HOUSING finance is an area that’s not being actively pursued by banks and non-banking financial institutions. Their reluctance is mainly attributed to difficulties in implementing the foreclosure law, titling issues and lack of risk-free investment avenues.

Another reason is banks’ reluctance to lend outside a few big cities. The state-run House Building Finance Corporation Ltd (HBFCL), set up in 1952, mainly survives on money borrowed from either the government or through the SBP’s credit lines.

This does not mean that the housing finance market is too small or less profitable. According to a World Bank study in 2009, there was a housing gap of around 7m units in Pakistan, with annual demand of additional 0.3m units.

Secondly, real estate businesses, housing societies, commercial plazas and Defence Housing Authorities (DHAs) are among the most profitable enterprises in the country. However, this activity is largely meant for the middle and upper classes of society, who invest their surplus funds either by purchasing a piece of land in some known housing society, or by booking a residential or commercial apartment for onward sale at a hefty profit.

In collaboration with builders, Islamic banks can offer mortgage finance products under diminishing Musharakah to the homeless

The super-rich class is also a player in this game, but in Dubai and rest of Middle East. Sometimes, efforts are made by the government to build low-cost houses for low-income groups. But owing to governance issues, such low-cost units get allotted to undeserving affluent persons. Even if some houses are allotted to poor people, they sell these for a small profit due to sheer poverty.

In the recent past, the central bank has made efforts to provide a better playing field for reluctant banks to enter this area in a big way. It includes setting up the infrastructure, housing and SME finance department in the SBP, as well as issuance of guidelines for house builders/developers, and, most importantly, making arrangements with the World Bank for establishment of a mortgage refinance company to develop a secondary market for housing.

But despite these efforts, the gross outstanding housing finance by all banks and DFIs stood at Rs 51.6bn at March 31, against Rs52.6bn by March 31, 2013, showing a decrease of Rs1bn (1.9pc) over the year.

Furthermore, the amount of loan is provided either for purchase of a residential plot or for construction of a house on an already purchased plot. Thus, there is no arrangement for low-income people to get their own shelter on monthly installments.

In advanced countries, a poor person can also own a small house by paying monthly installments; this is commonly known as mortgage financing. Under this, a small sum of money — around 5pc of the total cost — is paid at the time of purchase, whereas the remaining amount is paid in monthly installments spread over a long period of time.

This motivates a house-less person to own a house by paying installments that are almost equal to what he pays as monthly rent. A highly developed secondary market of housing finance enables the owner of a small house to switch over to a better one following an increase in his/her monthly income.

Meanwhile, strong foreclosure laws enable banks and DFIs to recover their loan by auctioning the house in case of default. The main job of a banker in these countries is to find people without houses or those who are living in rented premises and offer them proposals consistent with their incomes. With a rise in income, the bank manager can approach the same person with a proposal of a better house against slightly higher, but still affordable, monthly installments.

In Pakistan, there is no likelihood of such housing finance in the near future, except for the tiny hope offered by diminishing Musharakah products of Islamic banks, which are largely meant for housing finance.

According to this concept, a financier and his client participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units. It is understood that the client will periodically purchase these units one-by-one, thus increasing his own share, until the financier’s entire units have been purchased by the client so as to make him the sole owner of the property.

Islamic banks, in collaboration with recognised house builders and developers, may offer products on the pattern of western mortgage finance under diminishing Musharakah, enabling homeless poor people to own a small house after 10 to 15 years.

According to a recently conducted survey on Islamic banking by the SBP, “there is an overwhelming demand for Islamic banking in the country that is evenly distributed among rural and urban areas, varied income strata and education levels”.

The writer is President of the Institute of Banking and Business Learning Lahore

munir1951@hotmail.com