Dr. Ishrat Hussain exhorted the Banks and financial institutions to extend optimum credit support



Dec 23 - 29, 2002

Opening a two-day conference on "Housing & Finance" organised by the State Bank of Pakistan in collaboration with the World Bank in Karachi last week PM's Advisor on Finance Mr. Shaukat Aziz said that the housing sector, with enormous potential for growth, creating jobs and generating economic activities in above 40 allied industries offered huge opportunities for banking and financial institutions for long term investment and sustainable growth.

Both Shaukat Aziz and Governor State Bank, Dr. Ishrat Hussain exhorted the Banks and financial institutions to extend optimum credit support to the country's credit starved housing and construction industry and make use of their surplus liquidity by investing in a comparatively safer sector. Describing it as a mother of all industries, Mr. Shaukat Aziz rightly pointed out that this sector had the inherent potential of providing sustenance to a whole range of products from a cement to ceramics and from iron and steel to sanitary products besides covering a wide range of occupations including masonry and civil engineering. A labour intensive in almost all its department it can absorb a sizeable section of surplus manpower.

Mr. Shaukat Aziz regretted that such an important sector of industry remained neglected for a long time. He said that low cost housing was a major need in Pakistan, both in rural and urban areas. A hybrid of micro and housing finance can meet unfulfilled needs of a major segment of our society. He pointed out that according to 1998 Population and Housing Census of Pakistan, there were over 19.3 million housing units in the country, of which 67.7 per cent were in rural areas and 32.3 per cent in urban areas. In order to make up the backlog and meet the shortfall in next 20 years, the overall housing construction has to be raised to 500,000 housing units per annum. This is the extent of annual housing market in Pakistan. "It provides enormous opportunities to our commercial banks or devise products to finance construction of at least 500,000 housing units per annum for the next 20 years," Shaukat said.

He said there is a huge backlog of housing units in the country: "If we take the average cost at Rs.500,000 (a very conservative figure), and 50 per cent self-financing ratio, the total demand for housing finance is close to Rs.68 billion against the current supply of close to Rs.3-4 billion. Thus, there is a vast scope for a quantum leap in the housing finance business", Aziz said.

"Gone are the days of plain vanilla deposit mobilisation and lending to large borrowers or investing in government papers. Banks will have to change to ensure continued profitability and positive margins. In addition to reducing cost of intermediation, banks have to look for new attractive and prudent avenues for lending," he said adding that very attractive feature of housing sector is that private sector is its leader and possessed that required expertise to develop it further. Fortunately, the general conditions of construction industry. "The country has a very stable macroeconomic environment, reducing debt burden, low inflation, better fiscal balance and a strong foreign exchanges reserves position. These factors, along with political stability, will generate the right kind of environment for construction industry", he said.

He pointed out that a major area that has unfortunately and seriously lagged behind is the housing finance, which is a critical input required for promoting construction industry. By any yardstick the house finance sector is highly underdeveloped. In developed countries, on an average, housing finance (outstanding stock) represents over 25 per cent of GDP (US, 53 per cent, European Union, 36 per cent). In contrast, the number for Pakistan is hardly 1 per cent.

National Housing Policy has been adopted defining a national strategy for the development of housing sector as well as various required policy measures to address related core issues including land availability, registration of property rights and their hassle-free transferability, streamlining and modernisation of the construction and real estate markets, and meeting the needs of low-cost and rural housing, Shaukat Aziz said.

Adding that, tax incentives have been provided to home owners in the form of tax deductibility of mark-ups (upto Rs.100,000 per annum) on home loans.

The legal framework for the loan recovery of financial institutions has been further streamlined and strengthened through promulgation of Financial Institutions (Recovery of Finances) Ordinance, 2001; and through a more effective macroeconomic management the government has succeeded in reducing the general interest rates in the country. This will provide an opportunity for banks and other financial institutions to provide guidelines for banking companies to undertake asset securitisation, increased the lending limit for such loans to Rs.5 million and allowed banks to issue long-term debts to facilitate financing of housing loans.

There can be no denying the urgency of revival of the housing and construction industry, which has been hit the hardest during the recent years of economic stagnation. For the setback to this industry from a combination of factors has infected other areas of economic activity, too. In fact, housing activity is incomprehensible in times of recession, which leave little surplus in the hands of the people to improve their living standard, among other things, from owning a house to live in.

The process of reforms during the three years of General Musharraf's military-led government, as also encompassing the financial sector, has certainly resulted in laying the foundations of clean and healthy banking, from elimination of obsolete practices and guiding them on to the modern methods of banking. The ground rules have been laid, thereby opening the doors to better and more profitable areas of financing. Mention, in this regard, may specially be made of freeing the system of excessive control and encouraging the banks to interact with the private enterprises in the best traditions of the advanced economics. In principle, this should spur enough enthusiasm among the banks to increase their involvement in the activities of the private sector, which has been assigned the lead role in the country's all round economic effort. It will however, be noted that having learned to survive the worst times in the long periods of depression of the private sector, the banks continue to ensure enough profit from investment in Government treasury bills and innovations in the service sector, instead of risking the depositors money in loaning operations. Taking a due note of this agonising tendency, SBP Governor has continued advising the banks to revert to loaning operations in the private-sector, while offering newer incentives for the purpose. His address to the conference echoed the views and optimism for revival of hitherto neglected housing sector.

For evidently inspired by the tremendous potential of the housing and construction industry and encouraged by the reforms in the financial institutions, liberalisation of financial markets, introduction of financial engineering and new products and services, etc., he saw immense possibilities of this vital sector staging a big revival. Pointing out that the financial system has acquired enough strength and pace to diversify and branch into new areas, he explained that this was the purpose behind the convening of the conference itself. And this he rightly attributed to the emergence of competitive forces, reduction in borrowing by the government lower interest rates, swelling of rupee deposits, increased inflows of remittances, thereby increasing supply of loanable funds with the banking system. All these put together can certainly provide a strong fillip to the National Housing Construction Industry.