In order to promote housing and construction activities in the country, as envisaged by the Government of Pakistan (GoP), State Bank of Pakistan (SBP) has decided to set a mandatory target for banks to extend mortgage loans and financing for developers and builders. Banks will be required to increase their housing and construction of building loan portfolios to at least 5 percent of their private sector credit by the end of December 2021.
Banks are advised to gear up their infrastructure and capacity to ensure compliance in meeting these targets. Accordingly, each bank is required to develop a concrete action plan with detailed measures and timelines to achieve its housing and construction finance targets.
The action plan should contain a breakdown of overall targets into quarterly targets, development of suitable products, launching media campaigns, development of internal technology, capacity building of staff, and other actions needed to ensure the 5 percent target is met. Banks are advised to submit their action plans within 15 working days.
Moreover, they will be required to report data of approvals and disbursements against these targets on a monthly basis starting from September 2020. In today’s announcement, while issuing mandatory targets, banks have been asked to do capacity building of staff, amongst other areas.
Housing Finance in Pakistan
Due to significant shortages in meeting the annual demand for housing facilities by its citizens, a shortfall of nearly 10 million housing units has accumulated over the years. Filling this gap is important to improve the quality of living conditions for common people and the construction of housing with linkages to dozens of allied industries offers a substantial potential for boosting economic activity in the country.
This, however, requires a considerable amount of financing to meet investment needs.
In Pakistan, bank financing for mortgages and housing construction is less than one percent of GDP which is one of the lowest in the region. Banks have remained reluctant over the years to extend mortgage financing for various reasons. High rates of interest from the banks is also one of the main reasons why customers avoid getting financing from banks. So far, the banks’ housing finance portfolio is nearly Rs. 103 billion.
Steps by Govt and SBP
The present government is aiming to increase the number of housing units manifold in the coming years and has recently announced several measures including the commitment to remove hurdles in mortgage and construction financing, which is likely to spur the construction and housing sector and support over 40 industries including cement, steel, plastics, ceramics, and etc.
The government announced a subsidy of Rs. 30 billion for the first phase of the Naya Pakistan Housing Scheme, which will likely give a kick start to the construction activities in Pakistan. Further, it announced a tax relief scheme recently for the construction industry including tax waivers and reductions.
SBP is also taking several measures in consultation with key stakeholders. A high-level Steering Committee, under the Chairmanship of Governor SBP and with representation from Chairman NAPHDA (Naya Pakistan Housing Development Authority), several bank presidents and other stakeholders, is meeting every week to resolve issues and follow up on decisions to promote mortgage and construction financing, especially for NAPHDA projects. The Steering Committee has five sub-committees dedicated to various work streams with multiple operational level groups working at a fast pace.
SBP believes that several measures on the part of the government will support bank financing for housing and construction-related sectors. These include passage of efficient foreclosure law and its effective implementation, automation and computerization of land and property records for the facilitation of clean title for bank lending and reduction in time taken in the registration of title & creation/perfection of mortgages, creation of a Real Estate Regulatory Authority (RERA) to address bank concerns of ensuring adequate standards of developers and builders, and reduction in transaction cost related to property transfers.
SBP did not clarify the rate of financing for the banks which the government earlier announced 5 to 7 percent for 5 to 10 marla housing units. Presently, the rates of the banks vary from 10 to 15 percent depending on the financing/loan value and the period of repayments.