Subsidies Mortgage Financing in Pakistan

Despite announcing and delivering a number of residential societies for middle and lower-income class citizens by the government in last few years, the shortfall of houses has been continuously growing across the country. Majority of governing parties used to announcing countless housing projects for the underprivileged class in their respective eras and even private developers have introduced hundreds of residential societies across Pakistan but unfortunately, the gap is being constantly widened.

To curb the issue, the central bank has decided to take an effective step. The State Bank of Pakistan (SBP) is set to offer subsidized mortgage financing of up to Rs2 million to individuals and builders in Pakistan.

The news rolled out after the policy devised by central bank to overcome the growing shortfall of housing units that have touched the peak of 10 million. Yesterday, the State Bank of Pakistan (SBP) introduced the “Policy for Promotion of Low-Cost Housing Finance”, which has not yet been implemented as central bank is asking people to leave their feedback on it.

As per the policy document, “definition of low-cost housing financing in Pakistan to be adopted as loan amount is of up to Rs2 million with the property valuing up to Rs2.5 million. The maximum monthly income of a low cost housing finance borrower should be up to Rs60, 000”. It is also explained in the policy document that the central bank would provide half the loan at subsidized mark-up rate of 5%, while the remaining loan amount will be provided by the banks and development financial institutions (DFIs) at a fixed markup rate of 12% or variable rate of 1 year KIBOR plus risk premium up to 4%.

According to narration of policy paper, “The SBP will provide refinance up to Rs1 million or 50% of loan amount at a rate of 1% to banks/DFIs and the end borrower rate will be 5%. The remaining 50% of the loan/financing amount shall be provided by the banks/DFIs from their own sources at fixed rate of up to 12% or variable rate of one year KIBOR plus risk premium up to 4%.”

The loan facility will be available to every individual house borrower and developer/builder. Financing facility will also be provided through the Islamic Financial Institutions. The policy is devised seeing the market trends and demand and it aims to increase the housing finance portfolio of banks/DFIs from current Rs83 billion to Rs250 billion by June 2021, while also increasing the number of borrowers to 200,000 from the current numbers of 68,000.

Pakistan real estate experts believe that the banking sector and financial institutions can help meet the housing shortfall target but they need to soften the lending rules.

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