Still, long ways to go
‘Our people are more likely to live on rent than put up collateral against which they can mortgage a home. The idea of losing everything you own because of a bank loan is not unique – it is a fear that many harbour.’
In a report released earlier this month by the State Bank of Pakistan titled ‘Bank Credit to Private Sector, A Critical Review in the Context of Financial Sector Reforms’ stated that credit to households in Pakistan accounted for less than 0.2% of GDP in 2015. The ratio for various other Asian countries is way higher.
Pakistan lags behind most nations in this sector because of lack of enforcement and enactment of foreclosure laws outside the judicious realm. According to the report, this has persisted because of a weak valuation mechanism for real estate, hampering a checked real estate activity. However, there are several other factors at play.
A culture thing?
While it will seem easier to blame the entire financial sector of the country, there are various other reasons because of which the sector has not been able to properly develop itself all these years.
Many people in Pakistan are still rooted to believe in a collectivist culture whereby they opt for a joint family system and reside in their family home. Individualistic ideas, such as the need for one’s ‘own’ home, haven’t yet taken root the way they have in other capitalist societies. The nuclear family is on the rise, but it is yet to become the most dominant family setup.
Our people are more likely to live on rent than put up collateral against which they can mortgage a home. The idea of losing everything you own because of a bank loan is not unique – it is a fear that many harbour.
Maria Zahid* has mixed feelings about home financing. “My family lost a home because of home loans so it’s not something that I’m in favour of. However – and that’s a big, however – I feel like this is something that people who plan their finances really well can use to their advantage,” she said.
As they look towards these options, for people financial planning may be the key factor. “In my case, my parents, and more specifically my father, were really bad at planning things financially. Someone who has a good handle of their future plans, a stable job and income, and an idea of how they are going to be saving will be able to build a home of their dreams. I personally don’t see myself ever going down this route though,” Maria added.
Fear of banks
People have reasons to fear the banking sector as well. Things are moving towards a more positive picture, but past mistakes continue to haunt the industry. In 2008, Mohammad Tufail, a 27-year old who had taken a loan that he was unable to pay, committed suicide after facing extreme harassment from his bank’s recovery department.
A rather similar story is shared by Ali Malik* who recounts, “People must avoid pledging their homes to get loans from banks. The interest factor associated with loans is haram. I got my house pledged to get a loan for my business. The end result was that I lost my house and even my business couldn’t flourish.”
Mortgage financing needs a strong demand from the economy to be able to establish itself properly. It is only by practice that the ripple effects will set in and the overall financial sector will gain firm roots.
Mortgage Finance Law
The Financial Institution (Recovery of Finance) Ordinance (FIRO) was announced in 2001 to deal with the recovery process of the bank loans and loan defaults. However, in 2013 the Supreme Court declared Section 15 (details recovery process) of this bill as against the provisions of the Constitution.
Following this, the SBP started consulting with the relevant stakeholders to frame amendments in FIRO. In consideration of the judgment of this by the Apex Court and the requirement of the Financial Institution, the Financial Institutions (Recovery of Finances) (Amendment) Bill 2016 has been drafted. The proposed amendments are meant to facilitate the recovery process of bank loans, to minimise loan defaults etc.
This smooth recovery process is targeted to foster a healthy growth in the credit culture, reduce risks of default and to create additional funds for lending to new borrowers.
Even with all the laws and institutions set up in the country to aid those in need of a loan, we still have a long way to go in ensuring the impartiality and functionality of our Ordinances. The Mortgage Finance Law exists but needs to be properly implemented.
New trends and opportunities
With the rising population in Pakistan, it is true to expect that the demand for housing will increase, simultaneously. It is expected that by the end of 2025 Pakistan will be facing a housing shortfall of 20 million residential units and that at the present rate it needs to build one million new residential units annually to keep up with the fast increasing population growth.
Data at Zameen.com shows that the demand for real estate is on the rise and the market trends necessitate the need for a strong mortgage financing sector. The report released by the SBP has revealed that by the end of this year, the Pakistan Mortgage Refinancing Company (PMRC) will be opened which will increase activity for mortgage financing locally.
According to a report published by the World Bank recently, the housing in Pakistan is at a grim 1% while that for India is 7% and that of the developed world is 50%. This highlights how far behind the country is at providing adequate facilities to its people.
Another recent report has highlighted how the share of non-performing loans in mortgage finance declined considerably in 2016, causing an overall dip of 7.07% in the NPL ratio. However, the NPL ratio for mortgage finance still remains to be the highest.
Recently, the SBP has introduced a separate set of regulations to extend housing finance. This has been done to increase mortgage finance activity in the country.
According to former SBP Deputy Governor Saeed Ahmad, around twenty-four financial institutions are presently offering housing finance in Pakistan. This seems too low a number to be considered as a positive sign but with present trends, this seems like a move in the right direction. Ahmad further said that these 24 institutions alone have caused an increase in the housing portfolio of Pakistan to Rs.58 billion, which is an increase of more than 9% in a year.
‘With the economy expanding and newer opportunities for ventures exciting the public, the implementation of these laws would account for greater proximity to a fully functioning lending sector.’
Syed Ali Imran, a corporate and investment banker from Lahore, said, “SBP’s policies and monitoring mechanism is very thorough and it has developed a directory of all relevant information of borrowers (including income streams and net expenditures etc.).”
“Even with all the right policies, House Building Finance Corporation is a policy alternative that the government needs to develop further. This should be the starting point as it will allow home loans for most of the people in lower and middle-income groups,” he added. Furthermore, he thinks that the government should provide for a subsidised rate on these loans as a way of ensuring more people are able to pay these instalments.
With the economy expanding and newer opportunities for ventures exciting the public, the implementation of these laws would account for greater proximity to a fully functioning lending sector.
*Some names have been changed for privacy and security reasons.