In a first, Pakistan Mortgage Refinance Company (PMRC) - which provides long-term financing to banks for their housing and construction consumers at fixed and comparatively cheaper rates - has established a fund worth Rs15 billion to cover losses, if any, of financial institutions on low-cost housing finance.
The initiative is aimed at encouraging financial institutions - both Shariah-compliant and conventional - to extend housing finance for up to 20-25 years to small loan-seekers.
Earlier, banks were reluctant to offer mortgage financing to people from low and middle-income groups for multiple reasons.
“Pakistan’s first credit guarantee agreement for low-cost housing finance has been signed between Credit Guarantee Trust of Government (managed by PMRC) and The Bank of Punjab,” a company official told The Express Tribune on Monday.
“Several other financial institutions, including leading banks, will opt to avail the credit guarantee next week,” he said. “Almost all the banks offering low-cost housing finance (under the Naya Pakistan Housing Scheme or some other scheme) will secure financing by availing the guarantee.”
“The World Bank has provided funding of $10 million…for the credit guarantee which is like an insurance policy to cover risk,” he said, adding that the guarantee was established with support of the Ministry of Finance and the State Bank of Pakistan (SBP).
Besides, almost all banks operating in the country under the umbrella of Pakistan Banks’ Association (PBA) back the initiative.
The fund would cover up to 40% losses of banks on their respective low-cost housing finance portfolios. The size of the credit guarantee can be increased from Rs15 billion as and when needed.
“The amount (Rs15 billion) is for starting purpose…PMRC is providing the credit guarantee to banks at a fixed rate of 2% for 10 years that translates into 0.2% per annum,” he said.
Banks may provide up to Rs5 million for a property valued at a maximum of Rs6 million under the low-cost housing finance.
Banks and other financial institutions are offering the loan at a fixed rate of 5% for the first five years and at 7% for the next five years under the Naya Pakistan Housing Scheme. The government subsidises the loans by paying the difference between the rate at which loans are offered and the bank rate.
Average low-cost housing finance amounts to around Rs2-2.5 million each, he estimated.
PMRC - the secondary housing finance institution - has lent approximately Rs5 billion for low-cost housing finance to banks since the SBP established the company in 2018. “We have provided low-cost housing finance to banks at an interest rate of approximately 5.5-7%.”
In total, the company has extended financing of Rs14.3 billion to the primary financial institutions like commercial banks. The figure also includes middle and high-end housing finance.
Earlier, the SBP made it mandatory for banks to offer at least 5% (around Rs330 billion) of their total loan portfolio for housing and construction up to December 2021. The outstanding housing finance is estimated at around Rs180 billion.
“The housing and construction finance ratio in Pakistan currently stands at 0.2% of GDP (gross domestic product) while the ratio stands at 3% in Bangladesh and 6% in India,” the SBP deputy governor said the other day.
“The (low-cost housing) scheme is designed in a way that borrowers will only have to pay Rs10,000 to Rs13,000 per month, which will be within their reach,” the SBP official said.
To recall, Prime Minister Imran Khan had promised during his election campaign in 2018 to establish five million low-cost houses during his five-year tenure. His government announced a Rs30 billion subsidy for low-cost housing and significantly reduced tax rates, particularly for low-cost houses, during initial months of the Covid-19 pandemic in a bid to boost economic activities.
Housing and construction is believed to support 40-70 allied industries including cement, steel, paint and woodwork as well as creates thousands of jobs, particularly for daily-wage earners.
There is a shortage of 11-12 million housing units in Pakistan as the nation has constructed less-than-the-required average of 700,000 units per year over the past several decades.
The Supreme Court has changed a law for mortgage finance, which allows mortgage finance institutions to confiscate property if borrowers fail to pay back dues, the SBP official said.
Published in The Express Tribune, December 15th, 2020.
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