Last week the Sindh government signed an agreement with the National Bank of Pakistan for giving housing loans to its employees. Finance Minister Syed Sardar Ahmad, while initialling the agreement with the NBP President, S. Ali Raza, promised to provide land to the government employees for building houses. When the minister's commitment will materialise is a moot question.
The Chief Minister of Punjab, Chaudhry Pervez Ellahi, has been making similar promises for the last 18 months or more and yet there is nothing on the ground to show.
This is intriguing and dismaying, too, when the stage has long been set for smooth flow of housing finance.
As lending rates came down to low levels and banks were willing to give loans on a mark-up in single digit, Federal Finance Minister Shaukat Aziz and the Governor of State Bank of Pakistan, Dr Ishrat Hussain, saw an opportunity to exploit the potential of the construction sector as means to kick off economic growth.
Substantial increase in construction activity provides quick employment to the unskilled workforce, which we have in plenty. In its spin-off, it boosts sales of over 45 industries, comprising cement, steel, pipes, paints, cables, woodwork, glass etc.
SBP set the ball rolling by holding seminars which brought the builders, banks and the officials together. Obstacles ranging from legal issues, defective documentation and delays in the approval of building plans, besides lack of infrastructure such as roads, sewerage, water, electricity, gas and telephone services, were spotlighted at these seminars.
All kinds of issues were discussed threadbare and follow-up action was also undertaken in some spheres. Banks came up with programmed lending backed with technology and even central excise duty was reduced by Finance Minister Shaukat Aziz on cement to make good on his pledge to support the construction activity.
In the last financial year, duty on rolled steel bars and PASMIC raw material was reduced when international prices had shot up due to extraordinarily heavy purchases by China.
All this has paid dividends, and industrial production was up by 17.1 percent as of end June 2004, but the housing sector has yet to pick up as desired.
The sectoral break-up of the increase in consumer credit data available from SBP shows that the lion's share has been bagged by auto finance. It accounts for 45.4 percent while mortgage loans account for only 6.2 percent.
Further, bank-wise data for consumer credit indicates that the five large network banks have increased mortgage loans by a mere seven percent. In the same period, foreign banks accounted 41.5 percent and domestic banks' share was 51.5 percent in the rise in mortgage loans.
This data clearly shows that the home mortgages are being availed of by the upper class as both foreign banks and private domestic banks with small networks have been targeting them. Low cost housing remains a mere political slogan and is yet to get off the ground.
There appear to be two fundamental reasons for this situation. One is the vexatious issue of clear title for land and the other is the cost of land itself.
Most of the mortgage loans are confined to areas where the land title is not a major issue, such as Defence Housing Societies in Karachi and Lahore and the relatively new city of Islamabad. As a consequence, the price of land in these pockets has risen several fold.
Even in old towns and cities where the land title is generally not a major obstacle the price of land in developed localities is now out of reach for most bank clients.
Therefore, the perfect banking product which is the engine of growth even in major economies in the developed world, has yet fuel growth in Pakistan, despite the fact that both the President and the Finance Minister have held a series of meetings in this connection.
The central issue is the ownership of land in all urban centres. Most land belongs to the provincial governments. Unfortunately in our country provincial governments which do not make any meaningful effort for raising resources, are always protesting or grumbling over authority in most spheres, but they have a hell of a lot of clout and authority to place obstacles in any development scheme.
Promises were made to release 100 acres of land by the Provincial Chief Ministers immediately at the meeting held in the Presidency so that the price of land could come down. So far this has not happened.
Provincial governments instead of releasing land appear to be more interested in providing housing for their employees. They have two options: (a) to fund these projects from own resources, ie the provincial budget, or (b) take loans directly from banks.
As it is, debt servicing consumes a major part of their financial resources and there is very little space available in the budget. Realising this, both the Federal Finance Minister and the SBP Governor want the banks to give home loans directly to the employees, ie home-owners, and require the provincial governments to help in providing land to their employees on concessional terms ie below market rates. But so far despite various conferences at the highest level and the intervention of President Musharraf himself there is no movement visible anywhere.
The only sensible option now appears to be for provincial governments to provide land, with clear title, directly to a bank of their choice. The bank in turn should provide loans to the developers on market rates. After due plotting and placement of infrastructure (water and sewerage lines, road network, electricity, gas and telephone services), these plots be distributed through a ballot to government employees.
The difference in the concessional rate of a small plot (100 to 250 square yards) and the market rate could be treated as notional equity of the home-owner by the bank which provides the mortgage.
The market value of a plot with all amenities may be around Rs 400,000. The employee could get this plot upon payment of Rs 25,000. The bank would treat the borrower's contribution as Rs 400,000 and provide up to four times the value of the plot (Rs 1.6 million) to construct a home.
The bank has to ensure that monthly mortgage payment does not exceed 25 percent of borrower's monthly income.
It also needs to be understood that commercial banks' ability to give home loans can only expand when they are able to securitise their home loans portfolio on the secondary market.
The deposits held by commercial banks are mostly for short-term, ie below five years. Home loans are generally given for seven to 20 years period. This mismatch can only be corrected by developing a secondary market where banks can place their mortgage portfolio.
Therefore, the success of any initiative to launch new land development schemes and catch up with the demand for homes in the long term, would depend on banks spinning off home mortgages against long term certificates (TFCs) sold in the secondary market (bourses).
This is standard practice and does not require any rocketry science. What is required is the provincial will to release land and have the land record computerised in the registrar offices.
Banks need to have the comfort of a clean title and confidence in the courts system for speedy foreclosure in case of defaults. Only then will home mortgage product make a contribution to the economy and the solution of the housing problem.
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