Great demand, offers great potential of investment for the local banks

Sep 08 - 14, 2003

Pakistan reels from an acute shortage of housing units and the gap between demand and supply is on a constant increase by each passing year. Less than 300,000 housing units of all sizes and descriptions are built in the country each year enough only to satiate less than 60 per cent of the demand. The gap between the availability of housing units and their demand is thus rising steadily every year.

Like many other developing countries the rising prices of property and construction materials such as cement, iron, wood, etc., and labour on the one hand and the shrinking savings on the other has pushed the prices of housing units out of reach of the people. Particularly hit are the middle-income and salaried segments of the society which have found it harder and harder to buy a place of their own in a culture where cash still remains the preferred means of financial transactions.

Housing finance has remained an alien concept to the financial institutions and has never been accorded the priority that it deserves. Housing loans make up a negligible portion of banks and other financial institutions though a beginning was made by foreign banks years ago. However, due to obvious reasons the schemes offered no relief to ordinary buyers due to strict requirements. The schemes aimed at the affluent segments of the society did not make the least impact in the mainstream of the society.

On the other bank, the public sector House Building Finance Corporation did act as the sole housing lender but it can do only so much. However, it is evident that the house financing needs of a country populated by 140 million people can hardly be expected to be met by a sole lender. In fact, the HBFC was able to meet just a negligible portion of the demand for the house financing in the country. Despite its limitations the HBFC played a significant role to provide house financing in the mainstream. It is unfortunate, however, that the incessantly rising demand and the resultant growing gap was filled by a group of entrepreneurs who saw it fit to develop housing projects, both houses and apartments, not from their own finances but by 'selling' units by collecting monies in advance.

What passes for construction industry in Pakistan is actually nothing more than a rip-off. Where else a builder can get away with getting fully paid in advance for a housing unit to be delivered on a promised date years after the booking? Stories of buyers getting deprived of their hard-earned monies are all too uncommon. In most cases buyers were made to wait years beyond promised delivery dates and were asked to pay extra monies for this or that to acquire the possession. These and other such unethical practices became more a rule than an exception and were carried on with complete impunity.

One of the primary reasons of the immense housing shortfall can be attributed to absence of housing financing and the priority accorded to it by the financial institutions in Pakistan. Just how important a role the housing finance has been playing in the developed economies is evident from the fact that it makes up over half of all loans in the US and over one-third of all credits in Europe.

However, the officially patronised National Bank of Pakistan has taken an initiative to introduce a financing scheme to build, buy or renovate a house. "Saibaan", meaning 'shelter' in Urdu, is the first scheme aimed at providing to people in the mainstream of the society. For the first time a person with even a low salary of Rs.5,000 and above per month would be able to get a housing loan from a scheduled bank.

The NBP would be launching the scheme on the 14th of this month to coincide with the 56th Independence Day. The bank is planning to disburse Rs 40 billion to help mitigate the severe housing problem in the country. It would also help the bank to utilise enormous funds in a project which is virgin as far as commercial banks and other related financial institutions are concerned.

House financing in such a virgin market, and with such a great demand, offers great potential of investment for the local banks. As is, the banks enjoying liquidity like never before have found consumer financing a lucrative business so much so that the leasing companies and Modarabas now complain that such forays deprive them of level playing fields. Today, both domestic and foreign banks have offering a range of personal and consumer loans for leisure travel, advance salary, electronics goods, cars, etc., etc.

The competition has helped lower the interest rates to as low as 9 per cent for buying of a new car. The housing scheme announced by the NBP would help encourage nationalised and private local banks to diversify their portfolio beyond the traditional. It would also help give a boost to what passes for construction industry here in Pakistan.