By Yousuf Ibnul Hasan
(Pakistan News & Features Services)
(Pakistan News & Features Services)
The last seven decades have been witnessing the transformation of the basic characteristic of Pakistan from rural to an urban country. Since independence in 1947, the population of Pakistan has shown phenomenal upward trend. In 2020, the figure has reached over 200 million people within the boundaries of the country.
Accordingly, with a reasonable approach, a paper was written in 2000, anticipating the direction towards greater labor, intensity production and the market-oriented the economy would gain momentum to provide much higher employment, focused in the urban area.
Regrettably, it was upturned adverse due to non-governance of state affairs in which nation priorities were superseded to self-priorities by the state managers resulting in unemployment, political instability, inflation, anarchy and abuse of human rights.
Since 2008, non-economic in general and socioeconomic issues, in particular, were dripped for democratic priorities in view of the stability of the democratic government.
Thus the entire situation created chaos, mess and crimes. Pakistan, being an agro-based country, accomplished the economic growth since 1958 through the export of agro products. Now the export oriented economy has shifted on import bases.
The urban populated part of Pakistan thus started facing fast-growing densities in decaying large cities particularly Karachi and Lahore and springing up of squatter areas (Katchi Abadies).
The great majority of growth in large cities during the last decade has been in their slum areas. About 40% of the total population of Karachi and Lahore and other big cities live in Katchi Abadies.
Housing Finance Sector
Since 1974, the housing finance sector in the state priorities was practically absent as an organized ‘Shelter Delivery System’ to the population. Particularly all housing finance activities were casual.
The only source of mortgage credit was available from the state-owned House Building Finance Corporation (HBFC) which was technically declared as bankrupt at the end of 1990 and today as one of the most difficult and dissolute facilitators in the respective field. The HBFC was finally planned to operate on commercial lines in June 1992.
But this evolution in 2020 is still not seen justifying optimism and is seen a well-decorated “Glass House with loose nuts and bolts”. As a result since 1988 the backlog of housing piled up with the passage of time and figure in 2019, it was around 3 million now with an annual increase estimated to 15% to 20%.
Since the beginning of 2000, Pakistan has faced and endured natural disasters that put a part of the population to live without a roof. It’s also abortive of the government which never bothered to update the need and supply gap with authenticating figures that could guide the private sector to enter with their resources as a field of investment.
Going back to the year 1993 when a formal private house building industry existed only in Karachi but construction finance was scarce and informal. Delays in completion and escalation in prices were quite frequent. Despite the facts stated, informal provisioning of housing had been quite dynamic.
Beginning of Housing Finance
The housing finance started to take a shape and legal framework for the establishment and operation of HBFCs were laid down in the early 1990s.
Regulatory mechanisms in the form of Prudential Regulations were been formulated and notified by State Bank of Pakistan. But how did the housing finance company concept emerge in Pakistan? Or why the government overlooked this socioeconomic activity to be run as NBFI since the independence of Pakistan?
It is a dilemma that housing finance company sector ignorance was the incompetency of democratic governments. It is still ignored and not much importance is given, while the housing finance company concept was an initiative taken by a Military General in 1986. The purpose was to bring private housing finance companies in competition to improve the government sponsor HBFC and to regularize the Mortgage law.
In addition to bringing growth in the industrial sector to attach to the housing finance company as due to the Afghan war, Pakistan economy needed industrial intensification.
USAID for Pakistan’s Housing Finance Company
To bring the concern of government to housing finance company sector one cannot ignore the significant role played by the USAID under its Shelter Mobilization Program. The housing finance company idea was initiated and funded by the USAID by bringing a comprehensive study which was carried out by ANZ Grindlays Pakistan.
On the basis of this report, US $50 million was granted to the Government of Pakistan in 1989 to introduce housing finance companies in the private sector.
Disappointedly these funds were kept unutilized for a very long period and no significant importance was given to benefit the Pakistan Shelter Mobilization Program. Thee USAID called off the funds and ask the government its winding plans to the program in Pakistan.
Finally the dream came true in 1991 when the government mobilized its efforts to approve the National Housing Policy in one night under the supervision of Dr Sartaj Aziz.
At last, the housing policy was approved in a hurriedly-called cabinet meeting, a day before the maturity of the USAID warning.
Just after the sunrise and on the same day, out of two dozen applicants of housing finance companies, eleven applicants were granted the license of housing finance company on the condition that these housing finance companies arrange capital from their own resources but remain operative as private sector housing finance institutions under NBFI status.
Due to the innovative concept and high loan cost, only the Citi Housing of Citibank Pakistan in December 1992 and the International Housing Finance Limited (IHFL) in October 1993, with the support of Cresbank, PICIC, IFC and CDC, started their operation.
The USAID’s support was a blessing for Pakistan and its assistance to the government in regularizing and supporting of shelter program in coordination with leading international housing institutes contributed significantly.
The USAID arranged professional training workshops for the staff of private and government housing finance company at Philippines, Malaysia and in the USA through the Thomas Jefferson Scholarship Program by awarding the successful trainees with certificate in Home Financing & Recovery.
This scholarship programme on Housing Finance was joined by Home Development Financing Institute of India and around 123 professionals from Pakistan were trained.
Home financing as a consumer product
Pakistan’s financial market realized the importance of consumer finance at a common consumer level, bringing the housing loans as a consumer product in 2001.
The experience of international mortgage market motivated commercial banks to add the housing finance on their shelf as one of the financial product. This witnessed the new trend for individuals when the private banks allocated their funds for mortgage financing.
A mortgage which is still regarded as one of the most secure financing, the private banks in Pakistan aggressively entered into home financing.
Some of the banks started offering the financing facility to the limit of Rs.2.5 million to Rs.10 million for individual borrowers with the same criteria of 25% equity and 75% financing for various categories like the purchase of property, renovation, modernization, expansion and exchange or property.
Housing Finance Company scope
The Housing Finance Companies (HFCs) in its beginning were at a distinct disadvantage in relation to other NBFIs and commercial banks in their competition for mobilization of resources.
The market-oriented housing finance was only in its early years and had to establish its credibility for attracting deposits and funds.
The HFCs did not have any branching network to generate deposits, which would offer a lower cost of funds and provide capital for financing.
The commercial banks have had a much lower cost of funds and the government had the largest volume of funds and offers six month Treasury Bills at around 8% and Federal Investment Bonds, around 7% to 8%. The cost of funds for Housing Finance Companies, therefore, was around 14% to 16%.
Difficulties of Housing Finance Companies in fund resources
1. The above Housing Finance Companies were not allowed to have access to Pass Book Savings Account.
2. Since the housing, the finance company was under the Security and Exchange Commission of Pakistan there was no Bank of Last Resort to bail Housing Finance Companies from short-term liquidity problems.
3. By the incredibly nature of the industry, there is an inherent mismatch of funds, lending for the long term and borrowing short term.
4. There was no access to inter-bank borrowing and foreign exchange deposits.
5. It was almost impossible for Housing Finance Companies to structure debt instruments that can be underwritten, and traded in the capital market.
6. Housing finance company had no capacity to issue mortgage-backed securities or bond instruments to raise capital.
7. Housing finance company was in an urgent need to provide for long term liquidity needs through some type of discount or refinance window which lower both the interest and liquidity risks and provides a greater level of matching funds at a lower cost for long term lending at affordable rates.
Opportunities housing finance in the Islamic financial system
In all the prevailing economic systems as well in the developing or in the third world countries the Shelter Program always being the government priorities and in the Islamic system, it is more clarified and practicable as Shelter, Food and Clothing, the basic right for the common man.
Today all over the world home development program is known as Shelter Mobilization but in Islamic financing system this program provides an individual to develop saving conduct by way of purchasing assets through the gross monthly income.
This system converts monthly expense into monthly saving at higher side whereas monthly expense on the lower side with additional premiums and privileges. The system justifies right of the citizen on the state to have shelter within its means and affordability and it guides the affordability criteria too.
The Islamic financial system effectively develop the home financing sector and guide in developing saving and upgrading the living standard through miracles of Ijarah financing and magnificent Morabaha financing.
The two dynamic modes keep the balance of benefits for both the financier and Sarif (user) and give them opportunities to design a number of the products which provide the financing structuring in tailor-made rather be custom made, keeping the choice and affordability of Sarif.
The two-mode provide 100% risk covered on financing with an efficient repayment plan and better the profitability of financier.
Impact on Economy
The state cannot provide the home for each and every citizen, but it can give special attention to the financial resources by allowing into participation.
The resources generated through the participation give an enhancement to the industrial sector as the entire funds that shall be generated for home saving shall ultimately go for acquiring material.
A single house is backed by 27 small and big industries that produce the material that makes a single home and these 27 industries generate millions of employment. The production for supply for the development of home brings million direct and indirect employment opportunities that eliminate the crime in the society.
The target group for home development programme:
1. Employees of companies, organizations, institutions and multinationals who have a gross monthly income that specifies the home allowance in their salary package.
2. Business income group with verifiable income either by way of tax record or by banking account activities.
3. Self-employed Businessmen Professionals who have sufficient and continuous business operations for the last three years having a minimum income of Rs 6000 per month.
4. Companies who want to build a house or a colony for the accommodation of their employees.
5. Businessmen and professionals for purchase of space for setting up of Office. Facilities can also be advanced for the purchase of shops for the establishment of Business.
6. Proposals for the up-gradation of end improvement of existing properties.
7. Bridge financing to developers as well as for the Sarif to move from existing property to a better option by keeping the value of the existing property as equity contribution to the better property.
Home financing products on financing shelf
1. Purchase of Ready Property
2. Self Construction
3. Home Improvements
4. Financing to Companies/Organizations for the construction of houses/colonies for their employees.
5. Bridge financing to developers.
To encourage housing finance company sector and control the increasing budget deficit, liberalization of the financial sector, consistent monetary policy and phase-wise movement towards open market operations, it has become evident that the environment for the development of capital markets by interfacing with the housing finance sector, in particular, is an evolutionary process and shall stabilize the financial system and provide the basis for functioning and improvement of capital markets to assist the development of housing industry and meet its liquidity requirement, by going into following incentives for housing finance company:
1. Saving, Fixed Deposit schemes can serve as a source to propose various land and home purchase schemes. It could be seen as a growing source of capital for mortgage financing in neighboring countries and almost every developed housing finance company is allowed to avail this opportunity to seek low-cost funds from the market.
2. Every Pakistani living or working aboard need a second home in their own country. Housing Finance Companies should be allowed to facilitate these Pakistanis to get the financing on their Net Verifiable Income at their place of employment or business outside Pakistan and to have a house which can be owned by way of installment remittance in foreign exchange. Such scheme definitely is a great source of foreign exchange earnings for the country as the large part of the incoming foreign exchange help in the country’s foreign exchange requirements.
3. Housing finance companies to be allowed to get low-cost funds from State Bank of Pakistan similar to the export financing, BMR or LLM schemes. An average return at 5% for Housing Market with 1% addition of housing finance company share can generate the housing trade and reduce the backlog of constructed properties remain unsold. These properties can be sold to medium and low-income class and generate further movement in the construction industry. This encouragement ultimately provides revival to sick industries associated with the housing and construction industry that develop employment growth and reduce the crime level.
4. Housing Finance Companies is seen capitalized in the early years of operation as no lender of last resort. A refinance window would serve as a channel for the establishment and expansion of the housing finance industry and shall motivate the home financing business. To meet liquidity requirements for Housing Finance Companies and establish secondary mortgage market a refinance window at State bank of Pakistan to be the first important step. This step shall provide an interim arrangement until such time that an apex institution is established. This shall facilitate the setting up of infrastructure for the apex institution by ensuring standardization of mortgage documents, procedures and mechanism of Housing Finance Companies. Underwriting and financing contract and documentation for which standards shall be laid down for the industry to which mortgage portfolio shall confirm. This would also sure a strict credit appraisal, monitoring and recovery system.
5. Mortgage Insurance particularly Government-sponsored mortgage insurance can be greatly instrumental as a means of promoting financial integrated. Institutions and private investors unfamiliar with or seared with mortgage-backed securities may find it attractive to enter this field if the mortgages and/or securities carry Government insurance against default risk.
6. Stock Markets are the key players in providing equity base capital to the projects. Excellent trading system for servicing customers is information, transparency, liquidity, efficiency and reliability as the retail customer lacks information due to poor disclosure, insider trading, manipulation and other malpractices including poor infrastructure to service the customers. Housing finance companies can use the stock markets for the issuance of Sukuk on medium and long term basis through these markets provided a Stock market can be able to deal with legal issues, of securities. An institution somewhat on the lines of Securities and Exchange Commission of the USA may be required, which may work as an Apex institution for regulating the housing finance company’s equity participation and securities markets.
7. Private construction companies holding land should be allowed to float long term Sukuk 50% excess to the property value which will be equal once the development shall start on the property. In this situation, the long term Sukuk can be structure on the profit-sharing basis instead of interest-bearing bonds and monthly profit could be disbursed thorough repayment plan on the house.
The above measures shall definitely be facilitating the development of a Shelter Mobilization Program which shall not only provide the necessary liquidity rather than limiting to State bank’s discount.
The secondary mortgage market is a fundamental vehicle for financial incorporation of housing financing system in the overall financial system. In the initial stages, the secondary market process is focused around institutional wholesale investors.
In the secondary stage, mortgages are marketed through the capital market with a two-way quotation being offered for the purchase and sale of securities. The rapid integration of Housing Finance Companies with the banking sector shall be possible with the close cooperation of these institutions.
It should be emphasized that Home Financing is attach to the particular financing Capital and Equity instruments which have to be designed in the setting of operating environments with a particular type of borrower’s circumstances and the particular needs of investors.
The regulatory agency has to ensure that Housing Finance Companies have the necessary flexibility to adapt and their financing instruments/mortgages to the market conditions rather than impose a particular financing instrument for all Housing Finance Companies.
It should, however, ensure that financing instruments, as well as financing practices, meet the established criteria for safety and soundness in the operation of the institution and provide reasonable protection to the user of funds. Inefficient legislative and regulatory processes add to the cost of housing and therefore limit the market for housing and housing finance.
The process required to effect the legal transfer of title to land for development and to secure permission to develop and construct is quite corrupt time-consuming and frustrating. Delays add to cost. Modernizing building codes and standards and streamlining the building permit process can reduce the cost of new housing by 10% to 25%.
***The writer was the founder member of International Housing Finance Limited and participated in ‘Home Financing and Recovery’ under the Thomas Jefferson Scholarship programme through the USAID in 1995 at the Philippines. He designed the first Riba Free Mortgage product in 1990 for a finance house in the USA.