By Kazim Alam, The Express Tribune
KARACHI: The housing shortage in Pakistan goes up by 300,000 units every year, with the cumulative national housing backlog of at least seven million units, according to the International Housing Finance Programme 2008. Yet, the State Bank of Pakistan estimates that the formal financial sector caters to only 1% to 2% of all housing transactions in the country.
Given the burgeoning size of the Pakistani middle class – estimated to be roughly 60 million by the Pakistan Institute of Development Economics – it is surprising that the informal sector still dominates the country’s housing finance overwhelmingly.
While the formal sources of housing finance mainly consist of government-owned House Building Finance Company Limited (HBFCL) and commercial banks, the latter are generally known to serve high-end customers only. The average size of house loan of all public, private, foreign and Islamic banks of the country during the quarter ended December 31, 2011 – the latest period for which house financing data is available – was Rs4.7 million.
However, the average loan size for HBFCL was Rs1.3 million for the same period, less than one-third of the industry-wide average.
“Our average loan size is smaller than the industry average because our focus is on lending to low- and middle-income segments of the population. In addition, we are also financing in rural and remote areas, where other banks are reluctant to enter,” said Azhar A Jaffri, HBFCL CEO and Managing Director, while talking to The Express Tribune.
Although there is a big difference in the average loan size at HBFCL and its competitors, the overall weighted average interest rates for housing finance do not show significant variance. The highest weighted average profit rate for the quarter was reported by foreign banks (16.8%), followed by Islamic banks (16.7%), HBFCL (16%), private banks (15.8%) and public-sector banks (15.7%).
At HBFCL, Jaffri says, low- and middle-class segments refer to individuals with a fixed monthly income in the bracket of Rs25,000 to Rs100,000 per month. “They need to have a reasonable house from 80 to 400 square-yards within the range of Rs0.4 million to Rs2.5 million where the average monthly instalment should range between Rs2,000 and Rs25,000,” he said.
About 27 commercial banks, two microfinance banks, one development finance institution and state-owned HBFCL are offering housing finance in the country. The number of outstanding borrowers of housing finance in the financial sector was 91,398 on December 31, 2011, down by 7.2% compared to the preceding year.
As of March 31, 2012, HBFCL had 66,500 customers with total outstanding amount of Rs12.7 billion. According to the State Bank, the share of HBFCL in the total housing finance sector by the end of the last calendar year was 22%.
One of the reasons why housing finance through formal sources has not taken root, says Jaffri, is weak foreclosure laws prevailing in the country. He says the Housing Advisory Board has already submitted its recommendations on foreclosure laws to the government, which were aimed at ensuring growth of the housing finance market.
Weak foreclosure laws result in high non-performing loans (NPLs), as is evident from the State Bank’s data. NPLs in the housing finance sector were Rs19.07 billion as of December 31, 2011, up by 2.86% in one year.
As for HBFCL, the home loan default rate is considerably higher. About 58% of its ‘old portfolio’ – ie loans booked before 2009 – is non-performing. “That’s due to various reasons, including non-prudent lending and lack of recovery culture in the past,” Jaffri said.
HBFCL’s NPLs increased from Rs7.12 billion to Rs7.33 billion during 2011, a 2.95% increase in a year. Its share in total NPLs is 38.54%.
“The government should seriously try to expedite implementation of the Housing Advisory Group recommendations and National Housing Policy 2000, as 70-plus allied industries depend on the strength of housing activity,” urged Jaffri.
Published in The Express Tribune, May 20, 2012.