1.

Introduction
Home is a dream of a person that shows the quantity of efforts, sacrifices luxuries and above all gathering funds little by little to afford ones dream. Home is one of the things that everyone one wants to own. Home is a shelter to person where he rests and feels comfortable. Home loans work like any other debt. That is, loans are simply specific money that we borrow from a bank, a private lender, or some other type of lender. Afterwards, we must repay our debts with interest. However, unlike other types of loans, home loans are different in several respects. Owning a piece of land or property is a life time dream for every individual. Many banks provide home loans whether commercial banks or financial institutions to the people who want to have a home. Dutch Bangla Bank Limited have been serving the people for around three decades and providing various housing loan according to their varied needs at attractive & reasonable interest rates. Owing to their wide network of financing, DBBL Home Loan provides services at your doorstep and helps you find a home as per your requirements. Many banks are providing home loans at cheapest rate to attract consumers towards them. The more customer friendly attitude of these banks, currently offer to consumers cheapest loan over homes. In view of acute housing shortage in the country, and keeping in mind the social economic role of commercial banks in the present times, the Bangladesh Bank advised other banks to encourage the flow of credit for housing finance. DBBL also provides with Home Loan Improvement Loan for internal and external repairs and other structural improvements like painting, waterproofing, plumbing and electric works, tiling and flooring, grills and aluminum windows. DBBL finances up to 75 Lac taka.

1.2 Objective of the Study

The report will attempt to accomplish the following objectives. Primary Objective: The primary objective of this report is to fulfill the partial requirement of the course under the guidance of the course teacher. Secondary Objectives: The secondary objectives of the report are Analyzing the demand and supply of Home Loan from the perspective of Dutch Bangla Bank Limited. 1

Identifying the causes that are leading to shift in demand and supply curve for Home loan. Eliciting the price elasticity that means actually how rate of interest is affecting the rate of taking Home Loan. Finding out whether there is any control on Home Loan imposed by government and what consequences it has on Home Loan. Finally based on these, come up with recommendation to boost up the Home Loan up to convenient stage.

1.3 Methodology of the Study 1.3.1 Research Design

In order to attain the aims of the study, both the qualitative and quantitative methods were used. We have used information from different newspaper cutting, university library, Bangladesh Banks library, several websites, and web journals. Furthermore, we have taken interview of specialists of banks in order to make the analysis more compact.

1.3.2 Sources of Information

A two-phase approach of data collection will be required for the current study.

Primary data were collected in both phases of data collection. In the first phase, some openended questions-answers sessions were used in order to collect qualitative data. In addition, we went for the face-to-face in-depth interviews with the key professionals as well as some customers to get the required information. Secondary data were collected from sources like websites, DSE library, University library, DBBL own research articles, related journals etc.

1.3.3 Data Analysis

In order to accomplish the aims of the research, the following analytical techniques were used for the data analysis: We used MsWord, Excel, SPSS & other required Software in order to prepare the report. We will analyze the qualitative data by using knowledge that we have learnt in this courses, and other related papers and by using judgment of course.

1.4Limitation of the Study

Limitation of the study is that the essence of experience will not be there as the expertise regarding the specific industry is absent. There were difficulties in collecting some information that will be required for the research part because the industrys executives dont want to disclose sensitive information. Time is an important issue in report writing. As a specific deadline for gathering all the necessary information, submission and observation was too short, it would be tough to cope up with the time constraints.

2.1 Historical Background

Dutch-Bangla Bank Limited is a scheduled commercial bank. The Bank was established under the Bank Companies Act 1991 and incorporated as a public limited company under the Companies Act 1994 in Bangladesh with the primary objective to carry on all kinds of banking business in Bangladesh. The Bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited. DBBL- a Bangladesh European private joint venture scheduled commercial bank commenced formal operation from June 3, 1996. The head office of the Bank is located at Sena kalyan Bhaban (4th floor), 195, Motijheel C/A, Dhaka, Bangladesh. The Bank commenced its banking business with one branch on 4 July 1996. Dutch Bangla Bank Limited (DBBL) a public company limited by shares, incorporated in Bangladesh in the year 1995 under companies Act 1994. With 30% equity holding, the Netherlands Development Finance company (FMO) of the Netherlands is the international cosponsor of the Bank. Out of the rest 70%, 60% equity has been provided by prominent local entrepreneurs and industrialists & the rest 10% shares is the public issue. During the initial operating year (1996-1997) the bank received skill augmentation technical assistance from ABN Amro Bank of the Netherlands. DBBLs focus is to provide one counter service to clients covering: Commercial Banking Deposit Accounts), Consumer Banking (Retail Baking) - Traveler Cheques- Foreign & Inland Remittances, Financial Services, Corporate Banking, Asset & liability management, Liquidity & capital Resources Management, Information technology, Human Resources. DBBL Internet banking enables customer to access his/her personal or business accounts anytime anywhere from home, office or when traveling. Internet Banking gives customer the freedom to choose his/her own banking hours. It can save time, money and effort. It's fast, easy, secure and best of all. DBBL, since its inception was active in various social activities, which increased manifold over the period of time and its growth. It is one of the fast growing leading online banks in private sector. The emergence of Dutch-Bangla Bank Ltd. in the private sector is an important event in the banking area of Bangladesh. The Netherlands Development Finance Company (FMO) of the Netherlands is the international sponsor of the Bank. The FMO is the Dutch development bank of the Netherlands specialized in the financing of private enterprises in Asia, Africa, Latin America and Eastern Europe. Dutch-Bangla Bank Ltd. came into existence with joint venture as a public limited company incorporated in Bangladesh on June 26, 1995 with the primary objectives to carry on all kinds of banking business in and outside of Bangladesh. DBBL has started its business with foreign bank. DBBL commenced its business as scheduled bank with effect from July 04, 1995 with one branch-Motijheel Branch, Dhaka, 4

with a motto to grow as a leader in the banking arena of Bangladesh through better counseling and effect service to clients and thus to revitalize the economy of the country. All the branches are currently providing truly On-Line banking facility. DBBL resumed its operational activities initially with an authorized capital of Tk.400 million and paid up capital of Tk.202.14 million.

2.2 An overview of DBBL

Dutch-Bangla Bank is a second generation commercial private Bank. During the period of its operation, this bank creates a milestone of success in banking sector. This bank holds an experienced team of banking professional. They achieve this success because of their experienced banking professional team, proper management & so on. Dutch-Bangla Bank Limited is a BangladeshNetherlands joint venture scheduled commercial bank established in Bangladesh with the primary objective to carry on all kinds of banking business in and outside of Bangladesh. Starting with one Branch in 1996, DBBL has expanded to thirty nine (39) branches including nine Branches outside of the capital. To provide client services all over Bangladesh it has established a wide correspondent banking relationship with a number of local banks. To facilitate international trade transactions, it has arranged correspondent relationship with large number of international banks which are active across the globe. In addition to its banking activities, Dutch-Bangla Bank Limited takes part in different national activities promoting sports, culture, social awareness, etc. Participation in these activities as sponsors is part of its business development policy.

2.3 Philosophy of DBBL

The objectives of Dutch-Bangla Bank Limited remains to offer modern & innovative products & services to its clients in Bangladesh the partnership with FMO is optimistically scene to offer scopes opportunities to draw on modern tools & techniques of Banking from western world which could be blended with the currently prevalent local customs & practice. The Bank is committed to being a sophisticated prominent and professional institution, providing a one window service to its customers. During the first five years 5

Dutch Bangla Banks strategy was focused on continuing in provident of internal procedures and operating structures, to have a greater control on the quality of our business and to provide better management direction. After five years of working on the Banks structure, its culture and controls, the management is confident that the Bank can move forward on a rapid growth path. The DBBLs corporate philosophy is to build its no funded fees and commission income stream, thus reducing its reliance on interest income alone.

2.4 Core objective of DBBL

Dutch-Bangla Bank believes in its uncompromising commitment to fulfill its customer needs and satisfaction and to become their first choice in banking. Taking cue from its pool esteemed clientele, Dutch-Bangla Bank intends to pave the way for a new era in banking that uphold and epitomize its vaunted marquees Your Trusted Partner

2.5 Mission
Dutch-Bangla Bank engineers enterprise and creativity in business and industry with a commitment to social responsibility. "Profits alone" do not hold a central focus in the Bank's operation; because "man does not live by bread and butter alone".

2.6 Vision
Dutch-Bangla Bank dreams of better Bangladesh, where arts and letters, sports and athletics, music and entertainment, science and education, health and hygiene, clean and pollution free environment and above all a society based on morality and ethics make all our lives worth living. DBBL's essence and ethos rest on a cosmos of creativity and the marvel-magic of a charmed life that abounds with spirit of life and adventures that contributes towards human development.

2.7 Focus of DBBL

DBBLs focus is to provide one counter service to our clients covering: Commercial Banking (Deposit Accounts) Consumer Banking (Retail Baking)Traveler Cheques Foreign & Inland Remittances Financial Services Corporate Banking Asset & liability management Liquidity & capital Resources Management Information technology Human Resource.

2.8 Strategies of DBBL

The strategies are as follows:

To manage and operate the Bank in the most efficient manner to enhance financial performance and to control cost of fund To strive for customer satisfaction through quality control and delivery of timely services To identify customers' credit and other banking needs and monitor their perception towards our performance in meeting those requirements. To review and update policies, procedures and practices to enhance the ability to extend better service to customers. To train and develop all employees and provide them adequate resources so that customers' need can be reasonably addressed. To promote organizational effectiveness by openly communicating company plans, policies, practices and procedures to employees in a timely fashion To diversify portfolio both in the retail and wholesale market To increase direct contact with customers in order to cultivate a closer relationship between the bank and its customers.

2.9 Objectives of DBBL

To earn and maintain CAMEL Rating 'Strong' To establish relationship banking and improve service quality through development of Strategic Marketing Plans. To remain one of the best banks in Bangladesh in terms of profitability and assets quality. To introduce fully automated systems through integration of information Technology. To ensure an adequate rate of return on investment To keep risk position at an acceptable range (including any off balance sheet risk)

2.10 Home Loan

DBBL introduces the most convenient & practical Home Loan that suits your all home financing needs. Let it be for apartment purchase, home construction, extension or renovation - DBBL is here with the ultimate solution for you. With so many attractive features in it - the home you wanted to buy, or to extend the existing one or renovate the same is no longer a distant dream.

2.10.1 Features
Loan amount BDT 500,000 BDT 1 Crore or 50 times of applicants Gross Monthly Income, whichever is lower Repayment tenure 3 years to 20 years EBL Home Loan Interest Rate: 13.50% (floating) Loan Take-over facility with attractive interest rate option (1% less than existing other Home Loan but not less than 13.5% per annum) Processing fee 1.25% of the loan amount for the fresh applicants and 0% for the take-over loans Loan up to 80% of the property value Advance/Partial Prepayment - Anytime and any amount payment facility available, fee is 1% of the Advance/Partial Prepayment amount. Additional Loan Top up facility available

2.10.2 Eligibility
Bangladeshi citizen within age range 22 Years 57 years Length of Service/Business: Salaried Executives: Minimum 3 year of experience with 6 month permanent employment with present employer; Contractual Employees of Supranational Organizations, international development organizations & Donor agencies e.g. WHO, FAO, UNDP, CARE etc. will be eligible subject to 1. minimum length of service 5 years 2. contract renewed at least twice Professionals: Minimum 3 year of practice in the profession Businessman: Minimum 3 years of involvement in business Minimum Income for Individual : Salaried Executives: Minimum BDT 30,000/Self employment: Minimum BDT 40,000 Business Person: Minimum BDT 50,000/Combined minimum income of joint and principle applicant must be 40,000 BDT Joint Applicant - Spouse and immediate family members (father, mother, son, daughter, brother & sister) Total Income for Principal and Joint Applicants: BDT 30,000/- per month for Salaried Executives BDT 50,000/- per month for Self Employed, Businessmen and Others

2.10.3 Why Home loan

To purchase a flat. Refinancing of owned house property. Home Renovation Extension / Construction of Building

2.10.4 Size of the Market

There are no available & reliable statistics on the market share, however sales have been good & retail products have gained wide popularity in the market. 9

2.8.5 Target Market

Different foreign & local banks retail customers, salaried employees working within the MNCs & reputed organizations. UN bodies, financial institutions / Government officials, self-employed individuals & professionals.

2.10.6 List of local banks that offer Home Loan in Bangladesh

NCC Bank Prime Bank Bank Al-falah Eastern Bank Dutch Bangla Bank Limited AB Bank One Bank HSBC Standard Chartered National Bank Mutual Trust Bank Mercantile Bank Pubali Bank Premier Bank BRAC Bank IDLC Grameen Bank Delta Brac Housing

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3. Literature Review

In Feb 1, 2009 Vincent W. Yao and Eric Rosenblatt and Michael LaCour-Little had studied about the unique paired loan dataset containing information on multiple conventional conforming mortgage loans of households to examine home equity extraction decisions over the period 2000-2006. The main question addressed is how much households borrow when refinancing their current mortgage debt in a cash-out transaction. We also provide estimates of the marginal effect of certain borrower characteristics. Results contribute both to the literature on refinancing behavior and the role of house price appreciation in providing funds that may be used for consumer spending or other purposes. In 24 Oct 2008 David C. Wheelock had studied about the Government Response to Home Mortgage Distress: Lessons from the Great. They studied about The Great Depression was the worst macroeconomic collapse in U.S. history. Sharp declines in household income and real estate values resulted in soaring mortgage delinquency rates. According to one estimate, as of January1, 1934, fully one-half of U.S. home mortgages were delinquent and, on average, some 1000 home loans were foreclosed every business day. This paper documents the increase in residential mortgage distress during the Depression, and discusses actions taken by state governments and the federal government to reduce mortgage foreclosures and restore the functioning of the mortgage market. Many states imposed moratoria on both farm and nonfarm residential mortgage foreclosures. Although moratoria reduced farm foreclosure rates in the short run, they appear to have also reduced the supply of loans and made credit more expensive for subsequent borrowers. The federal government took a number of steps to relieve residential mortgage distress and to promote the recovery and growth of the national mortgage market. The Home Owners Loan Corporation (HOLC) was created in 1933 to purchase and refinance delinquent home loans as long-term, amortizing mortgages. Between 1933 and 1936, the HOLC acquired and refinanced one million delinquent loans totaling $3.1 billion. The HOLC refinanced loans on some 10 percent of all nonfarm, owner-occupied dwellings in the United States, and about 20 percent of those with an outstanding mortgage. The Great Depression experience suggests how foreclosures might be reduced during the present crisis.

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In October 14, 2008 David P. Bernstein had studied about the Home Equity Loans and Private Mortgage Insurance: Recent Trends & Potential Implications. They studied about the impact of increased use of home equity lines and decreased private mortgage insurance (PMI) on mortgage markets. The data confirms that in the years leading up to the mortgage crisis home buyers and lenders have aggressively used piggyback loans to avoid taking out PMI on first mortgages. Multiple-mortgage financing packages as a percent of newly originated mortgages (mortgages originated within the previous five years) went from 14.8% in survey year 2001 to 21.5% in survey year 2007. The multiple-mortgage percentage for seasoned mortgages (mortgages originated more than five years prior to the origination date) also increased by a modest amount. Further comparisons reveal a large decrease in the proportion of mortgages with PMI with the largest decreases in PMI coverage occurring among newly originated multiple-lien packages. Data from the SCF was used to compare five financial characteristics (credit card debt, installment loans, consumer credit, home-owners equity, and liquid assets) for multiple-lien versus single-lien households. The comparisons suggest single-lien households tend to have slightly stronger financial variables than multiple-lien households. The data does not support the view that homeowners with multiple liens are less risky and should therefore be allowed to avoid PMI. The reduced use of PMI and the increased use of home equity loans increased mortgage holder risk in several different ways and was a contributing factor to the 2008 mortgage and financial crisis. This change in lending and borrowing behavior is not a subprime market problem.

Vandell, Kerry D (2008) analyzed the sharp rise and then suddenly drop down home prices from the period 1998- 2008. changes in prices are for the reasons as such economic fundamentals , the problem was not subprime lending per se, but the Feds dramatic reductions, then increases in interest rates during the early- mid-2000 , the housing boom was concentrated in those markets with significant supply-side restrictions, which tend to be more price-volatile; he problem was not in the excess supply of credit in aggregate, or the increase in subprime per se, but rather in the increased or reduced presence of certain other mortgage products. In 10 Dec 2007 Irina Paley and Chau Do had studied about the Explaining the Growth of Higher-Priced Loans in HMDA: A Decomposition Approach. The period 2004-2005 showed a significant increase in Home Mortgage Disclosure Act (HMDA) rate spread reporting. Following the Oaxaca (1973), Blinder (1973), and Fairlie (2005) decomposition techniques, this study identifies the fraction of the increase due to the flattening of the yield curve. Even after controlling for changes in borrower risk characteristics, the findings reveal that during 2004-2006, the flattening of the yield curve explains a significant amount of the increase in rate spread reportable loans. This is the case for both prime and subprime originations.

In 1 Nov 2007 Marsha Courchane studied about The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential. The public releases of the 2004 and 2005 HMDA data

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have engendered a lively debate over the pricing of mortgage credit and its implications regarding the treatment of minority mortgage borrowers. We provide a unique empirical assessment of this issue by using aggregated proprietary data provided to us by lenders and an endogenous switching regression model to estimate the probability of taking out a subprime mortgage, and annual percentage rate ("APR")conditional on getting either a subprime or prime mortgage. We find that up to 90 percent of the African American APR gap, and 85 percent of the Hispanic APR gap, is attributable to observable differences in underwriting, costing and market factors that appropriately explain mortgage pricing differentials. Although any potential discrimination is problematic and should be addressed, our analysis suggests that little of the aggregate differences in APRs paid by minority and non-minority borrowers are appropriately attributed to differential treatment.

In August 2007 Michael LaCour-Little had studied about The Home Purchase Mortgage Preferences of Low- and Moderate-Income Households. Housing policy in the United States has long supported homeownership, yet variation persists across income groups. This article employs recent mortgage origination data to focus on the revealed preferences of low- and moderate-income (LMI) households in home purchase mortgage choice. I identify the factors associated with conventional conforming, FHA, nonprime and specially targeted programs. Empirical results show that individual credit characteristics and financial factors, including pricing, generally drive product choice, with some variation evident when loans are originated through brokers. Results also indicate that targeted conventional programs effectively compete with government-insured products in the LMI segment. In May 18, 2007 Michael La Cour-Little had studied about the Economic Factors Affecting Home Mortgage Disclosure Act Reporting. The public release of the 2004-2005 Home Mortgage Disclosure Act data raised a number of questions given the increase in the number and percentage of higher-priced home mortgage loans and continued differentials across demographic groups. Here we assess three possible explanations for the observed increase in 2005 over 2004: (1) changes in lender business practices; (2) changes in the risk profile of borrowers; and (3) changes in the yield curve environment. Results suggest that after controlling for the mix of loan types, credit risk factors, and the yield curve, there was no statistically significant increase in reportable volume for loans originated directly by lenders during 2005, though indirect, wholesale originations did significantly increase. Finally, given a model of the factors affecting results for 2004-2005, we predict that 2006 results will continue to show an increase in the percentage of loans that are higher priced when final numbers are released in September 2007.

In December 20, 2006 La courr, Micheal examined the home purchase mortgage product preferences of LMI households. Objectives of his study to analysis the factors that determined factors their choice of mortgage product, is different income groups have some specified need to meet particular product. The role pricing and product substitution play in this segment of the market and do results vary when loans are

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originated through mortgage brokers? For this they have use the regression analysis and the results are high interest risk reduce loan value. Self-employed borrower chooses reduce documented loans than salaried workers. Use of this product type seems to be more prevalent among borrowers with substantial funds for down payment and better credit scores. In case of pricing Multi families requires price premium and larger loans carry lower rate. And the role of time, particularly, the time required for the loan to proceed from application to closing it is find that government lending taking the longest time and Nonprime loans the shortest time. Multi-family properties take longer time in closing. And during peak season take longer time to close. And for last objective it is find that broker originated loans close faster. The effect of mortgage brokers on pricing and other market outcomes is fertile around for additional research.

In Dec 2006 Melissa B. Jacoby had studied about the Home Ownership Risk beyond a Subprime Crisis: The Role of Delinquency Management. They studied that Public investment in and promotion of homeownership and the home mortgage market often relies on three justifications to supplement shelter goals: to build household wealth and economic self-sufficiency, to generate positive social-psychological states, and to develop stable neighborhoods and communities. Homeownership and mortgage obligations do not inherently further these objectives, however, and sometimes undermine them. The most visible triggers of the recent surge in subprime delinquency have produced calls for emergency foreclosure avoidance interventions (as well as front-end regulatory fixes). Whatever their merit, I contend that a system of mortgage delinquency management should be an enduring component of housing policy. Furtherance of housing and household policy objectives hinges in part on the conditions under which homeownership is obtained, maintained, leveraged, and in some situations - exited. Given that high leverage or trigger events such as job loss and medical problems play significant roles in mortgage delinquency independent of loan terms, better origination practices cannot eliminate the need for delinquency management.

One function of this brief essay is to identify an existing rough framework for managing delinquency. Legal scholarship should no longer discuss mortgage enforcement primarily in terms of foreclosure law and instead should include other debtor-creditor laws such as bankruptcy, industry loss mitigation efforts, and third-party interventions such as delinquency housing counseling. In terms of analyzing this framework, it is tempting to focus on its impact on mortgage credit cost and access or on the absolute number of homes temporarily saved, but my proposed analysis is based on whether the system honors and furthers the goals of wealth building, positive social psychological states, and community development. Because those ends are not inexorably linked to ownership generally or owning a particular home, a system of delinquency management that honors these objectives should strive to provide fair, transparent, humane, and predictable strategies for home exit as well as for home retention. Although more empirical

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research is needed, this essay starts the process of analyzing mortgage delinquency management tools in the proposed fashion.

In July 2005 Gwilym B.J. Pryce and Patric H. Hendershott had studied about The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest. Mortgage interest tax deductibility is needed to treat debt and equity financing of homes equally. Countries that limit deductibility create a debt tax penalty that presumably leads households to shift from debt toward equity financing. The greater the shift, the less is the tax revenue raised by the limitation and smaller is its negative impact on housing demand. Measuring the financing response to a legislative change is complicated by the fact that lenders restrict mortgage debt to the value of the house (or slightly less) being financed. Taking this restriction into account reduces the estimated financing response by 20 percent (a 32 percent decline in debt vs. a 40 percent decline). The estimation is based on 86,000 newly originated UK loans from the late 1990s.

In Aug 2004 Mark Carey and Greg Nini had studied about the Is the Corporate Loan Market Globally Integrated? A Pricing Puzzle. We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market and bank portfolios display significant home "bias." This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home "bias" appears to be material for pricing, and corporate financing costs differ in Europe and the U.S.

In august 2001 James B. Thomson and Ben R. Craig had studied about the Federal Home Loan Bank Lending to Community Banks, is Targeted Subsidies Necessary? The Gramm-Leach-Bliley Act of 1999 amended the lending authority of the Federal Home Loan Banks to include advances secured by small enterprise loans of community financial institutions. Three possible reasons for the extension of this selective credit subsidy to community banks and thrifts are examined, including the need to: subsidize community depository institutions, stabilize the Federal Home Loan Banks, and address a market failure in rural markets for small enterprise loans. They empirically investigate whether funding constraints impact the small-business lending decision by rural community banks. Specifically, they estimate two empirical models of small-business lending by community banks. The data reject the hypothesis that access to increased funds will increase the amount of small-business loans made by community banks.

In June 29, 2001 Joshua Rosner had studied about the Housing in the New Millennium: A Home without Equity is Just a Rental with Debt. They studied about the prospects of the U.S. housing/mortgage sector

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over the next several years. Based on our analysis, we believe there are elements in place for the housing sector to continue to experience growth well above GDP. However, we believe there are risks that can materially distort the growth prospects of the sector. Specifically, it appears that a large portion of the housing sector's growth in the1990's came from the easing of the credit underwriting process. Such easing includes: * The drastic reduction of minimum down payment levels from 20% to 0% * A focused effort to target the "low income" borrower * The reduction in private mortgage insurance requirements on high loan to value mortgages * The increasing use of software to streamline the origination process and modify/recast delinquent loans in order to keep them classified as "current" * Changes in the appraisal process which has led to widespread over appraisal/over-valuation problems If these trends remain in place, it is likely that the home purchase boom of the past decade will continue unabated. Despite the increasingly more difficult economic environment, it may be possible for lenders to further ease credit standards and more fully exploit less penetrated markets. Recently targeted populations that have historically been denied homeownership opportunities have offered the mortgage industry novel hurdles to overcome. Industry participants in combination with eased regulatory standards and the support of the GSEs (Government Sponsored Enterprises) have overcome many of them.

If there is an economic disruption that causes a marked rise in unemployment, the negative impact on the housing market could be quite large. These impacts come in several forms. They include a reduction in the demand for homeownership, a decline in real estate prices and increased foreclosure expenses.

These impacts would be exacerbated by the increasing debt burden of the U.S. consumer and the reduction of home equity available in the home. Although we have yet to see any materially negative consequences of the relaxation of credit standards, we believe the risk of credit relaxation and leverage can't be ignored. Importantly, a relatively new method of loan forgiveness can temporarily alter the perception of credit health in the housing sector. In an effort to keep homeowners in the home and reduce foreclosure expenses, holders of mortgage assets are currently recasting or modifying troubled loans. Such policy initiatives may for a time distort the relevancy of delinquency and foreclosure statistics. However, a protracted housing slowdown could eventually cause modifications to become uneconomic and, thus, credit quality statistics would likely become relevant once again. The virtuous circle of increasing homeownership due to greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures.

In March 2001 TullioJappelli and Maria ConcettaChiuri had studied about the Financial Market Imperfections and Home Ownership: A Comparative Study. They explore the determinants of the

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international pattern of home ownership using the Luxembourg Income Study (LIS), a collection of microeconomic data on fourteen OECD countries. In most, the cross-section is repeated over time and includes several demographic variables carefully matched between the different surveys. This allows us to construct a truly unique international dataset, merging data on more than 400,000 households with aggregate panel data on mortgage loans and down payment ratios. After controlling for demographic characteristics, country effects, cohort effects and calendar time effects, we find strong evidence that the availability of mortgage finance as measured by outstanding mortgage loans and down payment ratios affects the age-profile of home ownership, especially at the young end. The results have important implications for the debate on the relationship between saving and growth. In Nov 2000 Michelle J. White and Emily Y. Lin had studied about the Bankruptcy and the Market for Mortgage and Home Improvement Loans. They studied that this paper investigates the relationship between bankruptcy exemptions and the availability of credit for mortgage and home improvement loans. We develop a combined model of debtors' decisions to file for bankruptcy and to default on their mortgages and show that the theory predicts positive relationships between both the homestead and personal property exemption levels and the probability of borrowers being denied mortgage (secured) and home improvement loans. We test these predictions empirically and find strong and statistically significant support when evidence from cross-state variation in bankruptcy exemption levels is used. Applicants for mortgages are 2 percentage points more likely to be turned down for mortgages and 5 percentage points more likely to be turned down for home improvement loans if they live in states with unlimited rather than low homestead exemptions. These relationships also hold when we introduce state fixed effects into the model. Haavio, Kauppi (2000) stated that countries where a large proportion of the population lives in owner occupied housing are experiencing higher unemployment rates. Than countries where the majority of people live in private rental housing, which might suggest that rental housing enhances labor mobility. In this paper, they develop a simple inter temporal two region model that allow us to compare owner occupied housing markets to rental markets and to analyze how these alternative arrangements allocate people in space and time. This is because, apart from the low rate, the interest on these loans is calculated on principal, which is reduced every month unlike other housing finance companies which calculate interest on annually reducing basis.

In 1999 Yoko Moriizumi had studied about the Current Wealth, Housing Purchaseand Private Housing Loan Demand in Japan. Japanese households accumulate wealth for down payments at a high rate. Therefore, current wealth plays an important role in home acquisition as public loans whose direct mortgage lending is a strong support for home purchasers. We estimate the wealth effect on private mortgage debt as well as housing consumption by applying a model where mortgage debt demand is

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derived from house purchase decisions and is determined jointly with housing consumption. We use a simultaneous equation to bit estimation method. Wealth effects on private mortgage debt, likelihood of borrowing, and housing consumption are not elastic. On the other hand, a change in housing consumption affects the likelihood of borrowing elastically much more than the private mortgage amount of borrowers. Housing and private mortgage markets fluctuate very closely with the number of participants in the mortgage market. Therefore, the number of housing starts is linked strongly to the private mortgage market.

4.1 Economy and financial market

4.1.1 World economic environment and outlook

The global economy is in a dangerous new phase. Global activity has weakened, confidence has fallen sharply recently, and downside risks are growing. A barrage of shocks hit the international economy last year. Japan was struck by the devastating earthquake and tsunami, and unrest swelled in some oilproducing countries. At the same time, the handover from public to private demand in the U. S. economy stalled, the euro area encountered major financial turbulence, global markets suffered a major sell-off of risky assets, and there are growing signs of spillovers to the real economy. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion. Prospects for emerging market economies have become more uncertain again, although growth is expected to remain fairly robust, especially in economies that can counter the effect on output of weaker foreign demand with less policy tightening.

4.1.2 State of the Bangladesh economy

4.1.2.1 Economic growth

Bangladesh economy gained some momentum during FY2011 as output and investment activities in the economy paced up substantially in FY2011 after a couple of years in post-global crisis relative slowdown; the buoyancy in economic activity was predominantly aided by robust export growth and strong domestic 18

demand. However, rising global food and fuel prices, deteriorating remittances, an increased reserve draw down, huge stock market volatility and its potential impact on the banking sector were the short-term risks for Bangladesh economy. Real GDP was estimated to grow by 6.7 percent, which is 0.6 percentage point higher than 6.1 percentage growth recorded in FY2010. The real GDP growth of 6.7 percent in FY2011 was driven by a robust growth in industry and increased output in agriculture and service sectors. The expansion was broad-based, registering positive growth by all sectors and sub-sectors of the economy. At current market prices, the GDP of Bangladesh in FY2011 was estimated at Taka 7,875 billion (Taka 6,924 billion in FY2010) representing a nominal growth of 13.4 percent which is higher than that of FY2010. In FY2011, the countrys real per capita GDP increased by 5.3 percent.

4.1.2.2 Service sector

The services sector contributed almost half of (49.7) percent total GDP in FY2011. Within this, 14.3 percent was attributed to wholesale and retail trade followed by 10.9 percent in transport, storage and communication, 7.0 percent in real estate, renting and business activities and 6.7 percent in community, social and personal services. Overall activities in the services sector registered 6.6 percent growth in FY2011 compared to 6.5 percent in FY2010. Despite some fluctuations, the growth appears to be broadbased across sub-sectors. Real estate, renting and business activities, public administration and defense, education and health and social work sub-sectors exhibited growth of 4.0 percent, 9.6 percent, 9.5 percent and 8.3 percent respectively in FY2011 against 3.9 percent, 8.4 percent, 9.2 percent and 8.1 percent respectively in FY2010. Monetary intermediation (banks) achieved lower growth of 8.8 percent in FY2011 compared to 10.5 percent in FY2010.

4.1.2.3 Money, Credit and Financial market

Bangladesh Bank (BB) remained proactive to ensure domestic resource mobilization, generation of savings and investments in productive sectors so that countrys most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth. To achieve greater efficiency, stability and transparency in the financial sector, the ongoing reform was continued in FY2011. However, the short-term and long-term credit markets of the country experienced a tremendous growth in FY2011 due to expansionary economic activities of the country. The increased demand for domestic credit as the economy paced up to the expected buoyant economic growth coupled with heavy 19

outflows for imports and other external payments put the banks into liquidity pressure from December 2010. Moreover, unauthorized investment of the banks in the unproductive sector also played role to put the banks into liquidity pressure. Despite the uptrend in inflationary pressure Bangladesh Bank has been providing liquidity facility to the banks in respect of increased demand in the money market as well as taking supervisory and credit policies to rectify unbalanced lending practices in banks including monitoring and enforcing of prudent advance-deposit ratios and good forward looking liquidity management and of regulatory ceilings on capital market exposures, tightening loan monitoring requirements to discourage diversion of credit to unauthorized and unproductive uses. Lending interest rate caps imposed earlier in the backdrop of global slowdown being no longer tenable in the changed context of high and rising demand, phase out of these caps was initiated in March 2011, starting with loans other than industrial term loans and loans for export, agriculture and essential imports.

4.1.2.4 Development in Banking Sector

Banks have been instructed to maintain general provision @ 2 percent instead of existing 1 percent against unclassified loans to Brokerage Houses/Merchant Banks/Stock Dealers against share etc. Banks have been advised that, in case of Fixed Term Loan (Home loan, Car loan etc.), interest will be calculated on the basis of the product of the day end balance but interest must be charged on quarterly basis without any penal interest. The loan accounts for Consumer Financing and Small Enterprise Financing will be repaid according to Equal Monthly Installment (EMI) method without any additional charges along with the rate of interest/profit on loans other than the announced schedule of charges.

Bangladesh faces continuous challenges in maintaining economic stability, improving public sector efficiency and inducing economic growth sufficient to alleviate the desperate poverty of a large segment of the population. This section briefly reviews current trends in the economic and financial environment with particular reference to the housing sector. Since the 1980s, Bangladesh has moved towards establishing a liberal market-based and private sector driven economy. Prudent macro-economic and fiscal policies have resulted in the highest foreign reserve in decades, increased GDP and a boost to the value of the taka compared to other currencies in the region. It appears that the economic turmoil in East Asia has had only a small impact on Bangladesh.

The economy has been diversifying. The agricultural sector, which provided 62% of GDP in 1975, presently accounts for roughly 30% of GDP. The services sector is the largest and fastest growing, contributing 54% of GDP and growing at a rate of 6.5% during 2012. Housing services have remained at 20

7% of GDP in constant prices. Last decade, employing an increasing proportion of the labor force, of which female workers are the majority. Inflation has increased in recent years, but remained modest. However, in February 2008, the year-on-year rate was 8.1%, while in previous years it had declined steadily to below 5%. Housing costs have risen faster than the overall CPI. The Government of Bangladesh has contained spending by downwards adjustment of its Annual Development Programme (ADP). Unfortunately, the efficiency and cost-effectiveness of programming and implementing the ADP is considered inadequate across sectors, including the housing sector. Allocation to the housing sector is approximately 5 to 6% of the ADP. Access to housing finance is a critical bottleneck for the majority of the population in developing countries. The lack of available and accessible housing finance has been identified by the Government of Bangladesh as one of the important hurdles in improving housing conditions for middle- and lower-income households. Although several potential sources of housing finance for mid- and high-income consumers exist, most of the low-income families needs are still unmet.

4.2 Different tiers of the housing market

The residential housing sector of Bangladesh is characterised by a three-tier market.

First are those households with the highest disposable income (less than 3% of the housing market), who are able to afford high-quality housing in fully serviced neighbourhoods, and able to utilise bank financing or specialised housing finance institutions.

The second tier is the relatively narrow stratum of middle-income households (representing 12 to 15 % of the housing market), who are the main users of specialised housing financial institutions such as Bangladesh House Building Finance Corporation (BHBFC). This group is the major beneficiary of available public subsidies and is composed predominantly of public servants and wage/salary earners of large private companies and public sector corporations.

The third and largest of the tiers is low-income households, for which housing is provided largely by the private sector, often under illegal and unsatisfactory site conditions.

4.3 Housing conditions in Bangladesh

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The poor economic situation and income inequality in the country is reflected in the quality of the housing stock. It was estimated that close to half of all housing units in the country were made of temporary materials and needed replacement within a one- to five-year period. Approximately one third of all houses in urban areas were constructed outside of the formal regulatory system, mostly on land to which the homeowner does not have a formal title. Tragically, the recent floods have destroyed more than 900,000 houses, mostly in rural areas, and another 1.3 million houses were seriously damaged. Of course, most of the houses affected were in the lowincome category. The only detailed figures on the type of housing in urban areas are available for Dhaka. Although the data are old, the situation has not changed much for the better and it is, therefore, still relevant to provide a broad picture of the urban housing conditions. The higher and middle-income groups are housed in either low-rise single-family houses, or, increasingly, in multifamily apartment buildings. The lower-income households, approximately 70% of the urban households, are housed in a variety of house types that can be described as follows: IFC Bulletin No 31 99 Approximately half of the low-income housing units are in bustees, informal settlements areas that include both private rental and private ownership housing, built on either privately owned land or illegally occupied public land. Conventional tenement slums (rental and owner occupied) take up another quarter of the low-income sector. Overcrowding in these buildings has increased over the last years due to an influx of rural migrants to work in the expanding garment industry. Other categories of low-income housing include: government-provided squatter resettlement camps, plots of land with basic services that are provided on a leasehold basis; employee housing consisting mostly of small apartments in high-rise complexes provided by the government; squatters who have built makeshift houses on illegally occupied public or private land; and pavement dwellers.

4.4 Housing sector characteristics of Bangladesh

According to the Centre for Urban Studies 2012

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Total number of dwelling units: Bangladesh 25,020,489 Rural 18,474,566 Urban 6,545,923 Per capita floor space: Bangladesh 54.9 square feet Rural 53.5 square feet Urban 62.3 square feet Occupancy level in 2006: 5.48 people/dwelling unit Access to clean water: Rural 78% & Urban 42%

4.4.1 Housing production

Suppliers of housing are the public sector, and the formal and informal private sector, including ownerhouseholds and NGOs. Rural housing in the rural areas is mostly produced incrementally by owner households. While most owners build on their own or rented land, informal occupation and squatting are increasing in rural areas. The Grameen Bank pioneered a housing loan programme that provided basic building materials for a simple new house for which repayment could take place over a 15-year period. Other NGOs have followed this example, with shorter payment periods and a total of approximately 700,000 housing units have been constructed using microfinance facilities from the time these programmes were put in place in the 1970s. After the Liberation, the then government inaugurated a programme to rehabilitate the poor and the homeless in a number of Guscho Gram (cluster villages). Later, various governments developed different programmes to support the rural landless and homeless people. Sheikh Hasinas government initiated programmes like Asrayon (shelter), GhareyPhera (return home) and Ekti Bari EktiKhamar (one homestead, one farm). GrihayanTahbil (housing fund), administered by the Prime Ministers Office, provides low-cost funds to NGOs and private sector developers for the construction of houses for low- to moderate-income group people.

4.4.2 Urban housing

Because of the scarcity and high cost of buildable land in the large urban areas, most new formal sector residential construction in Dhaka and some other large urban areas has, over the last few decades, been in 23

the form of multifamily units. In small towns single-family units prevail. The public sector. Several public agencies are, or have been involved in the financing and development of housing and residential infrastructure projects: the Housing and Settlement Directorate (HSD) and Public Works Department of the Ministry of Housing and Public Works; the Local Government Engineering Department of the MLGRDC; and the City Corporations of the four larger cities. Their funds come mostly from foreign aid and to a lesser extent from national revenues. Both City Corporations and the central government are developing residential subdivisions for lease to upper- and upper-middle income households, and resettlement programmes and site-and-services schemes for lower- to middle-income groups. The tenant purchase and sales projects require large down payments (25 to 30%) and a small number of annual payments. Arrears are a major problem with all government projects. In addition, it has always been difficult to reach lower-income households with the site-and-services projects and the size of the combined public housing programmes has remained extremely small in relation to housing requirements and new construction. Altogether the public sector has only produced approximately 12% of total urban residential land and housing requirements (not more than 6,000 units per annum) over the past few years. Non-governmental sector. The NGO sector has only been marginally involved in urban housing. The discrepancy between urban land and house prices, and incomes of the below median income groups has made sustainable housing solutions difficult to conceive for this income group. Recently, the larger microfinance institutions have shown an interest in entering the multifamily residential market for moderate and lower-income households. Proshika and BRAC have plans to invest in large-scale low-and moderate-income housing developments 30 to 40 km outside Dhaka. Some projects will receive free government land. The plan is to develop hostel-type rental housing for urban workers and small low-cost family apartments for tenant-purchase. The NGOs have access to international funds, which they complement by borrowing and other income sources. Their cheap sources of funds make it possible for them to make long-term investments in social housing. None of these plans, however, has been implemented as yet. The formal private and cooperative development sector. Private developers are increasingly important players in the urban land and housing markets, particularly in the market for apartment buildings. They operate as individuals or as businesses under the Companies Act, or form a housing cooperative and jointly develop a housing project partly for owner-occupation and partly for rental or sale. Interestingly, private developers feel that the higher-income apartment market is becoming saturated and they attempt to move down market. The most serious constraint in doing so is the lack of mortgage financing. Finding accessible and affordable land for middle-income housing construction is another challenge, particularly in Dhaka. One of the largest developers in Dhaka felt, however, that there was sufficient land available for the foreseeable future, but the lack of long-term finance for the development. Middle-income households would prevent them from expanding a middle-income line of housing production. Infrastructure provision is the third main concern hindering private sector production of middle-income houses. Services and infrastructure are the responsibility of the City Corporations and

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priority is given to their own land developments. It can take a long time for road networks and other services to be installed in new developments. The formal or semi-formal individual homeowner construction sector is by far the largest housing supply system in all but the main metropolitan areas. Households acquire land, mostly on a freehold basis, and gradually construct their house with or without official approval of plans. Only a small proportion of households access housing finance. Informal private rental housing sector. Landowners in urban areas construct high-density, low-rise housing units for rental, without adequate services, either for individual households or for group living (mess housing). Squatting.People building makeshift houses on public or private land, or squat in buildings. Sources of housing financing in Bangladesh Besides the state-owned BHBFC, other sources of housing finance currently available in Bangladesh are commercial banks, employee loans, life insurance policies, and informal means. In the rural sector, the housing cooperatives are the major providers of housing finance. Recent survey of homeowners of newly constructed houses showed that the most important source of housing finance was household savings (more than one third). Loans from relatives and friends were the second most common form of finance, followed by the sale of other parcels of land. Besides government efforts, a large number of NGOs are providing microcredits to the poor. The enactment of the Financial Institutions Act 1993 opened the door for private housing finance companies. There are now 23 private companies that extend housing finance in Bangladesh. Prominent among them are the Delta-BRAC Housing Finance Corporation Ltd. and the National Housing Finance and Investment Ltd. These companies make loans for the construction of houses, acquisition of flats and houses, extension and improvement of existing housing, and the purchase of housing plots. Most of the private sector players, though relatively new, have nonperforming loans (NPLs) of below 1%. But their interest rates are very high compared with the nationally owned BHBFC. For example, Delta-BRAC Housing charges interest rates as high as 16%, which is higher than that of BHBFC by 1%. The contribution of microcredit lenders (such as Grameen Bank, BRAC, ASA and Proshika) in this sector is very insignificant.

4.5 HOW PEOPLE MAKE DECISIONS

In any kind of decision making we face trade offs. People whom are interested to take home loans are not the exceptions. They may take home loans or can stay at their existing home on for rent. But we are driven by incentives. Bangladeshi peoples purchasing power as well as standard of living is increasing day by day. People are consuming more goods & services from the market & now we want better life, better housing. Thats why people are more interested to take home loans like never before & it is increasing day by day. But one of the main factors that are affecting the demand for loan is the interest 25

rate. It may not impact immediately after the sudden surge or collapse, but in the long run it has significant affect towards demand to get more or less loans. Government also has some roles to play. Proper governance & the complete set of standard procedure & the use of interest rate can influence the Home loan market all the time. Based on the peoples

Ten Principle of Economics

01. People face tradeoffs: The main assumption goes under this theory is that there is nothing as free e lunch. Banks also do the same they provide Home Loan with a view to having interest. This inner motive drives them for ensuring flow of loan in the market. Here emphasis goes first on efficiency rather than on equal distribution. 02. The cost of something is what you give up to get it: Those who are keen to have loan they have to make a payment as compensation for the lender. This constitutes cost of loan that loan seeker impart to Banks for having Home Loan. Opportunity cost: Someone who is pursuing home loan and ready to impart interest might think of having a car loan. He is abandoning car loan for the purpose of having home loan involving interest. 03. Rational people think at the margin: From the beginning of life people always desire of margin. In case of acquiring a home loan, they expect that the investment they are making will produce more financial incentives than what costs they are incurring now. 04. People respond to incentives: The great incentive that rolls on loan seekers mind if I take home loan it will be a cause of asset increment .Thats why an individual is motivated to home loan. 05. Trade can make everyone better off: 26

Any trade makes both the parties benefitted. Here banks get interest for granting the loan while loan getter can make his desired Home or renovate the existing one with the expectation of having financial return. 06. Markets are usually a good way to organize economic activity: An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. The same thing happens to also market of Home Loan. There are no control of this market .It is fully out of control of government intervention which means this is a market economy. 07. Governments can sometimes improve market outcomes: Although this market falls under market economy, sometimes government intervenes to improve market outcome. Government may set out rules for who may have access to home loan and ask banks @financial institutions to offer loan on the basis of priority that matches to government long term vision to reach the country to certain height. Market power: The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. But it is not applicable to home loan market as no single institution can influence interest rate. Because all the banks change the rate simultaneously when change the rate as it is an oligopoly market. 08. A countrys standard of living depends on its ability to produce goods and services.

For reaching that goal Home Loan is offered by banks and financial institutions for enhancing standard of life of people.

09. Prices rise when the government prints too much money: If government prints too much money, as a result too much money chases too few goods. That also bumps up construction cost of home or renovation while reducing demand of home loan halting the infrastructural development of country. 10. Society faces a short-run tradeoff between inflation and unemployment: if the inflation rises, consecutively the interest for home loan also increases .As a result banks may temporarily think of limiting members of marketing team.

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Market forces of Demand and Supply

What, How and for Whom
To be an effective one, every economic system must answer the three well-known fundamental economic questionsa. What will be produced? b. For whom will it be produced? c. How will it be produced?

All three questions, though apparently straightforward, are value-added and cannot be answered in a vacuum. It is necessary to have a worldview and strategy. The systems strategy is a logical outcome of the worldview it believes in. When there is inherent inconsistency between the goals and worldview and strategy within the system, it is about to produce problems repeatedly in more serious and forced manner each time. People living in such systems cannot but be the victims of false promises.

Now, for the prevailing three dominant systems-capitalism, socialism and their joint offspring, the secularist welfare state-they only differ in the strategy or mechanism, not in the worldview. Now, as a bank, DBBL seeks answer to these question in a quite different way, specially the 3 rd one, how to produce. Answer to the 1st question in case of home loan of DBBL: What to produce: DBBL offers a full range of retail products like home loan, car loan, education loan; which are similar those offered by their principal competitor HSBC, Standard Chartered Bank (SCB), and EBL. Answer to the 2ndquestion in case of home loan of DBBL: For whom to produce: DBBL & CITI N.A. Corporate Retail Customers, Salaried employees working within MNCs and reputable organizations, Navy officers, Govt. Officials, self-employed individuals and professionals, land

28

owners, land lords, and for those who want to purchase a flat, refinancing of owned house property, renovate home, and extend/construct of building etc. Answer to the 3rd question in case of home loan of DBBL: How to produce: The bank uses the deposit amount of money to make revenue. They offer the deposit money as loan at high interest rate compare to interest rate of deposited money. DBBL produces home loan with flexible facility and minimum security.

The Circular Flow

The economy is consist of large numbers of buyers and sellers and a transaction is performed every moments, where firms acquire factors of production from the market and households earn revenue by selling those factor of production in the market and go for buying satisfying their needs through goods and services are available in the market, which is produce by firms.

This is the circular flow of income works in the society. But when we talk about home loan in that case this traditional circular flow may work accordingly because this is not a direct demand, this sort of demand is created by other third parties involvement. In normal courses, individual purchased those goods and services who they feel it is needed for satisfying their needs but in case of home loan household deposit loan in the bank and then they take back the loan from the bank as home loan.

One reason is that, individuals are not ready to take home loan when they seem it is to be needed as we earlier mentioned that demand of home loan is significantly dependent on income, family structure, price expectation, and interest rate. Another reason is that, though the product is necessary good but the pattern of consumption is entirely static which means individuals are not enable to consume as they are expecting. The demand of home loan is inelastic in nature; there is less significant influence on quantity demanded by changing the interest rate of home loan.

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Home Loan
Revenue

Market for Home Loan

Spending Taking Home Loan

Banks & Home Loan Providers Figure 1The Circular Flow 1. Produce And Sell Of Home Loan Repayment
Factors of production

Households 1. Buyers Of Home Loan Income Market for Factors of Production

Factors of production

Flow of factors

Flow of Income

Figure:

Circular flow

Buyers and Sellers in Market

Demand for home loan is inelastic because, regardless of how much the interest rate increases, people with need of home will still need it to survive and will end up paying the interest rate for it, whether it

30

increases from 9% to 15%. When the interest rate changes, there is little or no variance in the demand of it.

When demand is perfectly inelastic, it is completely unresponsive to changes in price. For home loan seekers who need this loan, quantity demanded would be the same no matter what is the interest rate of taking loan. Thus, we illustrate the demand curve for home loan vertically at a quantity determined by the interest rate. In the diagram below, this vertical demand curve intersects the upward-sloping supply curve at an equilibrium point whose horizontal coordinate is the quantity Q0 and whose vertical coordinate is the price P0.

Consumer surplus equals the difference between prices people would be willing to pay and the price that they actually have to pay. As shown above, the price that consumers actually have to pay is P0. Thus, consumer surplus is the area above the price that consumers actually have to pay, and since their willingness to pay is unlimited, the area of this consumer surplus approaches infinity. An increase in supply describes a rightward shift of the supply curve. No change in quantity demanded describes a movement along the vertical demand curve. A new equilibrium emerges at the lower price P1 and at the same quantity Q0:

Initial Consumer Surplus

P0

AdditionalConsumer Surplus

Again,

P1

Q0
Figure: Change of Home Loan Supply

Consumer surplus equals the difference between interest rate people would be willing to pay and the interest rate against their home loan that they actually have to pay. As shown above, the price that consumers actually have to pay drops from P0 to P1. As long as demand remains perfectly inelastic, willingness to pay for insulin remains unlimited, and the difference between an unlimited willingness to pay and a lower price that actually has to be paid translates to an increase in consumer surplus. 31

Supply of home loan in the market consists of two distinct sources (1) local banks and (2) multinational banks; HSBC and Standard Chartered Bank. Demand fulfilled by local banks is negligible which means the significant quantities of home loan are supplied by multinational banks.

Local bank intervene in the market remarkably increase the market share of supply of home loan and reduce dependency of multinational banks for satisfying the demand in the market.

Market share holding by local banks tends to be good sign in case of fulfilling of unexpected market demand because demand fulfilled thorough multinational banks is a time consuming and not a perfect source of supply for short term. Local banks are interested to provide home loan and supply in the market due the one of the Economics Principle People Response to Incentives.

Factors affecting demand for Home Loan Interest Rate:

Home loan takers considered Interest Rate the most important factor. Home Loan seekers prefer Bank or Financial Institutions offering low Interest Rate. House Building Finance Corporation(HBFC) and National Housing Finance are customers first choice , since they offer Home Loan having low interest rate which is 9%.

Interest Rate Effect

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Series1 Yes 80% No 20%

80% of the respondents considered interest rate an important factor while taking home loan

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 Affordability:
Rising incomes mean that people are able to afford to spend more on housing. We are now in the period of economic growth and demand for houses is increasing. Demand for housing tends to be a luxury good. So a rise in income causes a bigger % rise in demand.

Income Group
80% 60% 40% 20% 0% Series1 40000-60000 2% 60000-80000 12% 80000-100000 18% 100000 and above 68%

68% of the home loan takers having income of 100,000 and above while minimum requirement is monthly gross income of 40,000.

Future Price Expectations

Demand for houses depends on consumer confidence. In particular it depends on peoples confidence about the future of the economy and housing market. If people expect prices to rise, demand will rise so people can gain from rising wealth. For the past two decades Price of Land and houses has been increasing substantially and causing the increase in demand for home loan.

Family Structure
Due to cultural changes, formation of nuclear family is creasing, hence causing the demand for new home, consequently increasing the demand for home loan.

Factors affecting Supply of Home Loan

Deposits
There is high saving tendency in our economy; there is a high amount of money available to financial intermediaries for offering loan. Consequently they are willing to increase the supply of money for home loan.

Growth in Real Estate Sector

Profitability of building new houses is high in our county. And as a sector Real Estate is growing at a faster pace. Home loan Financers find it profitable in investing in this sector, hence increase the supply of home loan.

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 Low Default Rate

In case of Home Loan; default rate is low, which makes the home loan financers prone to allocate more money for home loans.

Test of Elasticity

Determinants of demand elasticity

Sensitivity towards home loan

Affordability

High

Interest rate

Low

Price expectation

High

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Affordability: Someone needs to be eligible for home loan means to be able to afford the loan. Whether the person has meet all the requirements that banks want to be fulfilled. Thats why an individual with no affordability has no access to loan while if one has affordability may avail the loan. Interest rate: If interest rate is high, then people tend to have less home loan comparing to when the interest rate is low. Price expectation: If people perceive that price of apartments may soar up near future, then they may think of erecting home now to grasp the profit will generate in future.

Government regulation and taxation

Government Regulations:

The Regulatory system in Bangladesh does not have any specific restrictions for lending to Bangladeshi residence. However a prudential regulations guideline for consumer financing is introduced by Central Bank which we should comply with. The legal system is still developing in terms of enforcement of the law & although legal proceeding is a lengthy process the protection is there, and initiatives have been taken to help court decisions to be made quicker through simplifying court proceedings. DBBL is therefore using these to create additional pressure on its delinquent customers.Bangladesh Government or Bangladesh Bank has no regulations regarding Home Loan. More specifically no control over interest rate.

Tax Benefit on Home Loan:

According to the Income Tax Ordinance 1984, Section (25) Sub-section (1), the interest payable, on Home Loans with principal amount of up to BDT 2,000,000/- (Taka Twenty Lakhs only), would be deducted from the total taxable income. As a result, the income tax liability would be substantially reduced. For a person taking loan at gross ROI 15.00% p.a. and presently paying income tax @ 25%, the effective net ROI is 11.25% pa (15.00x75%) ie. 3.75% pa savings due to reduced tax payments by the borrower.

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Market Structure and Competitive Strategy

Game theory

Game theory is a method of studying strategic decision making. More formally, it is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers. It is the study of how people behave in strategic situations. By strategic we mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action. Because the number of firms in an oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce. In making its production decision, each firm in an oligopoly should consider how its decision might affect the production decisions of all the other firms. Game theory is not necessary for understanding competitive or monopoly markets. In a competitive market, each firm is so small compared to the market that strategic interactions with other firms are not important. In a monopolized market, strategic interactions are absent because the market has only one firm. But, as we will see, game theory is quite useful for understanding the behavior of oligopolies. Prisoners dilemma and the Home Loan of DBBL The prisoner's dilemma is a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so. A classic example of the prisoner's dilemma (PD) is presented as follows: Two men are arrested, but the police do not possess enough information for a conviction. Following the separation of the two men, the police offer both a similar dealif one testifies against his partner (defects/betrays), and the other remains silent (cooperates/assists), the betrayer goes free and the cooperator receives the full one-year sentence. If both remain silent, both are sentenced to only one month in jail for a minor charge. If each 'rats out' the other, each receives a three-month sentence. Each prisoner must choose either to betray or remain silent; the decision of each is kept quiet. What should they do? For DBBL setting the price is a decision point in the market. If they raise the rate of interest, their customers will leave& try to take loans from their competitors if their competitors do not increase the rate too. Thats why it is visible, all the players in the market are keeping the interest rate pretty close & their point of difference is the service they provide. The situation can be shown by drawing a payoff matrix. Even though the market is competitive but one banks strategic decision has significant impact on the decision of the other. 36

Interest rate up Demand up Demand down

Interest rate down

Pricing Strategy

Pricing strategies for products or services encompass three main ways to improve profits. These are that the business owner can cut costs or sell more, or find more profit with a better pricing strategy. In the downturn of 2008-11, and since, when costs are likely already at their lowest and sales are hard to find, adopting a better pricing strategy is a key option to stay viable. Merely raising prices is not always the answer, especially in a poor economy. Too many businesses have been lost because they priced themselves out of the marketplace. On the other hand, too many business and sales staff leave "money on the table". One strategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needs and behaviors of customers and clients. Models of pricing There are different types of pricing strategies. These strategies are described below: 1. Cost-plus pricing Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has 37

two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. This appears in two forms, Full cost pricing which takes into consideration both variable and fixed costs and adds a % markup. The other is Direct cost pricing which is variable costs plus a % markup, the latter is only used in periods of high competition as this method usually leads to a loss in the long run. 2. Creaming or skimming In market skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price-sensitivity - this can be attributed to: their need for the product outweighing their need to economies; a greater understanding of the product's value; or simply having a higher disposable income. This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition. 3. Limit pricing A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition. The problem with limit pricing as a strategy is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labor for a long period of time. In this strategy price of the product become limit according to budget.

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4. Loss leader A loss leader or leader is a product sold at a low price (ie at cost or below cost) to stimulate other profitable sales. This would help the companies to expand its market share as a whole. 5. Market-oriented pricing Setting a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the results from the research. For instance if the competitors are pricing their products at a lower price, then it's up to them to either price their goods at an above price or below, depending on what the company wants to achieve . 6. Penetration pricing Setting the price low in order to attract customers and gain market share. The price will be raised later once this market share is gained. 7. Price discrimination Setting a different price for the same product in different segments to the market. For example, this can be for different ages, such as classes, or for different opening times. 8. Premium pricing Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction. 9. Predatory pricing Aggressive pricing (also known as "undercutting") intended to drive out competitors from a market. It is illegal in some countries. 10. Contribution margin-based pricing Contribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs (the product's contribution margin per unit), and 39

on ones assumptions regarding the relationship between the products price and the number of units that can be sold at that price. The product's contribution to total firm profit (i.e. to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold). 11. Psychological pricing Pricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4.00. 12. Dynamic pricing A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customers willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight. 13. Price leadership An observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. The context is a state of limited competition, in which a market is shared by a small number of producers or sellers. 14. Target pricing Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers. Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product. 15. Absorption pricing 40

Method of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs and is a form of cost-plus pricing.

16. High-low pricing Method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices are designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products. 17. Premium decoy pricing Method of pricing where an organization artificially sets one product price high, in order to boost sales of a lower priced product.

18. Marginal-cost pricing In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all. 19. Value-based pricing Pricing a product based on the perceived value and not on any other factor. Pricing based on the demand for a specific product would have a likely change in the market place. 20. Pay what you want Pay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price

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may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the commodity. Giving buyers the freedom to pay what they want may seem to not make much sense for a seller, but in some situations it can be very successful. While most uses of pay what you want have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use. 21. Premium Premium is a business model that works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services or other) while charging a premium for advanced features, functionality, or related products and services. The word "freemium" is a portmanteau combining the two aspects of the business model: "free" and "premium". It has become a highly popular model, with notable success. 22. Odd pricing In this type of pricing, the seller tends to fix a price whose last digits are odd numbers. This is done so as to give the buyers/consumers no gap for bargaining as the prices seem to be less and yet in an actual sense are too high. A good example of this can be noticed in telephone promotions of some countries like Uganda where instead of writing the price as sh. 40000, they write it as sh. 39999. This pricing policy is common in economies using the free market policy. Pricing strategy of DBBL The pricing strategy in case of Home loan is market oriented pricing. This means that marketers will set prices depending on the results from the research. The risk free rate (Govt. T bill), banks additional services have influence over the pricing but the most of the case it is market determined &all the players raise or reduce the price altogether.

Market Structure& Market Power

Market structure can be broadly determined by entry and exit conditions. Technology, innovation, capital, legal rights, brand awareness and loyalty of target consumer group etc are the barriers to mobility factorsforHome Loan. The entry Barriers of Home Loan are tough in one case, but easy on the other. For new bank entrance the cost is really high. But on the other hand, those who are only 18 banks are proving 42

home loan in the market. Other 20 commercial banks & a lot of new NBFI have the opportunity to grab the market & perform in the market pretty competitively. But the exit barriers are pretty high. Because of the tough laws & regulation enforced in the country. Furthermore, once a contact is made with the customers & later before maturity dismissal of the contacts can jeopardize the brand value of the bank seriously. Apart from that Price of Production Substitutes, Price Expectations etc. has both direct 7 indirect influence over the market structure.

Economies of scale manufacturing, R&D, marketing, sales

Distribution product differentiation established products, brands and relationships

Capital requirements and financial resources

Access to distribution channels preferred arrangements

Regulatory policy
patents, regulatory standards

Switching costs employee retraining, new equipment, technical assistance

Based on Porters five forces Market structure market structure is described below: Buyers and sellers: The number and size distribution of active buyers and sellers is not fixed. The market participants who are offering home loans & who will be in need of the loans are not easy to determine. As the number of market participants is few now, less vigorous is the price and product quality competition. Price competition between buyers and sellers is visible. Thats why price provided by different players are 43

pretty same. The influence of government plays a good role here in manipulating interest rate of the home loan.

Potential entrants:

Only a few active participants, just sufficient to serve the target customers are available at present. Each firm has the capability to influence the market. Thats why all the market player has pretty same interest rate. But the change in interest rate has to be adjusted carefully because it may affect the profitability of the company as well as the industry performance. Degree of product differentiation:

Home Loan cannot be much differentiated as the need for this product is concentrated into a target group and the product is also highly customized. Amount and cost of information:

Information regarding home loans interest rate, selling firms, product price and quality as well as the conditions of entry and exit in the market are symmetric among the stakeholders. Since the population is ever increasing in Bangladesh, the market for Home loan is also gaining more opportunities continuously. To make the market self-dependent and successful in terms of manufacturing and selling the following factors need to be considered to formulate competitive strategy.

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Bargaining power of suppliers

government intervention and pricing price is pretty much unpredictable. Suppliers are the price taker.

Threat of substitutes
There's no particular substitute for Home loan.But any purpose loan can be called as a substitute.

Existing competition
Rivalry among market players are visible. Because change in price put pressure on others to change the price as well.

Barriers to entry Bargaining power of buyers

price regulation economies of scale innovation cost switching cost regulatory policy Bargaining power in this market is pretty low. Because all the players have priced pretty same & the point of difference is the services of the Banks.

Factors of Production

Land: DBBL Offices fall under the factor of land which is used to provide and handle all the things related to home loan. Besides all the infrastructure used may fall under the factor of land. Labor: labor consists of Full Time Employees and Marketing Team who dedicates themselves to make available home loan to prospective customers. Marketing team is assigned with a target to sell loan up to a certain level. Each bank has a division to deal with loan to optimize its resource use.

Capital:

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There are mainly two sources of banks to get cash are Deposits and Investments. Deposits are the amount that household and working people keep to banks and on the other hand banks also earn money from the investment they made earlier.

Trend Analysis and Forecasting

Trend analysis and forecasting
We found positive trend for the demand for home loan.

Demand(Tk in million)
600 500 400 Demand(Tk in million) 300 200 100 0 2004 Linear (Demand(Tk in million))

2006

2008

2010

2012

Our forecasted equation is Y= -61.57+69.35X and for the year 2012 to 2015 our forecasted demand are showed in the following table Year 2012 2013 2014 2015 Forecasted Demand(in million) 493.23 562.58 631.93 701.28

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HOUSING DEMAND
Bangladeshs housing market is characterized by a surplus of upper-echelon housing stock and an acute shortage of affordable housing for the great majority of middle and lower-income population groups. Estimates suggest a shortage of about 5 million houses in Bangladesh in 2009. In urban areas, the annual estimated demand amounts to 300,000500,000 houses. In rural areas, with an assumed 2 percent new household formation annually, the new demand could be as much as 3.5 million a year. Of the larger cities and towns in Bangladesh, Dhaka is the hardest pressed in terms of unsatisfied housing demand (according to data from the BHBFC). The housing needs of lower- and lower-middle-income groups are considerable and remain largely unfulfilled. The BHBFC reports that there is great demand for houses priced moderately between Tk 600,000 and Tk 1,000,000; but the supply of such dwellings is almost nonexistent because of high land prices in downtown areas of metropolitan cities, particularly in Dhaka City. In areas on the city periphery, land prices are lower; however, there is no practical transportation method for dwellers in farther outskirts to get to the city and to their workplaces on a regular basis. Careful market-based demand studies are not available, and there is a need for further research on the housing demand of lower- and medium-income groups.1Paradoxically, housing supply caters to upperincome groups, and the market is glutted with new luxury housing units. There are around 800 developers in Bangladesh, and the market is active and relatively competitive. According to the Real Estate and Housing Association of Bangladesh, private developers (focused mostly on Dhaka City) typically engage in the building of dwelling units covering1,0001,500 square feet. New formal construction accounts for about 3 percent of all housing (permanent and temporary) being built formally or informally in the country. Such development is exclusively limited to the upper-income urban groups, and it is undertaken mostly for investment and rental purposes, not for use as primary residences. Approximately one third of all houses in urban areas were constructed outside of the formal regulatory system, mostly on land to which the homeowner does not have a formal title. A 1991 Bangladesh national census counted 2,100 slums in Greater Dhaka. Currently, more than 2 million people in the capital city live either in slums or are without any proper shelter.

DEMAND FOR HOME LOAN

Demand Loan for home loan is mounting day by day as people now think of safety and security more vigorously than earlier. Besides owning a home also bear status in the society a particular man/women belongs to. At the same time incessant rising of flat rent is also driving people for erecting own 47

building/apartment. Furthermore increasing home loan demand can also be characterized by the rising income level of businessmen, professionals, salaried employees.

HOUSING SUPPLY
Bangladesh has a high population densityabout 1,200 people per square kilometerand a limited area of 134,000 square kilometers, which is frequently flooded during the summer months. In such difficult conditions, only 23 percent of housing in urban areas and merely 2 percent in rural areas is permanent housing. Close to half of all housing units in the country (approximately 3.3 million) are made of temporary materials. This nondurable housing requires replacement within one to five years after construction. Even among the housing defined as permanent, there are many types of dwellings with only some degree of permanency, ranging from construction with brick masonry and reinforced concrete construction pillars to tin-roofed and tin-walled houses. The heterogeneity of housing makes it difficult to estimate construction and housing materials costs, and complicates the measurement of real estate price indexes. Table B.1 shows some characteristics of the housing sector. The higher- and middle-income groups are housed in either low-rise, single-family houses or, increasingly, in multifamily apartment buildings (table B.2). The lower income households (approximately 70 percent of the urban households) are housed in a variety of house types. Approximately half of the low-income housing units are in bustees(slums), informal settlement areas that include both private rental and private ownership housing built either on privately owned land or on illegally occupied public land. Conventional tenement slums (rental and owner occupied) take up another quarter of the low-income sector. These multiunit buildings originally were built in compliance with the building code, but now are seriously overcrowded and poorly maintained. Overcrowding in these buildings has increased during the last several years because of an influx of rural migrants coming to work in the expanding garment industry. Other categories of lowincome housing include government provided squatter resettlement camps, plots of land with basic services that are given on a leasehold basis; employee housing that consists mostly of small apartments in high-rise complexes provided by the government; makeshift houses built by squatters on illegally occupied public or private land; and pavement dwellings .Several organizations and rural innovators in Bangladesh developed and modified various designs of rural low-cost housing after the devastating flood of 1987,and are doing the same for the people affected by cyclone SIDR in 2007. The houses vary in appearance throughout the country, but have similar basic structural components.

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SUPPLY OF HOME LOAN

Total housing loans from banks and non-bank financial institutions as of end June2011 amounted to Taka 280.2 billion, which was 8.2 percent of total credit to the private sector .In recent years, significant changes have been taking place in total housing loan portfolios. Of the total, private sector banks with ample deposit resources have been expanding their housing loan portfolios and now have dominant market position with the largest share of Taka 147.6billion in outstanding housing loans as of end June 2011. The SCBs have the second largest share of Taka 52.7 billion and other banks Taka 20.0 billion in outstanding housing loans as of end June 2011. Besides, two private sector specialized housing finance companies also provide a significant amount of housing loan. They provide fund for their operations by taking long-term deposits including some contractual deposit schemes. The state owned House Building Finance Corporation (HBFC) has the third largest share of Taka 25.3 billion in outstanding housing loans as of end June2011. The sources of Corporation's fund are paid-up capital by the Government and the proceeds as received by selling Government guaranteed interest bearing debentures to different organizations. The second mode of funding was unavailable in recent years. In the past the HBFC funded its housing loans by issuing of low interest debentures bought by the SCBs and the Bangladesh Bank. Though in FY04, the corporation got approval from the Government to sell debenture amounting Taka 1.0 billion, but till today it could not sell them. So, sufficient surplus cash fund could not be generated from the Corporations own cash in-flow after payments of debenture installments, Government debts, operational expenses and income tax. The HBFC has been constrained to rely on recoveries of past loans for new lending after defraying operating and debt servicing costs. Consequently, its new lending has been small. In FY10 and FY11 Taka 2.3 billion and Taka 2.2 billion were disbursed out of recoveries of Taka 4.0 billion and Taka 4.1billion respectively. The Graeme Bank provides housing loans to its members in rural areas. Comings also have small involvement in lending to housing. Out of these funds, GrihayanTahbil created by the GoB which provides housing loan to the NGOs at the rate of 1.0percent simple interest because of providing housing credit to the rural poor at the rate of5.0 percent simple interest. As of June 2011,the GrihayanTahbil has been released Taka1.3 billion against allocation of Taka 2.1 billion through 464 NGOs under rural housing programme which have covered 444 upazilas of 64 districts of the country and 50,252houses have already been constructed. In addition, for the target people those are adversely affected by different natural calamities, Taka 0.1 billion has been released as grant as per decision by the authority concerned. So far the Tahbil has recovered Taka 0.9 billion against the total recoverable amount of Taka 1.0 billion. As of June 2011,recovery rate is 88.0 percent. Since its beginning in FY98, the Tahbil received an amount of Taka 1.6 billion from the GoB up to end of June 2011.

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Figure: Outstanding Home Loan in Bangladesh ( Tk in billions)

4.8 DEMAND FOR DUTCH BANGLA BANK HOME LOAN

While conversing with DBBL employees, they opined that do not keep any account for the demand of their Home Loan. Now question arise how they deal with the Home Loan, usually every year they allocate a certain amount of taka for giving Home Loan to its customer. So no exact data of demand can be shown here.

4.9 SUPPLY FOR DUTCH BANGLA BANK HOME LOAN

Realizing the prospect of this sector, DBBL started providing Home Loan for last 13 years extensively. According to the data given by DBBL they supplied tk22 crore in 2011 and tk 20 crore in 2010. They supply this loan mainly to businessmen, professionals, such as, doctors, engineers etc. DBBL also supply a major portion of its home loan to its employees with a lower rate of interest which is now 6%.

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4.10 SURVEY RESULTS

We have done a survey In order to understand the proper peoples attitude toward home loan & to understand the demand & supply factors we have done a survey. In order to develop a good reserch, it is necessary to know who the customers are & what they actually want. We have targeted some those individuals who have already taken or likely to take home loan. The open ended question also gives us valuable in formations to develop our strategy. Survey results are as follows: Q. Age of the respondents?

Fig: Showing percentages of age groups of customers who have already taken home loan of Dutch Bangla Bank. Here we can observe that age group 36-45 has taken larger portion of home loan. This is approximately 45% 51

Q. Occupation of the respondents?

Fig: Showing occupation of the customers of Dutch Bangla Bank who have already taken home loan. Service holders have taken 47% of total home loan outstanding of this bank. Businessman and professionals have taken 20% and 33% consecutively.

Q. Monthly Income of the respondents?

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Fig: From the above fig we can observe that customers having monthly income of more than 100000 have taken 72% of total home loan of Dutch Bangla Bank. People having monthly income of 60000 or less have not taken any home loan.

Q. Factors that are affecting the decisions regarding Home Loans:

One-Sample Test Test Value = 3 95% Confidence Interval of Sig. t Interest rate 4.795 df 59 tailed) .000 (2- Mean Difference 1.133 the Difference Lower .63 Upper 1.64

Interpretation: Interest rate has significant impact on the demand for home loan.

One-Sample Test Test Value = 3

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95% Confidence Interval of Sig. t Down payment 2.256 df 59 tailed) .041 (2- Mean Difference .533 the Difference Lower .03 Upper 1.04

Interpretation: Down payment has significant impact on the demand for home loan.

One-Sample Test Test Value = 3 95% Confidence Interval of Sig. t Monthly Installment 8.573 df 59 tailed) .000 (2- Mean Difference 1.400 the Difference Lower 1.05 Upper 1.75

Interpretation: Monthly Installment has significant impact on the demand for home loan.

One-Sample Test Test Value = 3 95% Confidence Interval of Sig. t Collateral -.235 df 59 tailed) .818 (2- Mean Difference -.067 the Difference Lower -.68 Upper .54

Interpretation: Collateral has non-significant impact on the demand for home loan.

One-Sample Test Test Value = 3 95% Confidence Interval of Sig. t df tailed) (2- Mean Difference the Difference Lower Upper

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One-Sample Test Test Value = 3 95% Confidence Interval of Sig. t Years repayment to full 6.859 df 59 tailed) .000 (2- Mean Difference 1.133 the Difference Lower .78 Upper 1.49

Interpretation: Years to full repayment has significant impact on the demand for home loan. Hypothesis Testing: For all of the above Tests we have following Null Hypothesis and Alternative Hypothesis Ho: Mean=3 Vs Level of significance: 0.05 Q. If interest rate fluctuates, does it influence of taking home loan? HA: Mean>=3

Fig: Interest rate is a key factor for choosing a home loan. Almost 80% customers of Dutch Bangla Bank took into account the interest rate of their home loan

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5.1 Findings

By Analyzing the Home loan of Dutch Bangla Bank Ltd, we have figured out that Home loan market is very competitive market. People usually move to other banks if they figure out other banks offering lower interest rates. We could not figure out any demand data of home loan but we have figured out total outstanding or supply of Loan is 280.2 Billion taka for the financial year 2011. DBBL has sold 226,000,000 tk Home loan for the 1st quarter January to April & DBBL is expecting to sell around 100 croretk this year. The market is price sensitive & more or less all the banks are proving almost the same interest rate. Affordability, Publics Confidence, Interest Rates, Population & Price of related goods has a significant effect on demand for Home loan. Planning restrictions, Profitability of building new houses & the peoples saving tendency has affected the supply of Home Loan. As we have not figure out any demand supply data, that why we cant measure the price elasticity of demand & supply. But by asking DBBL officials we have can say that the demand is pretty inelastic in terms of interest rate & other factors. The government has not taken any price control measures like price flooring & price ceiling

5.2 Conclusion

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The home loan market in Bangladesh has grown at a rapid and alarming rate of over 60% for the period of last 3 years. And from the reports from some of the industry experts, it is evident that there is very little chance that there will be any significant decline in growth rates in the future. Therefore, it becomes important at this point in time to examine the key factors that have been instrumental in triggering this high growth period. There are several reasons that can be considered as having attributed to the growth of the home loan market. On the demand side, the first and the most important factor for the growth has been faster rise in incomes as compared to property prices, thus making housing more affordable. Most of the housing finance companies in Bangladesh have introduced several new home loan products in order to meet the needs of a wide variety of customers. The various home loan schemes have their different interest rates in the market. The customer can choose those schemes which he feels is best suited for him and have the capacity to repay it on that specified time period. If unwavering liability is what suits ones profile, then fixed interest rate home loan should be the natural choice. On the other hand, if one can handle risks and is willing to go the extra mile to benefit from any further fall in interest rates, floating rate home loans will be best suited for him.

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A questionnaire on customer demand determinants of Home Loan Dear Respondents We are highly appreciating your participation in this research project. Our questionnaire has no queries which would be sufficient enough to understand your clear personal identity. So, we hope you will feel free to provide your response. We will be grateful to you for your response, as it will enhance our realistic knowledge. Regards Students of IBA Course- Managerial Economics

01. What is your age? 25 - 30 35 - 40 40 - 45 Above 45

02. Gender? Male Female 03. Occupation Service holder Businessman Professionals Others

04. Monthly Income? 40000 to 60000 60001 to 80000 80001 to 100000 Above 100000 59

05. Tick the following determinants you consider most while taking home loan? [1 (least) to 5 (Best)] Determinants Interest Rate Down Payment Monthly Installment Collateral Tenure ( Years to Maturity) Rank 3 3 3 3 3

1 1 1 1 1

2 2 2 2 2

4 4 4 4 4

5 5 5 5 5

06. Rank the following determinants you consider most while taking home loan? [1 (Best) to 5 (Worst)]

Determinants Interest Rate Down Payment Monthly Installment Collateral Tenure ( Years to Maturity)

Rank in terms of importance

07. What do you think about Home Loan as a product? Necessary luxury

Thank You again for your cooperation.

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