Housing Finance in Pakistan Syed Samar Hasnain Executive Director - Development Finance Group & Islamic Banking State Bank of Pakistan Email: samar.husnain@sbp.org.pk

Outline Basic Facts about Pakistan State of Housing sector in Pakistan Demand and Market Segmentation of Housing sector Main issues in Housing sector development State of Housing Finance in Pakistan Market participants, financing structures and quality of housing portfolio SBP initiatives to promote housing sector Challenges and opportunities Way forward

Pakistan is a medium sized, lower middle income country Some Basic Facts Pakistan is a medium sized, lower middle income country General Facts Size: 796,095 Sq. km. Nearly 200 million inhabitants 100 million inhabitants are below the age of 25 years Economic Facts Currency: Pak. Rupee. GDP: US$ 202.8 Billion in 2011 GDP Per Capita: US$ 1,145

Source: Access to Finance Survey State of Financial Exclusion The Financial Market Development Frontiers The Formally Served The Informally Served The Financially Excluded Source: Access to Finance Survey

Status of Financial Services in Pakistan Population per branch stands at 16,607 people

Source: Access to Finance Survey State of Financial Exclusion The Financial Market Development Frontiers The Formally Served The Informally Served The Financially Excluded Source: Access to Finance Survey

Key Housing Industry Issues Weak institutional support and economic fundamentals, coupled with high transaction cost, the sector faces a number of Structural Challenges Weak property rights due to inefficient legal framework and land information systems Improper implementation of foreclosure laws; outdated building and zoning regulations Embryonic property development framework Poor master planning and governance issues at national and local government levels Multiple institutions and administrative procedures Restrictive building codes Unorganized real estate agencies Unreliable utility connections Emerging building industry Lack of housing finance particularly developer finance Rising land prices and rapid urbanization

Current State of Housing sector in Pakistan There is a large and widening gap in Housing market in Pakistan World Bank estimated a shortfall of 8 million housing units in Pakistan in 2009 According to estimates the annual incremental demand is 600,000 units, of which 50% is met by the private/public investment The ever widening housing demand and supply gap requires huge investment With 600,000 incremental demand and 500,000 units from the backlog, total annual housing needs comes to 1.1 million At an average price of Rs. 3 million per unit, total funding requirement is estimated at Rs 3.3 trillion per year (around US$ 35 billion) Assuming only 10% housing needs as effective demand, total funding needs are Rs.330 billion (around US$3.5 billion) At 70% LTV (Loan–to-Value Ratio), this translates into Rs. 231 billion per annum housing credit requirement The situation is compounded by increased urbanization and changed demographics

Diversity in Housing Finance Market Financial Institutions involved in Housing Finance Commercial Banks 22 Islamic Banks 5 DFIs 2 MFBs 2 Islamic Banking Branches 7 Product Range Construction Outright Purchase Renovation

Due to structural Impediments the sector is beset with anemic growth Gross Outstanding

Mortgage Market of Pakistan Non-Performing loans

Evolution of Housing Finance Ist HFC Capacity Building of Financial Institutions HBFC National Housing Policy 2001 Islamic Banks Commercial Banks 1952 2001 1992 2007 HAG Recommendations 2004 2003 2006 2008 Infrastructure & Housing Finance Department MFBs SBP Role & Efforts The MFIs Ordinance 2001 marked the beginning of a new era in microfinance, which allowed creation of micro-banking industry in Pakistan and allowed commercialisation of microfinance. The MFIs Ordinance provides multi-institutional approach by encouraging not only setting up of new MFBs at District, Regional, Provincial, and National level with varying capital requirements, but also an opportunity to NGOs/MFIs to transform into a Microfinance Bank. International Housing Finance Conference Establishment of MRC Housing Finance Reviews 12

SBP is actively Promoting Housing Finance Formation of Housing Advisory Group Implementation of HAG recommendations Development of secondary mortgage market in Pakistan by creating a Mortgage Refinance Company (MRC) Prudential Regulations for Housing Finance Model for Builders/Developers Finance Capacity Development of Financial Institutions in housing finance through seminars, workshops and training programs Effective coordination with key Stakeholders – ABAD, AMB etc

Housing Advisory Group HAG recommendations are actively pursued by all stakeholders including SBP: Reforming Legal Framework affecting Foreclosure, Transfer, Tenancy, Rent Control and Credit bureaus etc. Rationalization of Transaction Costs Establishing an integrated land registration information system Increasing supply of land for affordable housing Structuring and streamlining Large Scale Developer’s Finance Facilitate low-cost/low-income housing models and products Facilitate Real Estate Investment Trusts (REITs) Provision of long term funding for housing loans Housing Observatory (housing market information system) Capacity building of the mortgage banking industry in Pakistan

Mortgage Refinance Company SBP is facilitating the industry to put in place the missing market infrastructure Develop the Primary Mortgage Market Provide financial resources to enable primary mortgage lenders (PMLs) to grant more loans at fixed/hybrid rates and for longer tenure Prepare PMLs for BASEL compliance by narrowing the gap between the maturity structure of the housing loans and the source of funds Ensure loan standardization across primary lending institutions which is necessary for any future securitization Develop the Capital Markets Provide more private debt securities (Bonds) with different maturities and rates for investment of surplus funds Promote ABS as a tool for raising funds from the capital markets

Large Scale Builder Finance Model Given the huge housing gap, the industry needs to find solutions for large scale developer financing particularly for the low income housing SBP has developed the financing model to facilitate large-scale builders/developers’ access to formal financial sector. Guidelines would be issued to banks/DFIs for providing financing to builders/developers Key stakeholders including the Association of the Builders and Developers (ABAD), Investment Bankers, Association of Mortgage bankers (AMB) and Rating Agency have been consulted Key challenges include: Corporatization of large-scale developers Bankable financial statements Credit rating (Entity and Instrument Ratings) Fiscal issues relating to Book Value and Market Value, declared income and wealth etc.

Major changes relate to provisioning and classification Housing Finance PRs Keeping in view peculiar nature of housing finance, there is a need to give special attention to HF PRs PRs have been revised Major changes relate to provisioning and classification General as well as specific Separation from Consumer Finance PRs

Way Forward Adopting Innovative Approaches to Affordable Housing Exploration of Credit lines for institutions offering Housing Finance Arranging a Credit Guarantee Scheme for low-Income Housing Finance Promotion of Microfinance Banks to support borrowers with undocumented income Strengthening the Regulatory Framework

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