CHAPTER 3

HOUSING FINANCE IN GLOBAL PERSPECTIVE:

Houses are expensive. Consequently, the availability and

cost of housing finance are critical determinants of how
well housing markets functions around the world. Changing
in housing finance mechanism are drivers in explaining the
dramatic changes in housing markets and housing activity
seen industrialized countries in recent years. In many
countries, historically housing finance relied on funds
provide by local lenders, typically depository
institutions. With the development of capital markets and
mortgage securitization, however funding for housing comes
from a much broader set of investors, including

international investors (Jeanneney G. S. and Kpodar K., 2007).

In several countries most prominently United States, there

has been a major move to finance housing through mortgage
backed securities (MBS). The market structure that support
securitization as the predominant funding source for
mortgage finance in the United States has changes
dramatically over time(Richard K Green, 2007). We describe
these changes and the related development of home equity
extraction and borrowing and credit scoring and what has
been behind these developments. We also consider how a
government policy and market force has both contributed to
these developments (Oliver T Carr Chair of Real estate and
finance, Professor of finance and economics, George
Washington University).

Housing finance systems have evolved differently across

countries although there are elements in common. National
institutional factors remain important and the result is a
variety in housing finance institutions (Susan M Watcher,
2007-08).what accounts for these cross country differences
in the structure of housing finance? Is there a process of
convergence in structure? And how have these changes
affected housing affordability?

Over the past thirty years housing finance systems in

industrialized countries have undergone revolutionary
change. Historically housing finance has been provided by
heavily regulated local lenders and by the government run
entities (Richard B. Worley professor of financial
management).Mortgage finance had not been funded by
international capital flow. Today integration of housing
finance capital markets in a global phenomenon. The
deregulation of housing finance and its integration into
global financial markets is occurring throughout the world.
Nonetheless the historical structures of housing finance
have heavily impacted nation specific integration paradigms
(the Walton School, University of Pennsylvania).Housing
finance systems can be divided into four major types these
includes: depository systems, directed credit (including
provident funds raised by payroll taxes and contractual
saving schemes), specialized mortgage banks (either
government regulated or owned) and more recently, secondary
mortgage market systems.
The traditional methods of housing finance were constrained
by government policies that segmented the financing of
housing into specialized circuits that were cut off from
the rest of the economy (Kim and Watcher, 2004). Even the
most market oriented approach which provided housing
finance through a depository system was heavily regulated
through the 1080’s. For example in the UK housing finance
in the early 1980’s was largely funded by building
societies that charged below market interest rates.
Building societies were formed by cooperative that pooled
saving to finance the purchase of homes (Annual Demographia
International Housing Affordability Survey 2006). With
lenders cooperating to set below market rates on loans, the
mortgage market was shielded from macroeconomic
fluctuations making them intentionally unresponsive to
market rate changes. Under these circumstances institutions
raising capital through market channels such as commercial
banks could not compete and so mortgage financing largely
rested in institutions shielded from market pressures
(Green, Malpezzi and Mayo, 2005 and Glaeser, Gyourko and
Saks, 2005)

HOUSING FINANCE SECTOR IN PAKISTAN:

Pakistan is still a long way from coming any where closer
to fulfilling the un-satisfied demand for Housing Finance,
particularly from the small to Break up of Consumer Loans

medium categories of housing loan consumer durables auto loans credit cards
housing loans personal loans
seekers. (State Bank of Pakistan
Annual report 2007-2008)
consumer
durables,
Unless the huge backlog of demand personal 0.42, 0% auto loans,
loans, 40.23, 31.99, 32%
40%
for housing stock is taken care of,

housing credit cards,

11.52, 12%
loans, 15.84,
16%
there is no likelihood of keeping pace with the increased
demand, resulting from the regular expansion in our
population.

Increasing interest rates, under tightening monetary

expansion scenarios, will only benefit home-buyers in the
upper income echelons of the society and large commercial
bank, the resource profiles of which boast of “low-cost
funds” of longer-term maturities (Annual journal of state
bank of Pakistan 2007 and 2008).

A robust financial sector is the key to have sustained long

term growth. Within the financial sector both
infrastructure and housing finance are the pillars that
support development of the economy. Housing and
construction sectors are labor-intensive having backward
and forward linkages. In developed countries, housing
finance is one of the main drivers of the economy where
percentage of housing loans to GDP is more than 50 percent.
In developing countries like Thailand, it is about 15
percent and in the South Asia region, India has
corresponding ratio of 6 percent. Pakistan lags far behind
with 1 percent. (Annual report state bank of Pakistan).

The recent expansion in mortgage lending in Pakistan can be

attributed to SBP’s efforts to increase the supply of
mortgage lending by relaxing restriction on housing
finance. SBP has successfully encouraged banks to
facilitate middle class, it focused on developing mechanism
to address the needs of lower income groups and foster
further expansion of the housing finance market. SBP is
also playing a role in promoting mortgage lending and
designing incentives such as mortgage risk insurance and
creating conducive environment for housing finance
activities in Pakistan (Dr. Samshad Anwar, Governor State
bank of Pakistan, 2008)

The mortgage market in Pakistan, despite institutional

bottlenecks, has experienced considerable transformation.
During the year 2003, when State Bank of Pakistan
introduced regulations to promote housing finance, the
mortgage industry was characterized as highly concentrated;
of the total 14 commercial banks, only 3 held more than 80
percent share in total outstanding mortgage portfolio. As
more banks entered the market, the concentration of housing
finance has reduced, with 9 out of 29 banks now
collectively enjoying more than 80 percent of the share in
total outstanding (Executive Directors of state bank of
Pakistan).

INFRASTRUCTURE FINANCE MARKET:

Development of infrastructure is of paramount importance

for the growth of developing economies but government alone
cannot finance big infrastructure projects and the gap has
to be bridged by private sector
with viable financing options.
Among private sector, it is the
banking sector which actually
plays a pivotal role along with
capital markets in funding the
infrastructure projects. SBP
has initiated the development
of a database related to Infrastructure Project Financing
and collects data from commercial banks and DFIs to monitor
the growth of infrastructure market and trend of lenders in
different sectors. (Akhtar H, 2008, financial sector, State
bank of Pakistan Annual journal report)

According to data provided by lenders of infrastructure

projects total disbursement against infrastructure
financing was Rs 210.11 billion in June 2007 which rose to
Rs. 269.72 billion in March 2008. Stock value of
outstanding stood at Rs 143.8 billion in June 2007 which
rose to Rs 185.89 billion at the end of March 2008. This
relative growth in lending for project financing supports
the view that demand for project financing is increasing
and banks are expanding project financing portfolios.
Keeping in view the low level of project financing i.e.
less than 2 percent of GDP, it is important to formulate
infrastructure financing related policies to reinforce
public-private partnership to enhance the flow of credit
towards infrastructure development.

PROMOTION OF HOUSING FINANCE INFRASTRUCTURE IN PAKISTAN:

As part of its earlier efforts, SBP had established two

groups, namely a Housing Advisory Group (HAG) and SBP Task
Force on Infrastructure Finance. While the HAG was
established with intention to conduct a thorough analysis
on the existing regulatory and policy framework affecting
housing finance, the SBP Task Force on Infrastructure
Finance was delegated with a mandate to asses country’s
infrastructure needs, identify institutional bottlenecks
and recommend an institutional mechanism for risk
management of project financing. Both groups presented
their recommendations, identifying factors impeding flow of
credit to project financing and housing finance (Housing
Advisory group of State bank of Pakistan, journal 2007 and
2008)

Recommendations of infrastructure task force primarily

focus on development of long-term funding mechanism through
the establishment of dedicated infrastructure lending
organization. HAG has also made number of recommendations
to enhance access to financial services for the development
of housing sector. These include reforms in legal and
regulatory framework, establishment of secondary mortgage
market, development of market intelligence, and provision
of affordable / low income housing finance products
(Jeanneney G.S and Kpodar K, 2007).

SBP and World Bank have agreed to work together for

implementing key recommendations of HAG and bring about
financing environment conducive to growth of housing
sector. The areas in which both organizations want changes
are: restructuring of HBFC, establishment of Mortgage
Refinance Company, low cost housing finance, establishment
of an observatory for real estate market and capacity
building of professionals engaged in housing finance
through housing experts (Olivier Hassler, senior housing
finance specialist, World Bank Washington).

In addition to initiatives taken to institutionalize both

project and house financing, SBP realizes that a
simultaneous development of human capital will play a
critical role in ensuring sustainability of project and
house financing. A cooperation agreement was signed with
International Finance Corporation (IFC); the private sector
arm of the World Bank Group and SBP to launch housing
finance training program in Pakistan. The training intends
to cover all aspects of housing finance from product
development, loan marketing/distribution and origination to
loan underwriting, servicing and risk management. Staff of
both banks and non-bank financial institutions associated
with mortgage lending business benefited from this. First
session of training was conducted in December 2007 in SBP
Karachi and second session in May 2008 at NIBAF Islamabad.
Third session is planned for November 2008 in Karachi.
Similar capacity building initiatives are also being
planned for infrastructure lending( Annual journal of state
bank of Pakistan).

COMPETITORS IN House Finance Industry:

In Pakistan many agencies and banks are involved to lend

housing finance to homebuyers. Different commercial banks
provides funds to housing sector through its refinance
scheme for banks, housing finance companies and state level
corporation and housing finance societies. House building
Finance Corporation's double protection plan is a safeguard
against the unpredictability’s of life and free accident
risk cover protects the borrower's family against
dispossession of the house. In addition to housing finance
institutions and banks, financial assistance is also
available for home-buying against different deposits with
banks in Pakistan and security of different bonds that
issued by State Bank of Pakistan.
Competition is hooting up in the housing finance business
with most of the key players revising down their interest
rate by 0.5 to 1.00 percentage point across various slabs.
This follows the reduction in the prime lending rates by
banks following the recent budget proposals announced by
the Union finance minister. Now the Housing and Urban
Development Corporation (HUDCO) which has so far been
financing only government housing, has entered into the
retail housing finance with the launch of its Gher Aasan
Scheme' in Delhi. Experts believe that HUDCO's entry in the
retail finance will certainly have an impact on the
existing business.

Banks are better placed as they have access to low-cost

funds and have a distinct edge in terms of high
availability of short-term funds. Besides, their wide
branch network will provide them with better reach. Experts
also believe that once the foreclosure norms are in place,
the sector is expected to witness more aggressiveness on
the part of most of the players. Further, the expected
development of the secondary mortgage market will bring in
more liquidity in the sector. The tax incentive provided by
increasing the interest exemption limit from Rs 30,000 to
Rs 75,000 for self-occupied houses as also 40 per cent
depreciation benefit as against 20 per cent earlier for
corporate to set up employee housing will go a long way in
boosting the volume in the sector.

MANY COMMERCIAL BANKS PROVIDING HOUSING FINANCE:

Different institutions include commercial banks and other
financial institutions provide housing finance that makes
the industry in tough competition. Non-performing loans of
consumer financing by banks in Pakistan touched an alarming
level of Rs15.4 billion in September 2007 which is up from
Rs6.4 billion in June 06. This situation has forced a large
number of banks to suspend sanctioning of personal and auto
loans: the two segments which constitute almost 70 per cent
of default loans in consumer financing.

The State Bank of Pakistan has already asked banks to make

full provision for bad loans in their annual balance sheets
which bankers say is bound to impair their profitability in
the current year. Bankers say a slowdown in housing
financing is already visible. Bankers offered Rs23.30
billion housing loans in the first four months of 2006-07
against which housing financing in the same period of
current fiscal year came down to Rs14.32 billion. A report
by the State Bank reveals that within housing financing,
the highest share is of personal loans at 39 per cent,
followed by 31 per cent car financing, 17 per cent house
financing and 13 per cent credit cards.

In the first four months of 2007-08, banks recovered Rs1.95

billion as against sanctioning of Rs9.50 billion personal
loans in the same period in the last fiscal year. Banks
have recovered Rs15 million loans given for purchase of
durables this year. Last year too banks recovered Rs163
million extended for purchase of durables in the same
period. But banks maintained a growth tempo in advancing
loans for housing, car purchase and for credit cards in
first four months which is now being slowed down and
suspended in many banks.

Askari Commercial Bank:

Shelter has been rated among the primary needs of mankind

ever since the inception of life. Owning a home for oneself
still remains an exclusive dream for many. Askari Bank has
made the realization of your dream to have a house of your
very own possible. Whether you plan to build a house,
tailor made to your requirements or buy a constructed
house, Askari mortgage finance enables you to pursue your
goal without any problems (www.askaricommercialbank.com).

Standard Chartered Bank:

Turn your dreams into reality with Standard Chartered Home

Purchase. With Standard Chartered Home Purchase you can
purchase residential ready property for the purpose of
self-occupation.
Standard Chartered Home Loans gives you the unique feature
of reducing your principal balance through partial and full
pre-payments. This allows you to reduce your overall mark-
up costs as and when you have access to additional funds.
For the convenience of our customers our highly skilled
relationship managers make it an easy process. We will
disburse your loan within 15 days, provided that all the
relevant documents are submitted on time.

United Bank Limited:

The UBL also issue House Finance Loan to the consumers. The UBL gave his view that
the housing sector is a fundamental pillar in the development of the economy. "The
government as well as the State Bank is encouraging banks to come up with affordable &
accessible home financing schemes to fulfill the rising demand of housing due to rapid
urbanization and lack of adequate housing units in the country, they want to mention that
in developed countries, the total amount of house financing is in excess of 25% of the
country's GPD, whereas in Pakistan, this figure is hardly 1%.

He added that, "UBL's products and services are designed

keeping in mind our corporate vision to provide world class
financial services based on the needs of the consumer."
"Consumer finance is one area that we see tremendous
potential in this country, and they have invested a
substantial amount of resources and capital into this
effort (President Mr. Atif R Bukhari,UBL, August, 2004).

Speaking at the occasion, UBL's Group Executive Consumer &

Commercial, Mr. M.A. Mannan said, "The product menu entails
innovative features like Fixed, Floating & Adjustable Rate
Options, PAYS (Pay As You Select), Zero Pre-payment Penalty
Options, and Free Property Insurance. In addition, the
facility of Mark-up Monthly, Principal Annually will be
offered for the first time in Pakistan, that allows
customers to pay the mark-up every month, with one
principal payment at the end of the year. Hence our slogan
“yeh Hui na patay ki baat”