The SBP is urged to take steps to end 'discrimination' in the provision of housing finance to certain segments of society

Dec 29 - Jan 04, 2003

According to press reports, some of the nationalized and private banks have placed the journalists, the policemen and the lawyers on negative list of their housing loan operations. It has also been reported that some of these banks discourage housing credit for certain areas in Karachi including Nazimabad, Malir, Liaquatabad, Gulzar-i-Hijri Scheme and Orangi. It is said that these restrictions are not official but are being practiced. The financing operations by the banks generally are non-discriminatory. The banks have started housing finance/mortgage finance only recently. It is unbelievable that in such a short time these banks would have cogent reasons for restricting housing finance to the three groups of people or the specified areas.

The three groups reported to be discouraged from availing housing finance have distinct functions; though they might have among them certain common traits. The police personnel are government employees responsible for maintaining law and order; security and investigation of crimes. The journalists are mostly employed by the private sector publishers of newspapers or periodicals. They report on what is happening in the society and comment on performance of various functionaries and institutions. The lawyers generally plead cases on behalf of their clients. In that capacity they are working in the private sector and are considered experts in their own area of specialization. The judges of various courts are generally selected from the fraternity of lawyers. In their capacity as judges they are public functionaries and provide justice to the down-trodden. Thus, the three groups are important organs of society. As regards 'discrimination', it could be that the banks had bad experience with one or more members form these groups or a few people belong to the specified areas. Possibly, the incidents were blown out of proportion. Reportedly, this 'discrimination' has been brought to the attention of the State Bank of Pakistan (SBP). However, to streamline things, the issues might be studied in depth by the authorities/stakeholders for remedial steps.

According to a press report of July 2003, about 20% of the police force in Karachi had been provided accommodation, of which about 11% was for families. Official accommodation is available only during government service to the few lucky ones. The rest of the 80% personnel are obliged to rent accommodation, until some of them find resources to build or buy their own houses. Lack of suitable accommodation for most of the force could be one of the reasons that at times there are lapses in their performance. The police force has no 9 am to 5 pm routine as is the case for most other employees. To improve housing situation, the government might build more official accommodation for the police force on land already owned by it. Alternately, the government might consider allotting suitable plots of land to these employees on ownership basis for building own houses. Banks and HBFC might develop special products to meet cost of construction.

The Punjab Chief Minister on 12th November reportedly said that the plan to provide houses to government employees upon their retirement had been finalized, and it would be implemented from Lahore with the development of a housing colony on the already acquired land, for completion within a year. It was also said that land for such colonies had also been acquired in some other cities, for development in the next phase. The Punjab government will be creating an autonomous Government Employees' Housing Authority for the purpose. The governments of other provinces might consider similar steps for supply of housing units to the employees including the police force during active service or upon their retirement.

One reason for the 'discrimination' could be that these groups were rich and needed no financing from the banks. But then the banks mostly lend to those who already have lot of money and could easily do without borrowings. The banks might, as they often do, provide housing finance to the few resourceful against lien on cash deposits. For housing finance to the rest, the banks shall have to devise different procedures against other securities. Majority of the people in the police force are constables and junior ranks.

Same is probably the cases with majority of the people attached to journalism. The government has in the past provided plots of land in different cities to some of the journalists.

Large sections of the lawyers, at least in initial years of legal practice, earn only enough to feed the family. Major portion of their pay might be used up by the monthly rent payments. None of these people are thought to be in a position to save enough from their meager salaries for buying a house using hard cash.

Discouraging such people from housing finance will only add to their problems, with possible consequences for other members of society. The families of these groups also deserve to live in their own houses. They might be able to meet the criteria prescribed by the banks as their requirements in most cases will be modest. Their debt servicing capability or exposure limit could be determined from their salary slips or income tax/wealth tax statements, in case they fall in that category.

It is not clear if the banks had actual experience of bad loans with these groups or areas; or they adopted these measures as a precaution. Even if the banks had bad experience, one could argue that why stop lending to these groups or areas when the banks have not stopped financing loans to the industry and businesses despite huge non-performing loans. The banks might revise their lending strategy to squarely meet the challenges and offer a fighting chance to these people of building their own houses.

One probable reason why the banks are avoiding certain areas could be low rent of residential property. In many housing finance cases, monthly rent is shared between the bank and that of the house owner, in proportion to their investment. In case the property is developed in an area where rents are relatively low, the yield to the banks will be lower and thus unattractive. It could be said that same loan amount if used for building a house in a posh area, potential rent will be higher and thus promise higher return to the banks. However, it is not that simple; in posh areas the cost of land will be higher and so would the cost of construction. Though, the rent sharing ratio might change in posh areas. In case of problems in loan servicing, the properties in posh areas could be disposed off easily as compared to the ones in less attractive areas of the city. In stead of putting an informal ban on housing finance for relatively less attractive areas, the banks might develop appropriate products to cover their potential losses, if any.

The foreign banks have few branches in relatively unattractive areas. The borrowers might consider approaching the banks having branches in these areas. These banks would have better appreciation of the property market as well as the level of rents. Chances are these banks would be more accommodating. Alternately, the borrowers might approach HBFC, which originally financed many houses in these areas. HBFC was initially set up for housing loans in Karachi, and later its role was extended to other areas in the country. The SBP might consider assigning financing of small and medium houses to HBFC which liquidity-wise is not as comfortable as the banks. Larger houses could be financed by the banks.

The issue can also be looked from a different perspective. Assuming the unofficial restriction is declared formal in that case who would be the losers? The good people who form the majority in all these three groups would suffer. Why should they be placed at a disadvantage for being straight and honest? As such, it is suggested that the 'discrimination' issue is considered by the authorities at an early date.

One reason, though far-fetched, could be that the people in the three groups will not readily accept 'unreasonable' terms and conditions of the loans or the way loan cases are processed in the banks or how the loan/security documents are drafted. These people being exposed to the law/legal procedures would naturally not easily accept what is considered 'unreasonable'. They will argue their cases and, if need be, approach higher authorities to get their genuine grievances redressed. Most banks are maintaining legal departments comprising experienced lawyers, supported by practicing lawyers and therefore they should not hesitate to do business with the educated and informed customers. The banks should adopt truth in lending, and as suggested by the SBP, publish pamphlets on loan policies/conditions for benefits of all their customers.

Nazimabad, Malir and Liaquatabad are relatively old localities of middle and lower middle class people to whom land and built-up houses/living quarters were once provided by the government. Many people who were once residing in these areas have with the change in fortune moved to the posh localities like Defense Housing Authority. Perception of the general law and order in these areas might not be as good as in DHA. Yet, many middle-class people including government employees, traders and businessmen still find life in these areas peaceful and attractive. They might be wishing to re-build the houses or converting single-family houses to multi-family accommodation. To my thinking, these areas have good appetite for large number of relatively smaller loans. Instead of ignoring these areas, it would be better if new housing finance products specifically for these areas are marketed by the banks and HBFC.

The banking sector has mobilized savings from small depositors but it has not correspondingly met their credit needs. Housing market in Pakistan has big potential but it has not flourished fully due to non-availability of adequate finance. The SBP has since addressed this issue and created a Housing Finance Window. In order to make its initiative a success, the SBP is urged to take steps to end 'discrimination' in the provision of housing finance to certain segments of society as well as the city areas that are not perceived as posh.