Bank lending for affordable housing gains momentum

With the full support of the government and many initiatives of the State Bank of Pakistan, bank funding for the government's flagship markup subsidy scheme e.g. Mera Pakistan Mera Ghar (MPMG), has increased.

Banks have authorized about Rs 59 billion in housing loans under the MPMG scheme since its launch. Disbursement under MPMG, which was initially delayed due to variables such as housing availability, has also increased up. By August 31, 2021, the scheme had disbursed Rs 11.5 billion, an increase of Rs 3.8 billion or 49% (Charts 1a - 1c).

Meanwhile, The State Bank of Pakistan has allowed buyers to get bank financing for under-construction housing units aiming to bring about growth in the construction and housing sector in line with the government's policy.

"To facilitate buyers of under construction housing units in obtaining housing finance, the central bank has issued guidelines to banks and DFIs that allow them to extend loans for under-construction projects," said the SBP on Thursday.

The SBP said that currently banks are reluctant to provide such financing which limits the options of home buyers that need financing to complete units. "The SBP's new guidelines provide a complete framework with necessary risk mitigation elements for the banking industry to support this area of housing financing," it added.

Essentially, the financing risk of banks will be secured through mortgage of project land based on specific arrangements with builders.

"The payments to builders will be routed through a specially created account (known as an escrow account) with no direct access to the seller until completion of construction milestones as agreed between financing banks and builders," said the SBP.

The purchasers of housing units availing finance will be able to enjoy a number of benefits, said the SBP, adding that the purchasers will get housing units in under-construction projects which are relatively low-cost compared to fully constructed units. The strong monitoring and oversight by the banks will facilitate timely completion and transfer of possession to the purchasers while housing units are new. The purchasers may bear lower maintenance and renovation costs for initial few years.

"These benefits are expected to create incentives for buying underconstruction houses creating demand for the construction industry," said the SBP. Banks are reluctant to offer finance for purchase of housing units in under-construction projects as compared to completed projects.

The prevalent market practices is that builders allow the purchasers of housing units to make periodic payments when construction begins against allotment letters which is a convenient process in enabling home ownership.

However, banks do not provide housing finance against allotment letters. As a result, buyers are deprived of the opportunity to avail housing finance from banks and hence owning affordable housing units in the underconstruction phase of projects.