Mortgage refinance firm to loan home buyers Rs9 billion

World Bank will provide $140m, company will facilitate middle and low-income groups

KARACHI: Pakistan Mortgage Refinance Company, set up by the State Bank of Pakistan (SBP) with the support of the World Bank, would provide housing finance worth Rs9 billion for middle and low-income groups in the first year of its commercial operation in 2018, a top company official said.

“The World Bank will provide approximately $140 million (Rs14.77 billion) long-term funding for the mortgage refinance company. We expect to receive this in the third quarter of 2018,” the official told The Express Tribune.

“The International Finance Corporation has developed policy procedures for the company; we are targeting to kick-start commercial operations by December (this year). Right now, we are fulfilling the State Bank requirements.”

The SBP, in its Annual Performance Review 2017 which was released recently, said the federal government and banks were in the process of injecting committed equity into the mortgage refinance company. The central bank had floated the idea of setting up a mortgage refinance company which was incorporated with the Securities and Exchange Commission of Pakistan in 2015. The Ministry of Finance has notified the firm as a development finance institution.

SBP Deputy Governor Jameel Ahmad recently inaugurated the company office in Karachi, said a statement on Monday.

Business strategy

Being a private concern, the company will raise financing from the domestic debt market by issuing conventional and Islamic bonds at a fixed rate of return.

Potential financiers in the debt market may be pension funds, insurance companies and banks with surplus long-term funds seeking investment assets, according to the company’s website.

The raised funds will be provided to banks and financial institutions like House Building Finance Company for further extending the funds to middle and low-income groups at a fixed rate of interest.

Another important objective was to pioneer the development of local bond and Sukuk markets, the company said.

“The mortgage refinance company will finance Rs9 billion from its own resources which will help it launch first bonds in the first quarter of 2019,” the official said.

Right now, a major hurdle in the way of mortgage financing is the floating rate of interest instead of fixed rate. “The uncertainty over the floating rate does not allow banks and financial institutions to provide long-term financing as per market demand,” the official said.

The new company would provide funding to banks and financial institutions at a fixed rate to enable them to offer funds to long-term borrowers at a fixed rate, he said.

“Salaried class may acquire loans for up to 25-30 years instead of 15-20 years now. This will make loan repayment affordable,” he said.

Housing, mortgage history

Pakistan is the seventh largest country by population with more than 60% of people below 25 years of age.

Pakistan’s urban population comprises nearly a quarter of the total population and is likely to grow to half between 2030 and 2040.

The rapid growth in urban population is causing a shortage of housing units. Housing gap is currently estimated at 9-10 million units with demand growing at a pace of 0.7 million units per year.

Lack of housing finance instruments from the formal sector is an important factor behind the failure to meet housing needs. Pakistan’s mortgage-to-gross domestic product ratio is 0.5% compared to South Asia’s average of 3.4%.

Published in The Express Tribune, November 14^th, 2017.

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