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Demand for housing finance is on the rise but financial institutions are reluctant. While high interest rate is a serious issue, absence of clean title has emerged the biggest hurdle. People belonging to middle and lower middle class desperately need financing facility due to the rising cost of construction but HBFC, the only specialized financial institutions seems incapable of meeting the demand. As a result 'katchi abadies are proliferating, under the protection of 'land mafia'. Proliferation of these dwellings give birth to many problems that include, non-availability of clean drinking water and disposal of effluent, limit availability of electricity and gas availability and also cause acute shortage of public transport. These abadies have also become 'sanctuaries' for criminals and resident of areas are often used as human shield.

Despite fully cognizant of the importance of construction industry, the government has been failing in providing any impetus to the industry that drives nearly 60 different industries. One can see skyscrapers condominiums being constructed in Karachi but construction of low cost housing schemes are visible by their absence. There is a mushroom growth of katchi abadies. It is a fact that low cost housing units can't be constructed without the help of the government. In the past the government used to provide land at concessional price and also extend mortgage financing. However, it has been a long time that any such low cost schemes have been implemented.

According to State Bank of Pakistan (SBP) total sum of around Rs1.6 billion was disbursed among 766 under housing finance as fresh disbursements during January-March quarter of 2012. According to the details private banks extended Rs888 million followed by Islamic banks with Rs407 million, public sector banks with Rs15 million and foreign banks with Rs6 million. HBFC's fresh disbursements amounted to Rs296 million.

Among commercial banks, the number of new borrowers totaled 400, with private banks serving 290 borrowers and Islamic banks 98 customers. HBFC extended loans to 366 as fresh lending. Fresh disbursement by Islamic banking was Rs717 million among 141 new borrowers during the quarter that included new disbursements of Rs310 million to 43 customers by Islamic banking branches of conventional banks.

The average loan size of HBFC is reported to be Rs2.1 million. Private Banks reported an average financing size of Rs4.2 million, foreign banks as well as Islamic Banks Rs3.7 million, public sector banks 2.1 million. The housing finance market is still inclined towards lending to high income groups.

Cognizant of the importance of housing sector in boosting the domestic economy, a number of initiatives have been taken by SBP to further strengthen market based mechanisms and enhance the flow of credit to this priority sector. The SBP had established a Housing Advisory Group (HAG) with an intention to conduct a thorough analysis of the existing regulatory and policy framework affecting housing finance.

The HAG made number of recommendations stressing on the need to enhance access of financial services for the development of housing sector. These include reforms in legal and regulatory framework, establishment of secondary mortgage market, development of market intelligence, provision of affordable/low income housing finance products.

It can be said that the financial institutions are not keen in extending housing finance and borrowers are not willing to pay compound interest. The above stated numbers also show that a few loans are extended only to complete requirement of regulators. Lack of clean title is said to be the mother of all evils. In Karachi open plots and apartments mainly being sold/purchased with out clean title. The two most known examples are DHA plots and Askari Apartments. Since the original allottees are not allowed to sell these for a stipulated period, neither the sale deeds are registered nor the mutations completed. In such a scenario financial institutions are not interested in extending housing finance facilities.

It is beyond any doubt that HBFC can't meet the credit demand and housing finance is not a function of commercial banks, mismatch in deposit and lending maturities. It is on record that over 90 per cent of total deposits have less than one year maturity, whereas average tenure of housing finance is around. Ideally, the Government of Pakistan should have solicited soft-term loans with the international donors and the average lending rate have not been more than 5 per cent. Since commercial banks enjoy spread of around 7.5 per cent, in no way they should be interested in disbursing housing finance.

While it is true that high lending rate is a stumbling block, there is also a need to bring down cost of construction. Apart from high cost of land, persistent increase in cement and steel prices are the two serious impediments. Both the industries can be termed inefficient and victim of exorbitant financial cost. Pakistan Steel Mills can at the best meet 30% of steel requirement and after the collapse of ship breaking industry in Pakistan, rerolling mils are operating at dismal capacity utilization.

Cement industry has survived only because of presence of a strong cartel. While allocation of production quotas among the members may help in keeping average capacity utilization high, the ultimate sufferers are cement consumers. Almost all the cement manufacturing units suffer from high financial cost. It is true that after privatization of state owned cement manufacturing units industry has witnessed massive capacity addition but most of the expansion work has been done on borrowed money.

It is believed that if cost audit of cement manufacturing units, along with financial audit is made mandatory, reduction in cost of manufacturing may also be possible. Over the years cement industry has gradually switched over to coal from furnace oil and gas, it mostly uses imported coal. Pakistan has huge coal reserves by these have not been utilized in any significant manner. Lately, cement manufacturers have started using used tires as fuel. They may succeed in containing cost of production but will add huge pollution.
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Publication:Pakistan & Gulf Economist
Date:Aug 5, 2012

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