Research Analyst
July 30 - Aug 5, 2012

Despite the growing economic and social importance that development economists are attributing to housing finance, it remains largely underdeveloped in Pakistan. Private mortgages remain small and unaffordable. Housing finance is expensive and still rationed in favor of higher income populations.

But it also argues that the housing finance sector in Pakistan is at the tail end of the transition from being a government-dominated to a private sector led industry; that it is at the development stage where it can finally begin to realize its hitherto untapped potential.

Pakistan faces a critical shortage of housing units. Presently, it is estimated that the housing shortage in Pakistan goes up by 300,000 units every year, with the cumulative national housing backlog of at least seven million units. Yet, the State Bank of Pakistan estimates that the formal financial sector caters to only 1 per cent to 2 per cent of all housing transactions in the country. Given the burgeoning size of the Pakistani middle class - estimated to be roughly 60 million by the Pakistan Institute of Development Economics - it is surprising that the informal sector still dominates the country's housing finance overwhelmingly.

This shortage, together with the less than satisfactory conditions of existing housing facilities, contributes adversely to the quality of life of the general public, especially the urban working class.

The housing shortage is especially burdensome in urban cities and towns, where more than half of the population lives in slums or irregular settlements. In recent years, due to the high rate of economic growth and nearly quadrupling of remittances after the terrorist events of September 11, the housing sector is facing a problem of not only supply shortages but also escalating prices. Investment in housing in recent years has resulted in a higher ratio of urban property prices to purchasing power, which typically occurs in densely populated cities such as Bombay and Hong Kong. The twin problems of supply shortages and escalating prices are indicative of the fact that the housing sector is grossly underdeveloped and undercapitalized. One of the ways of improving capitalization of the sector is the provision of housing loans, thereby leveraging home ownership. However, In Pakistan, the House Building Finance Company Limited (HBFCL) is an unlisted public company and country's leading housing finance institution. HBFCL is geared up to play a pivotal role in addressing the increasing housing shortage in the country.

The government of Pakistan and SBP jointly hold the capital of HBFCL with 62.5 per cent and 37.50 per cent shares respectively. The Company has taken over all assets, running business, contracts, liabilities and proceedings of the House Building Finance Corporation (HBFC). This is the most longstanding housing finance institution in Pakistan and ranks amongst the oldest housing finance institution in the entire Asia pacific region. HBFCL is a government designated financial institution and provides financing facilities for construction, reconstruction, renovation and purchase of houses.

HBFCL has also focused on providing house financing for the housing needs of the lower and middle income socio-economic sector. To date, HBFCL has financed around 456,256 units for Rs.47.82 billion, successful recoveries of Rs.64 billion (inclusive of mark up) and has a housing portfolio of Rs.14.6 billion. At present the Company is handling over 77,666 operative accounts with a work force comprising of 951 officers and support staff. The Company operates throughout Pakistan including Azad Kashmir and Northern areas.

Approximately, 51 per cent HBFCL's clientele is of the lower income demographic with loan amount of less than Rs 100,000. Nearly 93 per cent of clients have loans below Rs 500,000 and maintain a monthly income between Rs 3,500 and Rs 5,000. Understanding that a large portion of their client base can only afford to pay installment of Rs 1,000 to Rs 1,200 per month, HBFCL has actively developed products to accommodate this market to include repayment plans over a 15 to 20 year period.

During December 31, 2011, the average loan size for HBFCL was Rs1.3 million for the same period, less than one-third of the industry-wide average. Although there is a big difference in the average loan size at HBFCL and its competitors, the overall weighted average interest rates for housing finance do not show significant variance. The highest weighted average profit rate for the quarter was reported by foreign banks (16.8%), followed by Islamic banks (16.7%), HBFCL (16%), private banks (15.8%) and public-sector banks (15.7%). At HBFCL, low- and middle-class segments refer to individuals with a fixed monthly income in the bracket of Rs 25,000 to Rs100,000 per month. They need to have a reasonable house from 80 to 400 square-yards within the range of Rs 0.4 million to Rs 2.5 million where the average monthly installment should range between Rs 2,000 and Rs 25,000.

As of March 31, 2012, HBFCL had 66,500 customers with total outstanding amount of Rs12.7 billion. The company's NPLs increased from Rs7.12 billion to Rs7.33 billion during 2011, a 2.95 per cent increase in a year.


In order to realize the potential of housing finance, policy makers, in collaboration with the private sector, need to actively address the challenges facing the sector, notably, strengthening property rights and the land development process, developing the property development framework, supporting the building industry, facilitating the development of the primary and secondary housing finance market, and introducing targeted housing finance programs. The government should seriously try to expedite implementation of the Housing Advisory Group recommendations and National Housing Policy, as 70-plus allied industries depend on the strength of housing activity.