PRIME MINISTER Imran Khan’s directions to the State Bank and the state-owned National Bank to ‘facilitate’ people seeking low-cost, subsidised home loans under his Naya Pakistan Housing Programme reflect the slower-than-expected pickup of mortgage financing in the country. Addressing a telethon on Sunday, the premier also instructed the central bank to push commercial banks to ease housing loan processes. What does all this signify?

For starters, it underlines the government’s concern about the slow uptake in housing loans, and the fact that aspiring homeowners are facing difficulties in securing bank financing. Second, it shows that the central bank could now put more pressure on unwilling commercial banks to speed up the processing of loan applications. By doing so, banks would be forced to go for riskier lending in spite of repeated assertions by the central bankers that the State Bank would merely be refinancing loans to expand the mortgage industry and that credit-risk decisions would be taken by the lenders. Still, commercial banks are reluctant to give housing loans as they believe that expanding the mortgage industry is not possible without a strong foreclosure law that lets them repossess the property in case of default on repayment.

The government has time and again promised to improve the foreclosure laws but hasn’t done anything about it. Third, it implies that the government may ask NBP to pursue a more liberal mortgage policy to make up for the reluctance of private banks. That will be disastrous for the bank’s balance sheet. We still remember the yellow cab scheme launched by the PML-N government in the 1990s.

A World Bank estimate says the total national housing deficit is over 10m units, with the gap increasing by 350,000 units annually. The incremental deficit is estimated to rise to 400,000 units. Some believe that an increase in housing and construction pushes growth in 30 to 40 related industries in the economy. One estimate indicates that an increase of 100,000 in housing units in one year contributes to up to 2pc of GDP. Besides, the provision of housing to people significantly cuts health and other economic and social costs imposed by informal urban settlements.

But the development of housing depends largely on a vibrant mortgage market, which is virtually nonexistent here. Most countries that have overcome their housing deficit have done so by creating a functioning mortgage industry and offering ordinary people a range of borrowing options to purchase or build a house. Although the State Bank has taken some important initiatives to encourage banks to extend home loans to support the government’s housing and construction industry, the banks remain reluctant. The housing initiative will not take off in a big way until we have a viable mortgage industry. That, in turn, will remain a pipe dream as long as the government does not strengthen recovery laws to protect the banks from potential losses.

Published in Dawn, March 30th, 2021