Syed Samar Hasnain

Executive Director - Development Finance Group & Islamic Banking State Bank of PakistanEmail: samar.husnain@sbp.org.pk

Housing Finance in Pakistan

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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 Pakistano Market participants, financing structures and quality of housing portfolio

SBP initiatives to promote housing sector

Challenges and opportunities

Way forward

Outline

Pakistan is a medium sized, lower middle income country

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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

Some Basic Facts

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Source: Access to Finance Survey

The Formally Served

The Financially Excluded

The Financial Market Development Frontiers

The Informally Served

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

11% 1% 32% 56%

%

State of Financial Exclusion

Population per branch stands at 16,607 people

Status of Financial Services in Pakistan

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Source: Access to Finance Survey

The Formally Served

The Financially Excluded

The Financial Market Development Frontiers

The Informally Served

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

11% 1% 32% 56%

%

State of Financial Exclusion

• 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• Improper implementation of foreclosure laws; outdated building and zoning regulations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 frameworko Poor master planning and governance issues at national

and local government levelso Multiple institutions and administrative procedureso 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

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Weak institutional support and economic fundamentals, coupled with high transaction cost, the sector faces a number of Structural Challenges

Key Housing Industry Issues

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

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Current State of Housing sector in Pakistan

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• 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

Diversity in Housing Finance Market

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2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

90

76

84

77

67

5955

5154

6467

61

53

4642

35

41

1217 16

14 13 13 1213

Total Gross Outstanding (Rs Billion) Gross Outstanding (Rs Billion) - Share of All Banks & Other DFIs Gross Outstanding (Rs Billion) - Share of HBFC

Rs. B

illio

n

Gross Outstanding

Due to structural Impediments the sector is beset with anemic growth

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2008 2009 2010 2011 2012 2013 20140

5

10

15

20

25

12

16

19 19 19

16 16

6

9

11 1211

9 9

6 77 7

87

6

Non-Performing Loans (Rs Billion) Share of All Banks & Other DFIs (Rs Billion) Share of HBFC (Rs Billion)

Rs. B

illio

n

Non-Performing loans

Mortgage Market of Pakistan

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Ist HFC

Capacity Building of Financial Institutions

HBFC National Housing Policy 2001

Islamic Banks

Commercial Banks

1952 2001

1992

2007

SBP Role & Efforts

2003

2004

HAG Recommendations

2006

Infrastructure & Housing Finance Department MFBs

2008

International Housing Finance Conference

Establishment of MRC Housing Finance Reviews

Evolution of Housing Finance

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• 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

SBP is actively Promoting Housing Finance

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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

Housing Advisory Group

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• Develop the Primary Mortgage Marketo Provide financial resources to enable primary mortgage lenders

(PMLs) to grant more loans at fixed/hybrid rates and for longer tenure

o Prepare PMLs for BASEL compliance by narrowing the gap between the maturity structure of the housing loans and the source of funds

o Ensure loan standardization across primary lending institutions which is necessary for any future securitization

• Develop the Capital Markets o Provide more private debt securities (Bonds) with different

maturities and rates for investment of surplus funds o Promote ABS as a tool for raising funds from the capital markets

SBP is facilitating the industry to put in place the missing market infrastructure

Mortgage Refinance Company

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• 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:o Corporatization of large-scale developerso Bankable financial statementso Credit rating (Entity and Instrument Ratings)o Fiscal issues relating to Book Value and Market Value, declared

income and wealth etc.

Given the huge housing gap, the industry needs to find solutions for large scale developer financing particularly for the low income housing

Large Scale Builder Finance Model

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• PRs have been revisedMajor changes relate to provisioning and

classificationo General as well as specific

Separation from Consumer Finance PRs

Keeping in view peculiar nature of housing finance, there is a need to give special attention to HF PRs

Housing Finance PRs

• 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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Way Forward

Thank You