Agriculture and housing loans — along with micro, small and medium enterprises (MSME) finance — are vital for boosting economic activity. And, if banks start lending more to all the three sectors at the same time, that almost guarantees accelerated GDP growth in the short-to-medium term.

Currently, though, banks are not wholesomely engaged in such an exercise. But the government and the State Bank of Pakistan (SBP) are trying to promote just that. Policies introduced for accelerating housing loans offer an added advantage to the government — they make room for politically-motivated tax amnesty in the name of the documentation of the economy. The ongoing Naya Pakistan Housing Programme (NPHP) is no exception.

Regardless of the fact that this is opening yet another avenue under this programme for the whitening of tax-evaded money, housing loans being offered under NPHP are quite promising. Already, they have reactivated the real estate and building construction sector and continue to enliven demand for outputs of dozens of allied industries and services sub-sectors. Their impact on the overall economy (rebased to 2015-16) is already being felt and is sure to become more and more pronounced with the passage of time. That is if future governments let the programme continue in its current form and spirit.

The euphoric demand for housing finance and liberal supply of loans remains subject to ground reality checks after the expiry of the tax amnesty scheme

Within seven months of this fiscal year (ie between July 2021 and Jan 2022), banks disbursed fresh consumers loans of Rs47.6 billion for the construction of buildings. In addition to this, they also disbursed Rs11.8bn loans to their employees for the same purpose.

Thus, overall lending for construction of buildings in the first seven months of this fiscal year totalled Rs59.4bn, the latest SBP stats reveal. During the same period of the last fiscal year, total lending for housing buildings was too small — Rs7.9bn for general consumers and Rs22bn for bank employees or a total of Rs29.9bn!

The demand for housing finance remained strong right from the beginning of this fiscal year partly because builders were using tax-evaded money for launching new housing projects following extension in the tax amnesty scheme. Partly, higher economic growth in 2021-21 compared to that of 2019-20 also motivated people to take advantage of the Naya Pakistan Housing Programme made easier this year — and apply for housing loans.

So, the volumes of housing finance offered so far could have been larger had banks been able to process loans applications a bit more speedily. The PTI government, challenged on all fronts and struggling for its survival, is pushing banks to their limits through the central bank to accelerate the disbursement of housing loans. So, one can hope that the volumes of fresh housing loans would grow even faster in near future, more so because the “no-question asked” status of the investment coming into this sector has been extended — once again — to the end of FY22 in June.

The overall lending for construction of buildings in the first seven months of this fiscal year totalled Rs59.4bn while during the same period last fiscal year, total lending for housing buildings was Rs7.9bn for general consumers and Rs22bn for bank employees or a total of Rs29.9bn

Growth in housing finance and underlying expansion in construction activities continue to fuel growth in allied sectors as well. During July-Dec 2021, manufacturing of iron and steel grew by 18.4 per cent, whereas in the same period of 2020 this sub-sector of large-scale manufacturing had contracted by 12.1pc, according to the Pakistan Bureau of Statistics.

Monthly cement production which was below 3.7 million tonnes in July 2021 gradually picked up and peaked at 4.48m tonnes in October before coming down to 4.3m tonnes and 4m tonnes in November and December respectively, due to a dramatic rise in the cost of production of coal-fired cement plants after skyrocketing of coal prices in international markets — and not due to slackness in demand.

To meet the increasing demand for housing finance, and particularly to meet the demand for low-cost housing, the SBP has now eased prudential regulations of microfinance banks. “The changes made in the prudential regulations include additional guidance on property assessment, mortgage creation and risk management,” the central bank announced on March 16. By end of 2021, total lending already made in the housing sector stood at Rs20bn — the number of beneficiaries was 75,000, an SBP press release said.

Moving forward, accelerated disbursement of housing finance through microfinance banks can be expected to boost volumes of financing and enhance the number of loan takers. But whether microfinance loans for housing can actually lead to the construction of new low-cost housing units is doubtful. These loans are likely to end up for purchasing already constructed flats and one-unit residential units or for the renovation of existing houses and apartments.

The current euphoric demand for housing finance from commercial banks and an equally liberal supply of housing loans remain subject to ground reality checks after the expiry of the tax amnesty scheme in June. If tax amnesty for investment in the housing sector is allowed to expire on time — and not extended any further — construction of new houses and apartments may come to a halt. But that perhaps doesn’t bother the government.

Another worrisome aspect of the housing finance euphoria is that banks are offering housing loans to their employees, particularly senior executives, a bit too liberally. The central bank needs to watch mortgage finance to bank employees closely to ward off any possible development of banks-builders nexus. Powerful builders particularly those with strong links with politicians and the establishment have successfully circumvented banking and environmental laws in the past for the construction of prized projects both in Karachi and Islamabad. Some of them still continue to do this.

While making more housing loans, banks must also focus on ensuring their sustainability in terms of market risks and the risk of defaults.

Published in Dawn, The Business and Finance Weekly, March 21st, 2022