The countrys population is booming and the ever-increasing mass of humanity is moving to the cities like never before. At present about 38 percent of the population of more than 170 million resides in urban areas and this proportion is only rising further each year.
The pace of urbanisation is leaving existing social infrastructure in the lurch. Studies attest that over 45 percent of the total urban population dwells in slums or irregular settlements which speak volume of the deplorable state of housing finance in the country.
According to World Bank, on an average, annual housing need in Pakistan is 1.1 million units which require an annual funding of around Rs3.3 trillion per year. However, the quarterly Housing Finance Review released by SBP suggests that the formal financial sector entertains only one to two percent of the total housing finance transactions ongoing in the economy while informal sector caters to 10 to 12 percent of such transactions. Personal finances form the major share of housing finance in the country.
It appears that the Pakistani banking industry took lessons from the global mortgage crisis. After registering a handsome growth until 2008, housing finance portfolio of the banking sector began plunging thereafter.
NPLs of the housing finance portfolio though dropped in absolute terms over the period yet in terms of their ratio to outstanding loans they display a rising trend - the reason for the banks repulsion.
Banks continue vigilant lending approach amidst decreased affordability of the borrowers due to inflated prices of property/houses, labour and construction material. Besides, the lack of secondary mortgage market and high rates of housing finance are also the major constraints to the growth of housing finance sector.
An interesting factor worth mentioning is that while conventional banks/DFIs (excluding House Building Finance Company) are stepping away from the housing finance, the share of Islamic banks and HBFC is surging.
In 2011, the share of conventional banks/DFIs, HBFCs and Islamic banks stood at 61 percent, 22 percent and 17 percent respectively. A year later in 2012, the share of conventional banks/DFIs dropped to 52 percent while HBFC and Islamic banks grew to 23 percent and 25 percent respectively.
More interestingly, while the gross house loans of conventional banks and HBFCs dropped year-on-year by 14 percent and three percent respectively as of December 2012, the loans of Islamic banks grew by 15 percent. Among Islamic banks, Meezan Bank, Burj Bank and BankIslami remained the major growth propellers, according to sources.
Industry insiders further underpinned that the Islamic housing finance instruments are attractive to the consumers because of the co-ownership nature of the contract instead of borrowing and lending. Besides, with the purchase of share consistently, the rental amount is gradually reduced every month.
In its draft strategic plan for Islamic banking, SBP focuses on bridging the housing finance gap by facilitating Islamic banks to extend loans on easy installments and relaxed terms and conditions. This coupled with the suggested development of secondary mortgage market is expected to buttress the housing finance in Pakistan.
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