Govt keen to develop mortgage finance market

May eliminate or cut tax on bank income generated via low-cost housing finance


Salman Siddiqui October 01, 2020

The government is working to eliminate or further slash the tax on bank income, to be generated from low-cost housing finance, to 10% in order to develop the mortgage finance market in Pakistan.

Recently, the government has slashed the tax rate by half to 20% from 39%. “And still efforts are going on, we are trying to either reduce it to 10% or possibly eliminate it,” said Naya Pakistan Housing Programme (NPHP) Chairman Zaigham M Rizvi.

Banks need such incentives to provide housing finance to people belonging to low and middle-income groups as the cost of financing for small-sized loans remains higher than the one for big-sized loans, he elaborated.

He was speaking at a webinar titled “The future outlook of housing finance industry in Pakistan given the government’s initiatives”, which was organised by the CFO Club in collaboration with the Institute of Bankers’ Pakistan.

“Housing does not simply mean providing shelter, but it remains the driver for employment opportunities and a growing economy,” Rizvi stated. He said the housing sector had been neglected as many governments made promises to build the housing sector but they achieved very little success or nothing.

“Housing simply does not need liquidity, but long-term liquidity,” he said, adding, “The government is making efforts to provide the much-needed long-term housing fiance under its Naya Pakistan Housing Programme.”

The State Bank of Pakistan (SBP), for the first time, has taken several regulatory and financial initiatives to motivate banks to provide long-term financing, including lowering the banks’ cost of financing by revising downward the Statutory Liquidity Requirement (SLR).

Besides, the central bank has asked banks to provide at least 5% of their total financing portfolio to the housing sector by December 2021. Such initiatives have created an additional Rs330 billion worth of liquidity with banks for the housing sector.

“The mandatory and directed housing finance stands at 40% (for banks) in India. We in Pakistan are starting with 5%,” said Rizvi, who had also headed House Building Finance Corporation (HBFC).

“HBFC provides on an average 5-6 housing loans every day in Pakistan compared to 1,000 by HBFC of India,” he said. Speaking in light of his experience of working in 24-25 countries on housing projects under the World Bank, Rizvi stated, “I want to assure banks that housing finance is the safest asset. The recovery rate for low and middle-cost housing remains around 98-99%, including in Pakistan.”

Pakistan Mortgage Refinance Company Limited (PMRC) Chief Executive Officer Mudassir H Khan said banks and dedicated housing finance institutions failed to develop the mortgage finance market in Pakistan previously due to re-pricing of long-term housing loans (offered for 20-25 years) after every six months or one year.

Banks and dedicated housing finance institutions have understood the problem and now they are offering such loans at a fixed rate for three to five years. Loans are offered for 20-25 years with the provision of re-pricing after three to five years, he added. PRMC has recently launched a product offering housing finance for 20 years at a fixed rate. It has set a cap and floor to adjust the interest rate in case the benchmark interest rate moves sharply, Khan said.

The outstanding housing finance stands at around Rs160 billion, which is about 0.3% of gross domestic product (GDP). “Housing finance grew 14% in Pakistan last year,” he pointed out.

PRMC, which came into being about two years ago to provide low-cost housing finance to banks for end-consumers, “is ready to launch the first Sukuk (worth Rs3.5 billion) in a few weeks to generate Islamic financing for the housing sector via banks,” he said.

Published in The Express Tribune, October 1st, 2020.

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