Issues in housing finance

There have always been complaints about the low level of borrowings in the housing sector despite efforts by various governments to incentivize banks to promote lending in this sector. The present government has gone a step further and announced the provision of housing as a central plank of its strategy to the poor and average households which would also revive growth in the country due to housing industry's close linkages with a number of other sectors. In a cabinet meeting on 1st November, 2019, some of the participants were reported to have raised concerns on the recovery of these loans in the absence of a foreclosure law. In an earlier Cabinet meeting held on 20th August, 2019, the concept of an interest-free loan scheme for low-cost housing in the country was approved in principle and the scheme was to be implemented in partnership with M/s Akhuwat Islamic Microfinance (AIM), the service provider selected through an open and transparent process for implementation of the programme with an allocation of Rs 5 billion. The Cabinet had also observed that eligibility criteria should be linked to the Poverty Score Card (PSC), geographical spread of the scheme should be expanded to ensure equitable distribution of funds across provinces, a mechanism should be introduced to include widows as a target group, independent monitoring of the scheme should be introduced and the operational manual of the scheme should be approved by the Board of the implementing agency. Housing and Works Division was also asked to ensure the collection of one-time service fee @ 4.99 percent at the time of disbursement of the loan.

Most of the cabinet's observations have been accepted but with certain reservations. For instance, it has been observed that PSC could be the eligibility criteria but the fact remains that it is a loan scheme and the payback capacity of the borrowers has to be assessed. The geographical coverage would be ensured with the programme to be initially implemented in 100 cities but later expanded to 200 cities of the country. Widows will be given top priority provided they have the means to repay regular monthly instalments. For monitoring of loans, Ministry of Housing and Works has hired M/s Riaz Ahmed and Co-Nexia International for carrying out verification and validation procedure for disbursement and recovery of loans. During discussions, questions were also raised about the clauses relating to default and cost of services. A member of the cabinet also raised questions about the recovery of loans for housing in the absence of foreclosure law.

The spadework done by the Housing and Works Division so far and the discussions in the cabinet meetings suggest that the present government is serious towards meeting its housing commitments made at the time of elections and its ministers are raising the right questions but the progress on the plan is rather slow and funds allocated for the purpose seem to be meagre as compared to the total requirements. It may also be added that according priority to the housing sector is the right move by the PTI government due to the huge backlog in this sector and the urgent need of society at large to provide a roof on the head of an average citizen of the country at the earliest. Raising growth rate is another advantage which cannot be ignored because of stagnant business conditions at the moment in the country. The increase in the housing loans is also necessary due to a dismal share of housing finance in the total portfolio of the Pakistani banks compared to other countries. For instance, house building finance was only 1.2 percent of the total loans of all banks in the country at the end of June, 2019 and this share has almost remained constant over the years. This share could even be lower if banks are asked to exclude housing loans to their own employees who are generally granted loans at a lower interest rate due to the normal facilities granted to the staff of banks. In any case, though the provision of housing to the poor and the needy, including widows would appear to be a very attractive political proposition, such a policy, if followed faithfully, has its limitations which cannot be ignored in any case. Most important is the condition of enough domestic and foreign resources which has to be fulfilled to make a reasonable progress in the sector but such resources are lacking in Pakistan and cannot be easily supplemented through known sources. The government has made some allocations for the purpose. It could devote more resources but seems to be hamstrung by the paucity of resources and the EFF agreement with the IMF to bring down the primary deficit to a low level over the duration of the agreement. Banks could of course be induced and encouraged to extend much higher level of housing finance but have been reluctant to extend loans to this sector because of poor recovery rate and the non-existence of a proper foreclosure law. House Building Finance Corporation (HBFC), which was the pioneer institution in the field, has virtually collapsed. It may be stated that strict recovery policies, particularly the enactment of foreclosure laws, have been instrumental in the rise in housing finance in other countries and Pakistan also needs to do the same due to the promise of the present government to provide millions of housing units to the deserving people. We also feel that the observations of the cabinet to provide housing units to widows only if they have the repaying capacity and to the poor if they have the means to pay back the loans also need to be seriously considered for implementation to preserve the revolving nature of credit in this area. It may be added that commercial banks are not charitable institutions and they will be only interested in the venture if they could recover the money without much hassle and make enough profits on their lending.