Pakistan Mortgage Refinance Company (PMRC) has established a Rs. 15 billion fund to cover losses of financial institutions on low-cost housing finance, Express Tribune reported on Tuesday.
PMRC provides long term financing to banks for their housing and construction consumers at fixed and comparatively cheaper rates.
The initiative has come to provide encouragement to both conventional and Islamic (Shariah-compliant) financial institutions to extend housing finance for up to 20-25 years to small loan-seekers, the newspaper said.
PMRC will provide the credit guarantee to banks at a fixed rate of 2 percent for 10 years, which will be effectively 0.2 percent per annum.
Banks are usually reluctant to offer mortgage financing to people from low and middle-income groups for multiple reasons, primarily because of the higher risk of loan defaults. Almost all banks operating in the country under the umbrella of Pakistan Banks’ Association (PBA) back the initiative.
This is the first initiative of its kind and has been signed between the Credit Guarantee Trust of Government (managed by PMRC) and The Bank of Punjab.
From next week onwards, several other banks and financial institutions will also opt to avail the credit guarantee. The banks that are offering low-cost housing finance (under the Naya Pakistan Housing Scheme) will also be able to secure this credit guarantee.
Sources familiar with the deal told the media that this guarantee was established with support of the Ministry of Finance and the State Bank of Pakistan (SBP). Additionally, the World Bank (WB) has also provided funding of $10 million for the credit guarantee with the provision that it may be increased to Rs. 15 billion as and when needed.
This guarantee will work as an insurance policy to cover the risk. The fund would cover up to 40 percent losses of banks on their respective portfolios of low-cost housing finance.
The SBP has already made it mandatory for banks to offer at least 5 percent of their total loan portfolio for housing and construction up to December 2021. The outstanding housing finance is estimated at around Rs. 180 billion.