Pakistan's housing deficit

Lending in itself is a specialised function that requires a certain set of skills. This skill set becomes more crucial in the event the lender happens to be a licensed deposit taker. In such cases, the regulator's responsibility is to ensure that lending practices do not impair the lender's ability to honour its obligations towards its depositors.
Therefore capacity building of licensed deposit takers in lending becomes imperative and a prerequisite, of course, is to minimise risk. This is even more important when deposit takers themselves initiate lending to a sector that is relatively new to it or to the market in which it operates.
In recent years the State Bank has tried to minimise the incidence of financial exclusion in Pakistan. Financing for housing is one such area where commercial banks in Pakistan were not permitted to participate for a long period. Only in recent years have commercial banks been allowed to venture into this area alongwith HBFC, a government sector entity that has been striving to provide affordable housing through debt financing to millions in Pakistan.
Though some institutions have started their housing finance operations and considerable progress has been made, there still is a need for more training and capacity building not only for increasing skills to design the product, but to ensure the risk attached to such lending is quantified and minimised. The objective of this SBP-IFC training programme is to address the area of expertise in financial institutions, assuming that improving capacity building in mortgage lending will increase housing finance activity in Pakistan. As the population and urbanisation increase we need to develop the housing finance market in the country.
Pakistan, with 162 million people, is ranked number sixth on the world's population index, 70% of whom reside in rural areas. Around 15 million people migrate from rural to urban areas each year and it is forecast to increase year to year. The obvious reason is that the bulk of the GDP is generated in urban locations.
Access to housing and reliable urban services is essential for poverty reduction and growth in Pakistan, with housing becoming an important component of the economy that contributes to job creation, expansion of financial services, and the creation of household wealth. (Housing investment has a multiplier effect of 1.8) Historically, Pakistan's performance in this sector has been woefully inadequate; outstanding mortgage loans are approximately 1 percent of GDP (compared with 3 % in India, 15 % in Chile and 65% in the USA). The housing deficit is estimated at 6 million, and as result, urban informal settlements are growing faster than average urban growth.
According to 1998 official statistics, there were 19.3 million households in Pakistan, with an average household size of 6.6 persons and occupancy at 3.3 persons per room. Of the overall housing stock, 39 per cent comprises mud houses. While currently incremental demand for housing is estimated at 570,000 units annually, only about 300,000 units are being built and these mostly in urban areas.
OVERVIEW OF HOUSING FINANCE IN PAKISTAN:
-- As of June 2007, total disbursement by all banks/DFIs was Rs 116 billion.
-- Of this, Rs 76 billion was by banks and Rs 40 billion by HBFC
-- For FY 04, FY 05, FY 06 and FY 07, disbursement data for housing finance reflects substantial growth of 24.8 %, 56.0 %, 38.2 % and 27.7 % respectively.
-- As mentioned earlier, mortgage lending is only 1 % of GDP which is relatively low compared to other regional countries (India 3% of GDP)
-- Market share of HBFC has declined due to the emergence of the banking sector in housing finance. In 2002-03, the share of HBFC was 89.5% which was reduced to 34.2 % by FY07.
-- The trend of commercial banks increasing their market share in housing finance is likely to continue in the future.
-- Banks primarily focus in major cities and selected areas for providing financing. Their average loan size is Rs 2.5 million while HBFC serves low income borrowers with an average loan size of Rs 75,000/-
-- Issues and Constraints
-- Lack of enabling legal framework
-- Lack of implementation of Recovery Ordinance 2001
-- Fraudulent sale of property after an attachment order to an innocent purchaser without full disclosure
-- Unregistered transfer of immovable property
-- Problems generated by tenancy and urban rent control laws
-- Ambiguity in the land acquisition Acts
-- Lack of rationalisation of transaction costs
-- A fragmented and poorly managed system of land records
-- Shortage of supply of land for affordable housing
-- Non utilisation of allotted land by the private sector
-- The phenomenon of katchi abadies
-- Lack of high rise building in urban areas
-- Unplanned and inadequate public land
-- Unstructured large scale developer finance
-- Lack of housing finance for affordable and low cost/income housing facilities
-- Lack of long-term funding for housing loans
-- Unavailability of housing market information system
-- Fragmented and underdeveloped mortgage banking industry in Pakistan
-- As far as SBP is concerned, we are doing our best to remove some of these constraints and have taken some initiatives. This training program is one of those initiatives. Although there are many SBP initiatives, I would like to mention some of them.
SBP INITIATIVES:
We have created a department for Infrastructure and Housing Finance to increase housing and infrastructure financing activities in Pakistan. This Infrastructure and Housing Finance Department (IHFD) is established to facilitate the regulatory framework to enhance the participation of mainstream banking in housing finance and to create an awareness among financial institutions with regard to private participation in infrastructure projects in support of development finance.
Establishment of a Housing Advisory Group (HAG) to identify legal and other issues in the housing sector.
Dissemination of HAG's recommendation to the city and provincial governments.
Meetings with Sindh and Karachi government officials to implement SBP recommendations.
Capacity building of commercial banks/DFIs on mortgage lending and infrastructure finance with the assistance of World Bank/IFC (around 200 SBP and banks/DFIs officers will be trained in first stage and it will be an ongoing process)
-- SBP has conducted mortgage lending practices and training need assessment surveys of the banking sector SBP has plans to organise national level workshops to understand the issues of the housing sector and to implement HAG's recommendation in January 2008
-- To develop a mortgage refinance market in Pakistan
-- Established a Task Force on Infrastructure finance to
1) assess the country's infrastructure needs.
2) Identify potential avenues for infrastructure financing and recommend financial products.
3) Examine available options for exploiting credit enhancement mechanisms.
4) Recommend an institutional mechanism for risk management of the infrastructure
-- Further steps in the process
-- SBP is also working on:
-- Establishment of a Housing Observatory to collect quality data on the housing sector
-- Establishment of Mortgage refinance companies in the private sector to promote housing finance
-- Developing Schemes for rural housing
(Text of speech of Deputy Governor, State Bank of Pakistan, at the inauguration of SBP-IFC Housing Finance Training Programme on December 3, 2007.)