliar with or seared with mortgage-backed securities may find it attractive to enter this field if the mortgages and/or securities carry Government insurance against default risk.
6.      Stock Markets are the key players in providing equity base capital to the projects. Excellent trading system for servicing customers are information, transparency, liquidity, efficiency and reliability as the retail customer lacks information due to poor disclosure, insider trading, manipulation and other malpractices including poor infrastructure to service the customers. HFC’s can use the stock markets for the issuance of Sukuk on medium and long term basis through these markets provided a Stock market can be able to deal with legal issues, of securities. An institution somewhat on the lines of Securities and Exchange Commission of the USA may be required, which may work as an Apex institution for regulating the HFC’s equity participation and securities markets.
7.      Private construction companies holding land should be allowed to float long term Sukuk 50% excess to the property value which will be equal once the development shall start on the property. In this situation, the long term Sukuk can be structure on the profit sharing basis instead of interest bearing bonds and monthly profit could be disbursed thorough repayment plan on the house.
The above measures shall defiantly be facilitating the development of a Shelter Mobilization Program which shall not only provide the necessary liquidity rather than limiting to State bank’s discount or repo window.
The secondary mortgage market is a fundamental vehicle for financial incorporation of housing financing system in the overall financial system. In the initial stages, the secondary market process is focused around institutional wholesale investors. In the secondary stage, mortgages are marketed through the capital market with a two-way quotation being offered for the purchase and sale of securities. The rapid integration of HFCs with the banking sector shall be possible with the close cooperation of these institutions.
In India, this trend is illustrated by the close cooperation between the Infrastructure Leasing and Financial Services Limited (IL and FS) and Housing Development Finance Cooperation (HDFC) and among HDFC and National Housing Bank (NHB) and ILF & S in promoting Real Estate Mutual Fund.
It should be emphasized that Home Financing is attach to the particular financing Capital and Equity instruments which have to be designed in the setting of operating environments with a particular type of borrower’s circumstances and the particular needs of investors. Regulatory the agency has to ensure that HFCs have the necessary flexibility to adapt and their financing instruments/mortgages to the market conditions rather than impose a particular financing instrument for all HFCs. It should, however, ensure that financing instruments, as well as financing practices, meet the established criteria for safety and soundness in the operation of the institution and provide reasonable protection to the user of funds.
Inefficient legislative and regulatory processes add to the cost of housing and therefore limit the market for housing and housing finance. The process required to effect the legal transfer of title to land for development and to secure permission develop and construct is quite corrupt time-consuming and frustrating. Delays add to cost. Modernizing building codes and standards and streamlining the building permit process can reduce the cost of new housing by 10% to 25%. In order to improve the housing delivery system and making housing more affordable the design of l
(The writer was the Head and founder member of International Housing Finance Limited and was trained under the Thomas Jefferson Scholarship program through USAID in 1995, pride4pen@gmail.com)

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