RESEARCH THESIS ON

HOUSE BUILDING FINANCE SCHEME FOR LOWER INCOME CONSUMER OF ALLIED BANK LIMITED

BY MUHAMMAD NAUMAN KHAN M.BA (General)

INSTITUTE OF MANAGEMENT STUDIES

UNIVERSITY OF PESHAWAR Session: 2006-2007

ii

RESEARCH THESIS ON

HOUSE BUILDING FINANCE SCHEME FOR LOWER INCOME CONSUMER OF ALLIED BANK LIMITED

Thesis submitted to the institute of management studies, university of Peshawar, in partial fulfillment of the requirements for the award of The degree of MASTER IN BUSINESS ADMINISTRATION

JULY, 2007

RESEARCH THESIS ON

HOUSE BUILDING FINANCE SCHEME FOR LOWER INCOME CONSUMER OF ALLIED BANK LIMITED

APPROVAL SHEET

EXTERNAL SUPERVISOR Signature: Name: Designation: __________________________ __________________________ __________________________

INTERNAL SUPERVISOR Signature: Name: Designation: __________________________ __________________________ __________________________

COORDINATOR RESEARCHER & DEVELOPMENT DIVISION Signature: Name: Designation: Date: __________________________ __________________________ __________________________ __________________________

ACKNOWLEDGEMENTS
My thanks first of all is to the most beneficient, most merciful, almighty ALLAH whose blessings made me able to work on my masters research and compile something worthy to present. Its only, due to the special prayers of my sweet parents that I am able to complete successfully what I started. I will always be in debt to them for what theyve done for me all life. I am obliged to mention Mr. Mehboob-ur-Rasheed my supervisor, institute of management studies. Their guidance in completion of the thesis was very precious. I owe great thanks to my teachers, for providing me the guidelines and support at every step. In the end, I would like to thanks Miss Nabeela Qayum, Mr. Muhammad Arif Page Master Services, U.O.P. for composing and compiling this research thesis. Muhammad Nauman Khan

CONTENTS
Acknowledgement......................................................................................................i List of Contents........................................................................................................ii List of Acronyms....................................................................................................iv ACKNOWLEDGEMENTS..........................................................................................i LIST OF ACRONYMS ...............................................................................................v

CHAPTER 1 ...............................................................................................1
INTRODUCTION TO THE REPORT......................................................................1

1.1 BACKGROUND .....................................................................................1 1.2 Objectives ................................................................................................2 1.3 Statement of the Problem ........................................................................2 1.4 Scope of the report ..................................................................................3 1.5 Significance of the study .........................................................................3 1.6 Methodology ...........................................................................................3 1.7 Sequence of the Study..............................................................................3 1.8 Annexure..................................................................................................4 1.9 Bibliography ............................................................................................4 CHAPTER 2 ...............................................................................................5
HOUSING LOANS IN PAKISTAN...........................................................................5

2.1 INTRODUCTION OF HOUSING LOAN IN PAKISTAN.....................5 2.2 ISSUES ...................................................................................................6 2.3 HOUSING STRATEGY .........................................................................7 2.4 LAND FOR HOUSING...........................................................................8 2.5 HOUSING DEVELOPMENT................................................................10 2.6 GENERAL HOUSING..........................................................................10 2.7 LOW-INCOME HOUSING...................................................................10 2.8 LOW-INCOME GROUP HOUSING.....................................................11 ii

2.9 GOVERNMENT SERVANTS HOUSING............................................11 2.10 KATCHI ABADIS...............................................................................12 2.11 RURAL HOUSING..............................................................................13 2.12 HOUSING FINANCE..........................................................................13 2.13 PRIVATE SECTOR.............................................................................15 2.14 INSTITUTIONAL STRENGTHENING..............................................16 2.15 RESEARCH AND DEVELOPMENT.................................................16 2.16 TARGETS AND FINANCIAL OUTLAY...........................................17 2.17 PICIC TO LAUNCH HOUSE FINANCING SCHEME......................18 2.18 PICIC HOUSING LOAN.....................................................................18 2.19 TYPES OF FACILITY.........................................................................18 2.20 ELIGIBILITY......................................................................................19 Chapter 3 ..................................................................................................22
HOUSING FINANCE IN PAKISTAN.....................................................................22

3.1 INTRODUCTION .................................................................................22 3.2 NATIONAL HOUSING POLICY.........................................................23 3.3 MEASURES ALREADY ADOPTED...................................................24 3.4 BANKS-HOUSING FINANCE.............................................................25 1.5 ANALYSIS............................................................................................26 1.6 AWARENESS OF THE HOUSING FINANCE SCHEMES.................28 1.7 ALLIED INDUSTRIES WITH HOUSING AND CONSTRUCTION. 29 Chapter 4 ..................................................................................................32
Methodology ..............................................................................................................32

4.1 NATURE OF THE RESEARCH...........................................................32 4.2 Rationale of the Questionnaire...............................................................32 iii

4.3 ANALYSIS............................................................................................34 Analysis of the questionnaire ......................................................................34 .....................................................................................................................43

Findings.......................................................................................................................44 RECOMMENDATIONS...........................................................................................45 CONCLUSION...........................................................................................................47 A MODEL HOUSING SCHEME FOR ABL..........................................................48

Eligibility .....................................................................................................48 Purpose.........................................................................................................48 Quantum of loan...........................................................................................48 Margin..........................................................................................................49 Interest Rate.................................................................................................49 Fixed Rate....................................................................................................49 Floating Rate: Based on KIBOR..................................................................49 Repayment period........................................................................................49 Security........................................................................................................50 Processing charge.........................................................................................50
Bibliography...............................................................................................................51

QUESTIONNAIRE......................................................................................52

iv

LIST OF ACRONYMS

GIS CIB HBFC PSDP DHA CDA LDA GDP KIBOR LIBOR

Global Information System Credit Investigation Bureau House Building Finance Corporation Public Sector Development Pakistan Defense Housing Authority Capital Development Authority Lahore Development Authority Gross Domestic Product Karachi Inter Bank Operation Rate London Inter Bank Operation Rate

CHAPTER 1

INTRODUCTION TO THE REPORT

1.1 BACKGROUND Housing sector in Pakistan continues to deteriorate. This is due to the constant growth of housing deficit at an alarming rate of 270,000 units per year. Pakistan, according to official statistics, needs 820,000 housing units annually over the next twenty years, whereas the current production of housing units is less than 300,000 units per year. Moreover, as per the recently released Economic Survey 2005-06 by the government, the housing sector has been steadily deteriorating due to the ineffective policies, which in turn has resulted in a huge backlog of six million units. The other factors that have contributed to the acute shortage of houses are: population growth, inadequate attention towards construction of new houses, migration from rural to urban areas and break up of the traditional joint family system. My mission is to highlight the importance of housing sector to the top management of ABL. Housing industry has a great potential as one of the main drivers of economic growth. It can not only become the biggest creator of jobs but also can engage a large number of support industries, thus creating demand for growth of the economy on the one hand and on the other, contribute to efforts for the alleviation of poverty from the country. In Pakistan, the shortage of houses is an old problem. Pakistan now faces a deficit of 6.405 million housing units against the shortage of 2.8 million the 80s. Governments in the past years tried to arrest the widening gap between the demand and availability of houses in the country but did not succeed in bridging the gap. Recently, Prime Minister Shaukat Aziz announced a Housing for All programme to provide housing for government employees in all districts of the 1

country. Under the programme, Islamabad and provincial governments were committed to allocate 100 acres of state land at affordable prices to the government servants. House financing is one of the ways for investment and development. Being a developing country, Pakistan should have programs like this one and all the banks should practice the same. The topic has been selected because of its importance for the low income people of our society. 1.2 OBJECTIVES The study was based on the following objectives. 1. 2. To define and explain house financing in Pakistan. To discuss the house financing scheme in Pakistan with regard to banking. 3. To light the facilities and products with respect to house financing scheme for low-income group offered by to its customers. 4. 5. 6. To make analysis of the collected information. To make findings and conclusion out of the data. To design a plan for Allied Bank Limited, Pakistan on house financing for low income group in Pakistan. 1.3 STATEMENT OF THE PROBLEM The study was conducted with the main aim to formulate a scheme for Allied Bank so that the bank can easily adopt it. The title of the report is House building finance schemes for lower income consumers of Allied Bank Limited. In Pakistan, most of the population has experience middle class life. Those who are below poverty line, they are not included in this report.

Hence the group of people with monthly income of Rs. 9000-12000 have been included. His annual income is lower then his taxable income. 1.4 SCOPE OF THE REPORT This report is containing material from House Building Finance Corporation, Muslim Commercial Bank, PICIC, United Bank Ltd. and a model housing scheme has been prepared at the end after recommendations. 1.5 SIGNIFICANCE OF THE STUDY This study is important because. 1. As a research for information: This study has due importance because of its valuable information for researches in studies and working on house financing in banking as well as other financial institutions. 2. For Government Officials: Government needs some investment to be done on the part of people as well as some organizations. Being the developing country Pakistan, the officials should have keen interest in house financing. 3. For Research: Being researcher one can get deep insight into the problem of housing for low income group and devising a scheme / model for banks. 1.6 METHODOLOGY Data is collected on questionnaire. Sample size was taken 60. Quota sampling has been applied, and 30, 30 copies have been distributed among Bank employees and general public. It was then properly treated for analysis. 1.7 1. SEQUENCE OF THE STUDY Chapter I-Introduction: This chapter introduction of the report, data source, statement of problem, its significance and methodology.

2.

Chapter II-Review of related literature: This chapter contains documents/notes related with house financing in banking sector and other industries related with house financing in Pakistan.

3.

Chapter III-House Financing in Pakistan: Information related with house financing in Pakistan have been included in this chapter.

4.

Chapter IV-Research Methodology: This section contains, nature of the research and rational of the questionnaire including the methodology and other techniques.

5.

Chapter V-Analysis: This portion contains detailed analysis of the questionnaire and graphical representation of the responses of the bank employees and general public.

6.

Chapter VI-Conclusion and Recommendations: All the information have been concluded and recommendation have been drawn here.

7.

Chapter VII-A model housing scheme for Allied Bank Limited: A housing scheme for Allied Bank Limited have been devised and a model have been prepared.

1.8

ANNEXURE Relevant sources have been included here.

1.9

BIBLIOGRAPHY Bibliography has been given in the end including all the sources and

books etc.

CHAPTER 2

HOUSING LOANS IN PAKISTAN

2.1 INTRODUCTION OF HOUSING LOAN IN PAKISTAN Shelter is one of the basic necessities of life and occupies the biggest portion of any human settlement. Housing ownership promotes social cohesion and citizens participation in other development activities. In view of everincreasing demand for housing and a huge backlog, some innovative methods need to be employed to make a major breakthrough in this area. The National Housing Policy 2001 is well articulated but its implementation has not been at the desired levels. Except for some positive measures for housing financing by the State Bank, not much progress has been made on other recommendations. Due to the strong linkage of the housing sector to the economy, the income multiplier is generally very high, and the private and informal sector can play a vital role in national development. Housing construction also generates direct employment including: (i) Absorbing rural labor and providing opportunity for seasonal employment for farm workers, (ii) enhancing participation of women workers, and (iii) activating small-scale and mostly self-employed industries including building construction materials, equipment, fittings and fixtures. Affordable housing for low-income groups also contributes to poverty alleviation, income redistribution and promotes individual productivity) and household savings. In 1998, there were 19.3 million households in Pakistan, with average household size at 6.6 persons and occupancy at 3.3 persons per room. The overall housing stock comprised 39 percent Kucha houses mostly without proper water supply, 40 percent semi-Pucca houses mostly without planned sanitation or sewerage system, and 21 percent Pucca houses. As against the current incremental demand for housing estimated at 570,000 units annually, only about 300,000 units are being built annually, mostly in urban areas. Accordingly, the housing backlog, estimated at 4.3 million units in 1998, has 5

increased to around 8 million units in 2006. The majority of rural housing is Kacha, with minimal water supply and sanitation or drainage services. About half the urban population is living in slums and Katchi Abadis, with inadequate housing and living conditions. The share of housing in the public sector programs has progressively decreased from 10.9 percent in the 1960s to 5.9 percent in 1990s, with limited institutional finance continuing to be a major constraint in housing production and maintenance of old dilapidated housing stock. In addition, more than 80 per cent of the total population cannot afford the financing terms provided by the House building Finance Corporation and other housing finance institutions. Resultantly, the construction of low-income housing has been much slower than the incremental needs. 2.2 ISSUES The following are the major issues in the housing sector: i. ii. The households below poverty line have remained neglected. Inadequate supply of developed land and its skyrocketing prices, particularly in large cities, is making housing ownership beyond the affordability limits of the majority of population. Related barriers include poor land administration with inadequate legal and regulatory systems, and high cost of property transactions. iii. Housing for rural population, constituting two-third of the total population, has not received adequate emphasis. iv. More than 30 per cent housing is in dilapidated condition requiring improvement /replacement. v. An overemphasis on Katchi Abadis regularization in urban areas has encouraged further encroachments. vi. Limited supply of housing finance, with weak mortgage collateral, does not encourage institutional credit based housing development. vii. Traditional approaches of reliance on the Government have not resulted in an increase in housing construction to match the needs. 6

viii. ix.

Low public confidence in the housing development industry. Most of the Local Governments lack required skills to effectively manage the urban growth, provide basic utility service and maintain the infrastructure especially in low-income areas/Katchi Abadis.

x.

Lack of comprehensive planning at national, provincial, regional and local level without effective coordination among various Government departments, development agencies and other bodies has impeded housing development.

2.3

HOUSING STRATEGY In addition to the backlog of 6 million housing units, the incremental

housing need during the MTDF will be 3 million housing units. Increasing the house construction from 300,000 units in 2005 to 800,000 units by 2010 will only cater to the incremental needs during 2005-10. A much larger mass housing construction will be required if the housing backlog is to be reduced during the MTDF. Accordingly, the strategy will be to undertake mass housing program with enhanced supply of institutional finance and long term fixed rate financing options; increase availability of developed land; enhance proportion of small-size plots for low income groups; undertake high rise condominium development, where appropriate, to utilize land more effectively; build capacity for land administration; discourage speculation in land; improve house construction technology. Including standardization of components for mass production; regularize notified Katchi Abadis complemented by policies to restrain the emergence of new Katchi Abadis; increase community participation in housing and service delivery; provide sufficient and affordable credit for rural housing to meet the needs of shelter less poor: invest in human capital to improve the quality of construction; and put in place legal and regulatory framework to facilitate the development of housing both in urban and rural areas.

The MTDF housing programs would be developed as per the recommendations of National Housing Policy, by the Ministry of Housing and Works in consultation with the Provincial Governments and would be sustainable, both financially and environmentally, with replicable models. The Government would assume the role of a facilitator for the Implementing of housing programs rather than being the developer. Land Banks would be established at the federal and provincial levels, and innovative techniques developed to effectively involve the private sector. Consideration would be given to discontinuation of auction policy for disposal of residential plots/ sites to arrest land speculation, and also to capture a share of rising land values resulting from speculation to meet the housing needs of low-income groups. Low-Income Housing Funds would be established at the provincial level, and opportunities capitalized from the effective implementation of proposed Spatial Planning Systems for development of rural and urban areas in the country. Salient features of the housing strategy are outlined below. 2.4 LAND FOR HOUSING The efficiency of urban land market needs to be improved. Weaknesses in the land titling and information systems include institutional fragmentation between numerous record keeping entities at different levels; inconsistencies between different types of records; the lack of transparency, cumbersome and unsecured manual processes, and difficult reconstitution of chains of land titles; the heterogeneity of rules and procedures between agencies within the same urban areas; and widespread avoidance of formal property registration. The strategy would include: (i) appropriate and affordable land use, building standards and regulations; (ii) improving procedures for land transfers (including cadastral mapping, titling, and computerized registration); (iii) measures to stop land being held vacant for speculative purposes; and (iv) improving information to public on land-market indicators. Comprehensive land information systems would be developed using modern technology including computerization, remote sensing techniques, GIS mapping, satellite 8

imageries, and aerial mosaics, to record correct and up-to-date information regarding the inventory and land classification, settlement patterns, land values and the extent of land available in all urban and rural areas for future planning and development. Land is required for any type and level of housing. The high income group constituting only 20 per cent of total population is being serviced by the private and public sectors. It is the balance 80 per cent that is being severely hurt by the soaring land prices at varying degrees. Accordingly, the following strategy is proposed: i. Land Banks would be established at the federal and provincial levels. The Banks will allocate lands for various housing projects/ new towns with focus on low-income housing. ii. All suitable federal and provincial state lands would be transferred to the proposed Land Banks. iii. The availability of land in the Land Banks would be increased by purchasing cheap land in small and medium towns, and the proposed urban development corridors with growth potentials determined through the Provincial Spatial Development Plans. iv. Funds for purchase of lands would be obtained from the proposed LowIncome Housing Fund or loans from commercial banks. In case of loans, the mark-up may be picked up by the Provincial Governments, at least in the initial stages. v. Proceeds from the sale of commercial areas in Government schemes and valuable State Land would be used to buy land in advance through the proposed Land Banks. vi. Land would be used as a resource to generate funds by allocating plots in advance of actual development of housing schemes, as is being done by the private sector successfully.

vii.

Geographic Information Systems (GIS) would be established at Tehsil level, with aggregated information at district and provincial levels.

2.5

HOUSING DEVELOPMENT There is a whole range of housing catering to the various income

groups. As the land is a limited resource, it has to be used optimally to conserve it for the future and for other uses like industry and agriculture. Accordingly, the large plot sizes would be discouraged and the ratio of smaller plots shall be increased substantially to cater to the needs of the low income groups and to strictly control the formation of Katchi Abadis. 2.6 i. GENERAL HOUSING High-income group housing would be left to the private sector. The Government would focus on low and middle-income housing demand. ii. High-income housing projects would provide for at least an equal number of s mall sizes up to (up to 10 Maria) housing plots. This will increase the supply of low-income plots substantially thereby lowering their prices also. iii. Recommendations of the National Housing Policy 2001 would be strictly followed by the federal and provincial authorities. 2.7 LOW-INCOME HOUSING Low-income Housing Funds would be created at the federal and provincial level, which may be funded from private and Government sources as follows: 25 per cent of the Non-utilization Fee for vacant plots after a specified period. Non-utilization Fee to be substantially increased in view of the rapid increase in the prices of the urban plots. 25 per cent of the transfer fee charged by the private developers, cooperative societies, development authorities and Government

10

departments. The Transfer Fee for vacant plots to be increased in view of higher gains to the plot owners. Allocations/grants Governments. Consideration to be given to allocating certain percentage of the sale proceeds from the Privatization of public enterprises. 2.8 i. ii. Private Donations Assistance from development partners and bilateral internal donors for LOW-INCOME GROUP HOUSING Consideration to be given to using Zakat Fund. Determine additional ways and means to secure at least a small percentage of high profits being gained by the plots speculators. iii. In all the Government and private housing schemes, the ratio of small plots would be increased (not less than 50 per cent). Small size plots would be cross-subsidized from the sale proceeds of larger plots and commercial areas. iv. Research would be carried out to develop low-cost housing and determine the optimum size of plots for low-income groups. The development of socially integrated housing areas, both in urban and rural areas, would be encouraged. 2.9 i. GOVERNMENT SERVANTS HOUSING Housing schemes for Government servants of all grades, with emphasis on the lower grades, would be pursued. ii. Punjab Province has recently established Government Servants Housing Foundation under an Act. It is about to launch its first model project in Lahore, based on advance payments to be deducted at source. As a large number belong to the category of low-income group, a substantial need 11 from Federal and the concerned Provincial

of low-income housing will be met through this replicable model. Other provinces could consider initiating similar programs. iii. Additional programs of Workers Housing will be developed and implemented on fast track basis, throughout Pakistan. 2.10 i. KATCHI ABADIS The programs should be de-emphasized in favor of genuine low-income housing areas with the objective that emergence of new Katchi Abadis is stopped. ii. Katchi Abadis regularization and improvement program should be restricted strictly to the already notified Abadis. iii. For Katchi Abadis on private lands, the role of the Government would be to facilitate dialogue between the owners and the residents. iv. Sindh model of Katchi Abadis regularization with the land title tied to payment of dues (land and development cost) should be considered for adoption by other provinces. v. The experience of Khuda-ki-Basti in Hyderabad, being self-financing and target group oriented, should be replicated. The development cost can be made affordable through the involvement of the residents and other measures. vi. vii. No Katchi Abadis should be regularized free of cost. Katchi Abadis on prime locations should be offered reasonable alternate sites for relocation or accommodated on a portion of the location in high-density development. The remaining areas should be sold to generate funds for developing the low-income areas. viii. The standards of services/ utilities being provided in Katchi Abadis should be improved incrcmcntally. ix. Community loans for house construction/ improvement should be considered under the micro credit programs. , 12

2.11 i.

RURAL HOUSING A greater emphasis on rural housing to reduce the population influx to big cities, with increase in house ownership.

ii.

The program of the Punjab Government under Jinnah Abadis Act to grant 5 Maria plots for housing for rural shelter less to be expanded with initiation of similar program by the other Provinces.

iii.

Incremental provision of water, sanitation, electricity, health and education facilities to be ensured through a phased but integrated program on sustainable basis by provincial governments.

iv.

Affluent individuals belonging to the rural areas to be encouraged to participate in Adopt a Village scheme for provision of basic facilities and services. Once some models are developed, the idea can be promoted through mass-media campaigns to reach potential sponsors in cities and abroad. Overseas Pakistanis have done similar efforts on a small scale, which can be turned into a movement with proper advertising.

v.

Small loan facilities to be made available at low-mark up for house improvements and new construction.

vi.

Research to be carried out to develop low-cost indigenous construction models, with emphasis on construction quality.

vii.

Rural housing service centers to be established to furnish information on credit, low-cost technology and building material.

viii.

Private Foundations and Rural Housing Cooperatives to be encouraged to undertake development of villages with local participation on selfhelp basis.

2.12

HOUSING FINANCE Currently there is inadequate housing finance, management capacity,

and awareness. Weaknesses in the land titling and land information systems 13

restrict the possibilities of mortgage finance to limited urban areas and are largely responsible for the concentration of lenders to the upper-income groups for whom the property collateralization is not the main risk-mitigating factor. The lack of a long term fixed rate funding market acts a constraint as it increases the risk for the lenders and restricts the menu of long term mortgage products thus curtailing affordability of the middle and low income groups to buy even a small plot and build house thereon. The main funding from the existing banks for housing loans is derived from their deposit-base, which leads to major financial risks relating to interest rates and liquidity. The interest rate portion is managed by relying on floating rates and keeping fixed rate duration for just a few years. Liquidity risk is currently low due to constraints levied by the State Bank of Pakistan delineating a maximum exposure limit for the banks vis-a-vis the home finance. Until now the main crux of housing mortgagees was towards the floating rate side. Given the recent run up in rates, the mortgages have been the primary victims, as they have had to pay the cost of rising interest rates in the shape of enhanced monthly mortgage payments. In a fixed rate mortgage, which is funded by short-term liabilities, an increase in interest rate primarily affects the mortgagee financial institution because of re-pricing of liabilities. Thus, it is prudent to develop long term fixed rate funding arrangements for enabling banks to offer fixed rate mortgages. Institutional investors such as Pension Funds and Insurance Companies can afford the alternate long-term investment opportunities such as 15 or 20-year mortgage backed securities. However, banks, especially the large ones with huge pools of funds in the shape of demand and time depicts liabilities, are unwilling to forego the high spread they are earning by financing their long-term housing loans through short-term liabilities. It is imperative that a properly functioning local housing bond market is developed. This would allow the banks to match their assets with their liabilities more efficiently, thus reducing both their interest rate, as well as 14

liquidity risks. This would require a well thought out strategy for the bonds duration, mark up rate and liquidity management after bonds issuance. It would be important to facilitate the market through a refinancing structure which not only alleviates the liquidity risk incurred by the primary lenders, but promotes sound practices and standards in the lending activity through its refinancing requirements and have an overall catalytic effect on the development of house lending activity. The pooling of funding needs would result in larger, more transparent mechanism, which would decrease the relative issuance cost and help ensure liquidity n the secondary market for bonds. In addition to a permanent long-term capital source, some financial hedging instruments may be necessary to protect the lenders against the financial risks. Promotion of the mark-up rate swap market would be of special importance given (i) the likely obstacles in extending bonds maturities beyond 15 years, (ii) the practice of adjustable mortgage mark-up, and (iii) the repayment risk incurred by the lenders. The creation of such derivatives depends in particular on the liquidity of the private investment bonds market, which would be used by swap sellers to hedge their positions. As a measure of establishing a pass though mechanism for funding the housing loans, a secondary mortgage company could be considered. The government would need to facilitate by offering a credit enhancement mechanism as well as equity participation, on the pattern of Cagamas of Malaysia and Fannie Mae and Freddie Mac of USA, which enables the interested financial institutions to generate off balance sheet housing loans. 2.13 PRIVATE SECTOR Increased attention would be given to the private sector involvement in the delivery of housing services and land development. For this purpose, appropriate incentive systems and legal and regulatory frameworks would be developed. A priority will be to make market entry easier through better security of tenure, access to land and credit, and regulations to allow mixed use of land, and affordable planning and building standards. Given the massive 15

investment required in housing infrastructure, a greater focus is needed on the creation of cost-effective and efficient public-private partnerships that include mechanisms for attracting private capital for infrastructure provision. 2.14 INSTITUTIONAL STRENGTHENING Provision of Housing for All requires strong and cost effective institutions, acting as facilitators rather than developers, capable of using modern technology, methods and techniques efficiently. Accordingly, emphasis would be placed on strengthening housing sector institutions and related research organizations including construction technology, to establish replicable and sustainable models for mass housing. Housing is mainly in the provincial domain. It is envisaged that the Provincial Governments will play the lead role in enabling the sustained delivery of Housing for All. This includes developing appropriate mechanisms and institutional frameworks, and setting up provincial housing delivery goals and performance parameters in support of the national housing delivery goals. Housing is also a local community affair where end users are both the contributors and stakeholders for all types of housing activities. Accordingly, the role of the local governments would be important in enabling, promoting and facilitating the provision of housing to all segments of the population within their respective jurisdictions. It is envisaged that the Federal Government would provide the overall coordinating and monitoring mechanism through the Ministry of Housing and Works. Provincial Governments will initiate all necessary legislative, regulatory, and institutional strengthening measures, both at the Provincial and local government level, for the effective implementation of the National Housing Policy and to achieve the MTDF targets in the respective provinces. 2.15 RESEARCH AND DEVELOPMENT The MTDF envisages the promotion of integrated construction approach through a combination of design orientation, use of traditional and indigenous 16

building materials and adoption of new construction techniques, making housing construction cost-effective and ensuring up gradation of quality, by: i. Standardization of principal building components and allied

specifications to facilitate their maximum production making it cost effective and affordable for the low and middle income groups. ii. Introduction of building materials already developed such as compressed mud-brick (Adobe) and Ferro-cement roofing system in rural low-rise housing. iii. Promotion of research and development on housing and construction materials and effective coordination of research institutions for speedy application. 2.16 TARGETS AND FINANCIAL OUTLAY An investment of Rs. 950 billion is envisaged in the MTDF for the development of housing, including Rs 920 billion investments by the private sector and Rs. 30 billion in the public sector. The private sector will be involved in construction and improvement of at least 3 million housing units during 2005-10 in urban and rural areas. In addition, the private sector would also undertake area development schemes with necessary infrastructure to provide developed residential plots, and construct about 25,000 houses/flats for the public servants under house ownership schemes, mostly in urban area during next five years. The PSDP allocations would be utilized mainly by the Federal and Provincial Governments for undertaking infrastructure development in ongoing housing programs and new area development schemes for provision of developed residential plots with necessary amenities. In addition, the Government would continue constructing public offices and essential accommodation for Government servants and Constabulary Armed Forces. Details are provided in Table 1 below. During the first year of MTDF (2005-06), the federal PSDP allocation for housing is earmarked as Rs. 2 billion for housing on ownership basis, Federal Government Employees and construction of office buildings. Whereas, the Provincial Governments are 17

required to allocate Rs. 3 billion during 2005-06 in order to accelerate the house construction activity throughout Pakistan. 2.17 PICIC TO LAUNCH HOUSE FINANCING SCHEME Pakistan Industrial Credit & Investment Corporation (PICIC) has lunched housing financing scheme to help bridge the gap between demand and availability of housing units in the country. Loans with a maximum limit of Rs 10 million will be provided to people on easy terms. Consumer financing - a comprehensive treatment at PICIC . Under the said scheme, loans will be extended for the purchase of readymade houses or flats, renovation and expansion, house refinance (debt consolidation/swapping), construction of house/flat and purchase of land. The mark up on these loans would be about 12 percent (SBPs discount rate plus 3.5 percent). During the first phase of the disbursement, the housing financing facility would be available in Karachi, Hyderabad, Lahore, Sialkot, Gujranwala, Multan, Faisalabad, Peshawar, Quetta, Rawalpindi and Islamabad. PICIC should also extend technical support to the borrowers by helping them in preparation of feasibility reports on projects. 2.18 PICIC HOUSING LOAN PICIC Housing Finance offers Home for everyone who enables home ownership through easy installment plan, designed specifically customers needs. 2.19 TYPES OF FACILITY Constructed House/Flat Renovation Expansion Refinance House/Flat New construction of House/Flat 18

 2.20

Purchase of Land Mortgage Financing ELIGIBILITY Pakistani National holding NIC (Resident/Non Resident) Salaried/Self Employed person
SIZE OF THE LOAN Upto Rs. 10 million MARK-UP RATE Competitive REPAYMENT PERIOD Upto 20 years repayable in easy installments BORROWERS Nominal EQUITY SECURITIES

Registered/Equitable Mortgage Personal Guarantee/References whenever necessary Documentation Mortgage and legal documentation charges to be borne

by the borrower:
Insurance Life Insurance at PICICs cost Processing Fee Nil Conditions apply

Documents Required 1. 2. 3. 4. 5. 6. 7. Indenture of lease Indenture of Sub-lease Declaration and Confirmation of Oral Gift Sale Deed / Conveyance Deed A, B & C Leases (DHA properties only) Search certificate Sale Agreement 19

8. 9.

General / Special Irrevocable Power (if applicable) Letter of administration in case of property having devolved to legal heirs of the deceased owner of the property

10. 11.

Letter of Sub Division from the competent authority (if applicable) NOC/permission to mortgage in favor of PICIC (applicable in case of mortgage financing and Home Construction

12.

Allotment Order / transfer Order (in case of property being purchased from builder/developer)

13. 14. 15. 16.

Approved building plan Site Plan Construction Estimate (in case of construction) Letter of dues from builder (in case of property being purchased from builder/developer)

17.

Copy of NOC for sale and advertisement from KBCA (in case of property being purchased from builder/developer)

20

If the property is already mortgaged following additional documents are required: 1. 2. 3. Relinquishment Deed Mortgage Deed/Redemption of Mortgage Deed Revocation of power of attorney where the power of attorney is registered Property Evaluation fees: For cases upto 5.0 million Rs. 3,000 For cases above 5.0 million Rs. 4,000

Documentation and Legal Consultation Fees: For cases below Rs. 3 million Rs. 3,000 For cases below 5.0 million Rs. 5,000 For cases above Rs.5 million Rs. 8,000

21

CHAPTER 3

HOUSING FINANCE IN PAKISTAN

3.1 INTRODUCTION Roti, Kapra aur Makaan - The slogan mostly underscores the fact that the housing is one of the most fundamental needs - as every family requires roof of his own. It is of course but as natural as food and clothing, yet many are caught in the struggle of having a house. According to the Population and Housing Census of Pakistan, in the year 1998 there were over 19.3 million Housing Units in the country. With the population at 149 million by the end of June, 2003, the housing unit requirement on the basis of the World Banks recommendation at the occupancy rate of 6 persons per house and the total number of Housing Units required in the country should be around 24.8 million. The above formula shows that there is shortfall of over 5.0 million Housing Units. HOUSING UNITS BY TENURE
TENURE All Areas i) All types ii) Owned iii) Rented iv) Rent Free 19.3 (100) 15.5 (80.8) 1.7 (9.0) 2.0 (10.2) CENSUS 1998 Rural 13.1 (100) 11.4 (87.1) 0.3 (2.3) 1.4 (10.6) Urban 6.2 (100) 4.2 (67.6) 1.4 (23.2) 0.6 (9.2)

According to the convener of the housing advisory group the country needs an additional supply of 570,000 Housing Units per annum. While the actual annual supply does not exceed 300,000, thus there is net shortfall of 22

270,000 Housing Units p.a and the backlog is increasing every year. To meet this shortfall Housing Finance to the extent of Rs. 68 billion is required as against Rs. 4/5 billion being outlaid at present. These alarming statistics have created a red-light situation where million of peoples are homeless. In addition to population growth of 3.2% during the last decade the country was burdened with sheltering hundreds of thousands of refugees of the effected neighboring country further encountered by the climatic extremes. Hence, it is a matter of great concern and demands very serious attention to be paid on a national level. Governments normally do not have enough funds resources to provide readymade Houses to their badly needed citizens. But it is the endeavor of every welfare State to create an environment, where construction and ownership of home is facilitated. This paper has been prepared on the lines to examine the role of Housing Finance to resolve the countrys Housing Problem and its impact on the Economy. 3.2 NATIONAL HOUSING POLICY The present government appreciating the gravity of situation and realizing the importance of this sector for its potential to generate employment, decided to revitalize it as a vehicle for economic revival. Accordingly, Ministry of Housing and Works formulated a new National Housing Policy - 2001 approved by cabinet on 5-12-2001. The policy addresses all the issues relating to land matters, house finance, construction, services sector, low cost and rural housing, building material and infrastructure development, building and zoning regulation, and institutional framework. It clearly sketches out the role of Federal govt. up to the local government defining the desired roles to be played by governing bodies on each level. The policy also seriously considers the multifarious problems including housing shortage, lack of housing finance, non-existence of foreclosure laws, lack of planning, outdated building and zoning regulations, etc. The major emphasis of the policy is on resource mobilization, land availability, incentives for home ownership, incentives to developers and constructors and promotion of research and development 23

activities to make construction cost effective. The main objective of the policy is to create affordability to owning a housing unit, especially for the middle and low-income groups. 3.3 MEASURES ALREADY ADOPTED Banks exposure to housing finance has been enhanced from 5% to 10% of their net advances. CED on wires & cables withdrawn. CED on cement reduced. Bank allowed to deduct 3% of the income arising out of consumer loans For creation of a reserve to off-set bad debts in this segment. Broadened the scope of Credit Information Bureau at SEP. Facilitating CIB in the private sector for consumer loans. The per party limit has been raised from Rs. 5 million to Rs. 7.5 million. The maximum loan period has been enhanced from 15yrs to 20 yrs. Debt equity ratio in housing finance has been improved to 80:20 from 60:40. Tax rebate on mark up to Rs. 500,000 (from previous Rs. 100,0007-) or 40% of the income which ever is less for those who construct their houses their loans. Maximum limit of HBFC raised to Rs. 5 million. Provincial governments are rationalizing stamp duties and registration fee on transfer and acquisition of housing property. The legal framework for the loan recovery of financial institutions has been further streamlined and strengthened through the promulgation of Finance Institutions (Recovery of Finance) Ordinance, 2001. 24

Through a more effective macro economic management the government has succeeded in reducing the general interest rates in the country. This will provide an opportunity for banks and other financial institutions to provide more affordable mortgage loans.

HBFC has been put under a new and professional Board of Directors and management with a mandate to restructure the instruction into a commercially viable and self sustaining entity.

HBFC shall compete in the market for business and resources at par with private. Sector institutions. Moreover, the HBFC has been amended to enable it to provide Sharia compliant housing finance product, which has since been introduced.

3.4

BANKS-HOUSING FINANCE In order to meet the backlog and shortfall of the housing units in the

country in the next 20 years, the overall housing production has to be more than 570,000 housing units annually. IT is refreshing to note that favorable developments at the market place are facilitating origination of housing loans in the primary mortgage market. On the supply side bank are flushed with liquidity due to reduced borrowing from government, de-dollarization of the economy and rising inflows of remittances. Consequently interest rates have reached their lowest ebb. In this scenario banks are looking for alternate lending opportunities and develop asset based consumer products. Housing finance provides an attractive opportunity as both profit margins and recovery rates on average are higher for mortgage finance than project and corporate lending. On the demand side marketing efforts by banks are creating awareness amongst general public for early home ownership through housing finance. The increasing scope of House Financing in Pakistan has made many local and foreign banks engaged in House Financing activities. The potential of the industry promises sound future of the capital resource. 25

HOUSING LOAN PORTFOLIO

Banks Total Disbursement # of Amount loans 634 Rs. 1SS.8 Total Outstanding # of Amount loans 633 Rs, 163.4

Nationalized HBL-R5.1S9 NBP-Rs.97 Denationalized MCB-Rs.63.1 Private Banks Union Banks Rs. 489 Askari Rs. 626 B.A.F. Rs.141 Foreign Banks Citi Bank Rs. 1968 ABN Rs. 827 H.B.F.C

43 1079

Rs.63.1 Rs. 3393,2

41 1044

Rs.55.1 1229.5

L 18S2

Rs.2796

1350

1727.6

3945 418,530

4547.9 30,789.5 35,337.4

3065 151,031

3175,7 17,810.9 20,986.6

1.5 ANALYSIS
Name of Bank Habib Bank Limited National Bank of Pakistan Muslim Commercial Bank Ltd. Union Bank Askari Bank Ltd. B.A.F. Citi Bank ABN Amro Bank Others H.B.F.C. Outright Purchase Construction Renovation Percentage of Share 4.16% 2.13 % 1.38% 10.75 % 13.76 % 3.10% 43.27 % 18.18% 3.27 % 100.00 % 65.8 % 17.99 % 16.90 % 100.00 % Average Amount Per Loan 0.3 million 1.46 million 1.29 million 1.49 million

0.07 million

The above figures indicate the following very interesting facts, which need to be evaluated by the policy makers for taking appropriate decision: 26

a.

That out of the total loan 62% market share is with the foreign banks 28% private banks as compared to only 6% with the Nationalized Banks.

b.

That the major players in the field are Citibank 43% followed by ABN Amro 18%, Askari 14% & Union Bank 11%. Total 86%.

c.

That the majority of the loans have been given for outright purchase i.e. 66% followed by loan for construction 18% renovation 17%.

d.

That average loan per borrower: Foreign bank/De-nationalized banks Private Banks Nationalized Banks HBFC Rs. 1.50 million Rs. 1.29 million Rs. 0.30 million Rs. 0.07 million.

e.

That the market leader which had a almost monopolist share originally in the Housing Finance is still H.B.F.C. with total disbursement of almost Rs. 31.00 billion followed by all the banks clubbed together at Rs. 4.5 billion.

f.

The figure of Rs. 4.5 billion is a tremendous improvement in the Banking Sector is a recent evolution, which is a consequence of Macro Economic Conditions, National Housing Policy 2001 and the measures and steps taken by the State Bank of Pakistan and other Agencies.

As part of this research paper a questionnaire was circulated among the Major Players in the Banking Sector w.r.t. Housing Finance who enjoy an almost 90% of the market share. This questionnaire was followed up with telephonic reminders and meetings/discussion. Based on the above survey the findings are tabulated under:

27

MAJOR PRIVATE BANKS IN HOUSING SECTOR

NAME Banks Union Bank Soneri Bank Askari Bank PICIC Faysal Bank City Bank ABN Amro HBFC Al-Falah Limit for Loan (Million Rs) 0.3-7.5 2.5 0.2-7.5 0.25 0.3 - 7.5 0.3-7.5 0.1 - 7.5 0.1-7.5 0.1-7.5 Equity Ratio 70:30 70:30 60:40 60:40 60:40 60:40 60:40 70:30 70:30 Time Frame Years 1-20 yrs 1-15 yrs 1-20 yrs 2-20 yrs 3-20 yrs 1-20 yrs 3-20 yrs 1-20 yrs 1-20 yrs 15000-25000 (Accumulated) 11000 Accumulated 3000-5000-r others 950D Accumulated 5000 20000 Processing Fee Rate of Interest Floating 9-11 % 11% 10-12 % 12.5 % 9.37 % 9.5 % 10% 12.5 % 7% Fixed X 16% 18% 14% 18% 17% 16% 12.50%

5000 + others 2500 or 0.5% of Loan -f others 2500 or 0.5% of Loan + others

1.6

AWARENESS OF THE HOUSING FINANCE SCHEMES The above exercise was conducted in respect to the Institutions involved

in extending House Finance. Now this exercise is undertaken to find out the knowledge and general perception of H-F amidst potential borrowers. The survey has produced some very meaningful results. The restricted parameters of the survey are that the target group selected were:a. b. c. d. Mostly educated Bread earners of the family 92% male More than 90% above age of 40

28

With these parameters, the survey needs to be understood and results are: OWN HOUSE: DEPENDENTS: RENTAL PAYMENTS: 64% do not own their own house 60% have 2-4 + 24% 5-6 + 16% >6 56% pay approx Rs. 10,000724% pay approx Rs. 15,000 20% pay approx Rs. 20,0007 SOURCES: 70% have purchased their own house. 30% have been gifted or inherited. AWARENESS: 65% do not know about the various H-F sche 35% knew of it. BEEN TO A BANK: 92% have not been to a bank for this. PERCEPTION OF 80% felt that the packages offered by the various PACKAGES: Financial Institutions are neither convenient nor affordable. MARKUP RATE: 72% did not know of the present markup charged CONVENIENT 92% responded by saying that they would prefer PACKAGE: Package/product of housing finance which is conveniently obtained is economical and can stretch for a longer period of time. 1.7 ALLIED INDUSTRIES WITH HOUSING AND CONSTRUCTION Housing and construction sector is not only highly labour intensive, it has also multiplier effects on Industrial activity in the country. Revival of this sector will also generate momentum in almost 70 allied industries such as:

29

CEMENT 1. Crush Stone 2. Polly bag / Polly propane bag 3. Lime stone 4. Printing of bag 5. Transportations 6. Shower 7. Flash WOOD INDUSTRY 1. Door 2. Window 3. Shuttering HARDWARE INDUSTRY 1. Nails 2. Screw 3. Angle 4. Brackets 5. Door closer 6. Door Lock 7. Hammer 8. Screw Driver 9. Curtain Railing 10. Curtain Rod PIPE 1. PVC Pipe 2. Steel Pipe 3. Asbestos Pipe BLOCK

SANITARY FITTINGS

1. Sink 2. Wash Basin

3. Bath tub 4. Water Tanks 5. Tap

Aluminums Glass Silica FLOORING 1. Tiles 2. Mosaic 3. Marble

30

PAINT INDUSTRY

ELECTRICITY

1. Oil paint 2. Wall paint 3. Distemper 4. Whitewash 5. Paint Brushes 6. Sand paper 7. Paint Drum/Pot 8. Transportation 9. Pant Dyes 10. Petrol Chemical 11. Warmish 12. Sprit 13. Polish

l. Wire 2. Switch 3. Regulator/Dimmer 4. Tube Light 5. Bulbs 6. Fancy Light 7. Fan 8. AC 9. Heater 10. Electric Motor

House is the serious need for every one I this world which is impossible with out the above industries.

31

CHAPTER 4

METHODOLOGY
4.1 NATURE OF THE RESEARCH The research is contained on survey hence can be called as descriptive research. Quota sampling has been applied, and 30, 30 copies have been distributed among Bank employees and general public. It was then properly treated for analysis. The material has been collected through personal observation and questionnaires. The data have been collected with the help of the following techniques. 1. Primary Data Primary data has been collected on questionnaire. It has been a valuable source for collecting the clients opinion and their expertise. 2. Secondary Data Books, newspaper and Internet sources have been the source for secondary data. All the data have been properly studied, analyzed and treated for concluding remarks and devising a scheme for Allied Bank Limited. 4.2 RATIONALE OF THE QUESTIONNAIRE The questionnaire contained 10 questions, including open-ended, multiple choice and close-ended questions. Question 1 was about to note down the available ways to finance a property purchase. Question 2 was about different types of charges included in house financing / loans taking from financial institutions and banks. Question 3 asks about the relevant documents and other formalities required while applying for a loan. 32

Question 4 needs information about approving one for loan, keeping in view different Factors.

Question 5 asks about repaying schedule, devised by the bank and some opinions from

the clients. Question 6 was about making claims and options have been given. Question 7 was about the main factors that affect the value of property. Question 8 was about the main factors that affect the value of property of the customers.

Question 9 asks about need to consider than deciding the amount to insure home of the customers.

Question 10 was about the willingness of insuring house.

33

4.3

ANALYSIS

ANALYSIS OF THE QUESTIONNAIRE This questionnaire is designed for the customer who interested in house financing. This activity was carried out in PICIC Commercial Bank Hayatabad Peshawar. Total No. of questionnaire was 20, in which 15 were consider to be fit for the analysis. In the below table the first row shows the options of the question and the second row show answers given by the customers. Q. No.1: What are the ways available to you to finance property purchase? Bank Loan through family Other financial institutions 8 5 2

This graph shows most of the people want loan from banks, because loan through family creates problem of ownership. Loan through family and friend is good when there is joint family system.
8

0 Bank Loan through family Other financial institutions

34

Q. No.2: What are the charges involved in taking a loan from the bank?

Legal fee Processing fee Pre-payment fee Other

15 15 15 15

All the above mention charges are involved for every one. That is why every customer ticks all the options.

16 14 12 10 8 6 4 2 0 Legal fee Processing fee Pre-payment fee Other

35

Q. No.3

What are the documents you need to have to produce to the bank when applying for a housing loan?

Legal documents Tax documents Option to purchase Agreement document Others

15 15 15 15 15

All the option is selected by every customer. Because every customer has to summit all these documents.

Others 20%

Legal documents 20%

Agreement document 20%

Tax documents 20%

Option to purchase 20%

36

Q. No.4:

What are the main factors for banks to consider when deciding whether to approve your housing loan application? 15 15 15 15 15

Customer assets and liabilities Customer employment history Customers property current market value Age of the customer Income of the customer

The bank has to over view the above mentioned points before deciding approval of loan

16

12

0 Customer assets and liabilities Customer employment history Customers property current market value Age of the customer Income of the customer

37

Q. No. 5:

What are the possible solutions offered by banks to help you keep to you repayment schedules?

Restructuring the loan Interest servicing Lower repayments Capital reduction

5 2 8 0

Most of the customers want to low the repayment and restructure the loan

0 Restructuring the loan Interest servicing Low er repayments Capital reduction

38

Q. No. 6:

How do you go about making claims?

Though court Others

15 0

If there are some calms from banks after paying yours installment the customer will clam it through court.

20

15

15

10

0 Though court

0 Others

39

Q. No.7:

What are the main factors that affect the value of your property?

Tenure Location Surrounding features Current demand of the property

8 1 3 3

Its means the main factor that affect the value of your property is tenure of the property surrounding features and location is also important.

10 8 8

0 Tenure Location Surrounding features Current demand of the property

40

Q. No. 8:

What do you need to consider than deciding the amount to insure your home?

More insure the house Keep in mind the contents of you house Potential cost Cost of construction

8 0 0 6

People want to insure their house but on low cost.

2 0 More insure the house Keep in mind the contents of you house 0 Potential cost Cost of construction

41

Q. No. 9:

Do you want to insure your house?

Yes No

6 8

Most of the people dont want to insure there houses because the insurance prices of banks are too high.

6 6

0 Yes No

42

Q. No. 10:

Are you ready to pay the extra insurance amount?

Yes No

2 13

All most every one not ready to pay such an extra amount.

15 13

10

5 2

0 Yes No

43

FINDINGS

1.

From the analysis of my research thesis I found that the people want loan from bank instead of family and other financial institution because family creates ownership problem and loan through bank is secure method therefore all banks should have house financing scheme.

2.

The crucial factors which are to be consider by the bank is to overview customers assets and liabilities, employment history, property current market value. Age of the customers, and income of the customer.

3.

If customers are not satisfied from the bank they claim in the banking court for legal relief.

4.

From the analysis of the thesis I have found that the most affected factors that affect the value of your property is tenure, location, surrounding features, current demand of property etc.

5.

People want to insure their home at low cost. Most of the people dont insure because of high interest rate.

6. 7.

Housing finance should not be limited to big cities. People trust more on those financial institutions which have fixed rate of interest instead of floating rate.

44

RECOMMENDATIONS
1. Housing Finance should be not being restricted to few cities like Karachi, Lahore and Rawalpindi. Few localities like DHAs, Army Schemes, Cantts, LDA and CDA. Selected borrowers like Bank employees, multinational reps, Business class personnel. It should be broad based in all respect. 2. The PICIC Housing Authority should make immediately segment wise task force i.e. Financial, Utility, Legal, Builder and Housing Societies to ensure proper and timely implementation. 3. There should be either fixed rates instead of floating rates or some cap into the floaters. 4. Housing finance market should be broad based rather than concentrated in a few pre-selected specialized institutions. The demand for housing finance in Pakistan is too large to be met by a few institutions. 5. Another caution point is that there is a need to improve significantly the enabling environment i.e. the property market, the property registration and retrieval system, legal and judicial system and the real estate market. 6. The benefit of the reduction of excise duty on cement should be passed on to the consumers. The government should initiate action to break the cartel of the cement manufacturers. 7. Lands and utilities providing agencies should willingly and actively participate in this cause otherwise no matter how lucrative the Housing Finance package offered by banks will die sooner or later. 8. Loans should be provided by banks to developers of residential and commercial projects based on their reputation, good will and feasibility. That is a Developer Finance System

45

9.

Funds lying with SBP to the tune of US $15 million or Rs. 900 million under this head since 1994. This amount should be disbursed to the banks at reduced rates.

10.

Title of documents of property should be computerized and made available on demand in the shortest possible time.

11.

Foreclosure laws should be implemented without recourse to courts within 90 days.

12.

Training of Banks Staff on various aspects like: - underwriting, developer financing, documentation, foreclosure etc. May study housing finance projects from Srilanka and Thailand / Malaysia.

13.

CIB information for customers is shared between banks through the Central bank.

14.

Extensive publicity in shape of advertisements in print and media w.r.t. the housing finance available and its procedures and benefits. Especially those which are none interest bearing schemes.

15.

Broadly speaking a rapid growth in housing finance business will accrue significant benefits to the economy in the form of employment opportunities, support to a variety of sectors, a higher economic growth, and fulfillment of an important social need of own Makaan.

46

CONCLUSION
As is now evident from the above findings that housing finance is the critical input required for the promotion of construction industry leading in turn to the economic revival. Housing and allied construction sector is not only highly labor intensive but it has also multiplier effects on industrial activity in the country. Revival of this sector will also generate momentum in almost 70 allied industries Thus the housing and construction sector can safely be regarded as the mother of industrial activity in the country. The National Housing Policy 2001 embodies measures to ensure the development of the housing sector by use of a number of instruments such as availability of concessionary Housing Finance, access to land cross-subsidy and removal of bureaucratic and legal bottlenecks to facilitate the entire process of home ownership. Measures adopted by the Government/SBP particularly in the provision of housing finance at affordable rates will provide a significant boost to housing and construction sector. The low share of Housing Finance to GDP does not represent any lack of demand rather it reflects the absence of properly organized approach to housing finance which has hitherto suffered form rather high interest rates and somewhat lack of competition in the financial sector. There are some other significant constraints in the housing sector that either increase the cost of transaction or increase risks for the lender to unmanageable levels. These can be identified as poor record / retrieval of property rights, high stamps duties, bureaucratic delays, corruption, disorganized state of the real estate market etc. It is worldwide-recognized fact that the construction industry of a country plays a vital and significant role in the development of its economy and prosperity.

47

A MODEL HOUSING SCHEME FOR ABL

A shelter which you can call your own has been eluding you so far? Not any more. With the ABL Housing Scheme, almost any one can now fulfill his long cherished dream of owning a house or a flat of his/her choice at most attractive terms. ELIGIBILITY Any individual aged 21 years or above having regular income. PURPOSE Purchase of land, purchase or construction of house/flat or purchase of old house/flat. Renovation/extension/repair/furnishing of house/flat. Taking over of existing Housing Loan form other Bank/Financial Institution. The loan is now extended to those cases also where flats are being constructed by promoters/developers where immediate mortgage of the property may not be possible. QUANTUM OF LOAN Maximum of Rs. 100.00 Lac loan depending on the cost of house/flat, applications age, income, repayment capacity etc. Loans of higher amount may be considered on the basis of merit of the case. The maximum quantum of loan shall be as follows:
Nature of applicant Metro i) In case of individual ii)Incase of co- borrower 80 100 Location of house /flat Urban 80 100 Semi-Urban Rural 80 100

Enhancement of loan up to 10% may be allowed for furnishing of house/flat

48

MARGIN Margin may be as low as 10% INTEREST RATE Facility of both fixed and floating rates interest available. FIXED RATE Period of Loan Up to 5 years Above 5 years but up to 10 years Above 10 years FLOATING RATE: BASED ON KIBOR Period of Loan For all periods Rate of Interest At KIBOR Minus 2.25% subject to a minimum of 11.50% Rate of Interest 10.50% p.a. 11.00% p.a. 11. 25% p.a.

Further reduction of 0.50% p.a. in the rate of interest (both for fixed and floating) is allowed if the loan is taken by a woman having own income or taken by a married couple jointly and another 0.25% p.a. reduction is allowed on providing liquid security covering at least 50% of the loan amount. In case, a borrower opt for life insurance cover under the scheme a further reduction of 0.25% p.a is allowed in the interest rate. Thus the effective rate may be as low as 10.50% p.a REPAYMENT PERIOD Loan is repayable within a maximum of 20 years, hi case of salaried person repayable within superannuation and in case of professional and selfemployed person within the age of 65 years. Loan is repayable in Equated Monthly Installment which includes part of principal and interest and worked out considering loan amount, interest for initial moratorium period, rate of interest and period of repayment.

49

Facility of variable EMI depending on the repayment capacity is available. One can switch over from fixed rate to floating rate of interest and viceversa during the tenure of the loan at nominal fee. Advance payment of EMI or pre-payment of loan is permissible with penalty, other than bullet repayment due to death or retirement of the borrower. SECURITY Mortgage (either equitable or registered) of house/flat for which the loan is given and hypothecation of movable assets financed by the Bank for furnishing the house/flat. If mortgage of house/flat is not possible, the loan shall be covered by liquid/tangible security of adequate value acceptable to the Bank. In case of professional or self employed persons additional security shall be required either in the form of Banks won Term Deposit, LIC Policy (by surrender value), NSC, Relief Bond etc to the tune pf 10 to 20% of loan or Personal Guarantee of one or two persons having worth of 125% of the loan and acceptable to bank. PROCESSING CHARGE No processing charge Insurance Insurance of house property is mandatory whereas life insurance cover for the borrower is optional. The Bank is offering a very attractive package of home insurance under the scheme. Keeping in view the existing house financing scheme, kibor rates and State Bank of Pakistan regulation the above mention house financing scheme is proposed for ABL. This proposes scheme will attract the customers and maximize the low market share of ABL in the sector of housing loans.

50

BIBLIOGRAPHY
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. The Millionaire Next Door by Stanley and Danko. Your Money or Your Life by Dominguez and Robin. The Total Money Makoever by Dave Ramsey. The Wealthy Barber by David Chilton. The Richest Man in Babylon by George Clason. The Joy of Simple Living by Jeff Davidson. Yes You Can Achieve Financial Independence by James Stowers. Never Eat Alone by Keith Ferrazzi. Living Simply with Children. Getting Things Done by David Allen. www.housebuildingfinancecorporation.com Alfalah Housing Loans. PICIC Housing Loans. Askari Commercial Bank Housing Loans. This report containing material from house building finance corporation, Muslim Commercial Bank, PICIC, United Bank Limited and Housing Scheme Models, Bank Articles.

51

QUESTIONNAIRE
Tick the suitable option: 1. What are the ways available to you to finance a property purchase? a) Bank b) Loan through family, friends c) Other financial institutions What are the charges involved in taking a loan from the bank? a) Legal fee b) Processing fee c) Pre-payment fee d) Others What are the documents you need to have produce to the bank when applying for a housing loan? a) Legal documents b) Tax documents c) Option to purchase d) Agreement document e) Others What are the main factors for banks to consider when deciding whether to approve your housing loan application? a) Customer assets and liabilities b) Customer employment history c) Customer property current market value d) Age of the customer e) Income of the customer What are the possible solutions offered by banks to help you keep to you repayment schedules? a) Restructuring the loan b) Interest servicing c) Lower repayments d) Capital reduction How do you go about making claims? a) Through court b) Police c) Others if any mention it ______________. 52

2.

3.

4.

5.

6.

7.

What are the main factors that effect the value of your property? a) Tenure b) Location c) Surrounding features d) Current demand of the property What do home? a) b) c) d) you need to consider than deciding the amount to insure your More insure the house Keep in mind the contests of your house Potential cost Cost of construction

8.

9.

Do you want to insure your house? a) Yes b) No Are you ready to pay the extra insurance amount? a) Yes b) No

10.

53