Housing finance: Weak foreclosure laws discourage banks from offering house loans

Financial institutions account for less than 2% of all housing transactions.

KARACHI:

Credit is known as the lifeblood of the housing industry. And the housing industry has led most post-World War II economic recoveries all over the world. In contrast, lack of housing finance invariably translates into sluggish economic growth.

It is a pity that Pakistan’s formal financial sector caters to less than 2% of all housing transactions in the country, according to the State Bank of Pakistan (SBP). Not only is the mortgage-to-gross domestic product (GDP) ratio abysmally low (0.6%), the amount of gross outstanding housing finance has been in decline for many years consistently.

At the end of fiscal year 2012-13, gross housing finance of all banks and development finance institutions (DFIs) was Rs52.2 billion as opposed to Rs57.1 billion a year ago, a decrease of 8.5%.

Currently, commercial banks, House Building Finance Company (HBFC) and two microfinance banks offer housing finance. However, a number of commercial banks have either stopped extending housing finance altogether or gradually reduced their outstanding housing loans over the last five years.



As for the banking sector, commercial banks accounted for 76.2% of the total outstanding loans at the end of the last fiscal year with a share of Rs39.8 billion. The volume of banks’ housing finance registered a massive decrease of 17.7% during fiscal years 2012-13 and 2011-12.

Other than private banks (Rs22.5 billion), Islamic banks (Rs10.4 billion), public-sector banks (Rs6.6 billion) and foreign banks (Rs300 million), HBFC was also a main source of housing finance in the country with Rs12.3 billion, which decreased by 4.7% on a year-on-year basis.

Speaking to The Express Tribune, Meezan Bank Deputy CEO Ariful Islam said foreclosure laws are not strong enough in Pakistan, which discourage banks from increasing their footprint in the housing segment.

“It is very important that banks have recourse to the house being financed. Our experience in the last nine years has not been very satisfactory from the foreclosure perspective,” Islam said.

The combined share of Islamic banks and Islamic banking divisions of conventional banks was Rs13.7 billion at the end of fiscal year 2012-13, which is up by 8% compared to the preceding year.



Although the Financial Institution Recovery Ordinance 2001 allows financial institutions to foreclose a mortgaged property without recourse to the court of law in case the client defaults, bankers say the law has practically been ineffective because of a longstanding stay order against its implementation.

“The litigation process usually takes four to five years, which hurts the bank’s cash flow. Even if the court decides in favour of the bank, the foreclosed property receives little interest from new clients due to its legal history,” another banker at a top commercial bank said while requesting anonymity.

Reasons that such top bankers cite in both off and on-the-record conversations for their lack of interest in housing finance include, but are not restricted to, manual handling of land record, poor legal framework regarding foreclosure laws, encroachments, tedious ownership transfer processes and absence of documented income on part of many potential clients.

No wonder non-performing loans of the industry were Rs17.6 billion on June 30, which constitutes over one-third of the gross outstanding housing finance in the country.

Speaking to The Express Tribune, SBP Infrastructure and Housing Finance Division Additional Director Imran Ahmad said major problems in housing finance have remained largely the same in the last six years at least.

Referring to a document titled “Recommendation for Nationwide Provision of Housing Finance” that he wrote back in 2007, Ahmad said almost all problems persist, with little improvement in terms of the flow of credit into the housing finance segment.

Published in The Express Tribune, November 25^th, 2013.

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