The Asian Development Bank (ADB) and International Finance Corporation (IFC) have shown interest to get 30 percent shares with an investment of about Rs 1.8 billion in Mortgage Refinance Company (MRC), a project for Mortgage Liquidity Facility (MLF) in Pakistan.
Source in banking sector told Business Recorder on Monday that following the international practices a MRC is being launched in Pakistan to address the long-term funding constraint hindering the growth of the primary mortgage market.
SBP has engaged IFC to conduct a feasibility study and prepare a preliminary business plan for setting up a mortgage liquidity facility in Pakistan, i.e, MRC through public-private partnership. MRC will be a non-depository DFI, which will be regulated by the State Bank.
MRC would serve as a secured source of long-term funding at attractive rates while ensuring sound lending habits amongst Primary Mortgage Lenders (PMLs) to reduce maturity mismatch risk and ensure the availability of fixed rate and hybrid mortgages and increase available loan terms.
Sources said that planning on the MRC has almost completed and soon it will be registered in the Securities Exchange Commission of Pakistan (SECP). The SECP will oversee the MRC's capital market operations. Significant progress has been made since the development of feasibility report, as firm equity commitments have been secured from commercial banks/DFIs and Government of Pakistan as well from some foreign institutions.
Initially paid up of the company will be Rs 6 billion, which would be generated through funding from government, banks and foreign investment. "As per formula banks will be largest shareholders in the company with 50 percent investment, while the government of Pakistan would have a 20 percent share," they added.
In addition, two leading international financial institutions have shown interest to invest in the company and they are likely to have a 30 percent share in MRC, which calculated Rs 1.8 billion. The State Bank has also confirmed that IFC and ADB are investing in MCR with a share of 15 percent each and SBP has already asked banks to deposit their share to finally register the company.
According to SBP MRC would in turn help improve the affordability of mortgages and extend the number of potential borrowers and result in the expansion of the primary mortgage market and thus home ownership in the country. Additionally, MRC can act as a conduit to efficiently connect long-term investors with PMLs generating long-term assets in Pakistan, thus helping develop a debt market and a longer term yield curve.
In emerging markets like Pakistan, where interest rates and inflation are relatively volatile and can dampen confidence in the markets, the availability of long term fixed rates financing by mortgage liquidity facilities like MRC, can instil a degree of certainty which can help the markets develop with confidence.
In times of a credit crunch, MRC can also help a bank cover an unexpected short-term deposit outflow (or other temporary losses of funds), thereby avoiding potentially costly short-term borrowing or asset liquidation. To solve the house finance financing, the State Bank had constituted an Advisory Group on Housing Finance, comprising eminent bankers and housing sector specialists, for identifying bottlenecks, besides, proposing measures for instituting an effective and broad-based housing finance system in the country.
This Housing Advisory Group (HAG) after an in-depth study has come up with a set of recommendations. Provision of long term funding through the formation of a Mortgage Refinance Company is one of the 10 recommendations put forward by the HAG committee. MRC is not only aimed at providing liquidity facility to primary mortgage lenders and enabling them to prudently match maturity profile of their assets and liabilities, it would also help in developing hybrid mortgage models and develop capital markets, they informed.
It may be mentioned here that Pakistan is facing an issue of high rate of urbanisation and population growth. However, the consequences of such unprecedented changes are seen in the form of unplanned, unregulated and uncontrolled urbanisation, which pose a major problem to the city dwellers.
Housing shortages currently hovers in the vicinity of around 8 million housing units and is increasing by approximately 300,000 units annually. Mortgage Debt to GDP ratio, which measures the depth of housing finance market, remains below 1 percent, which is one of the lowest in the world. At present, 29 commercial banks, a specialised housing finance company-House Building Finance Company (HBFC) and one DFI is catering to housing finance needs in Pakistan.