Mort­gage - Sri Lanka

De­mand for houses in Sri Lanka is in­creas­ing and so is for mort­gage loans:

Banking Frontiers - - Contents -

Sri Lanka has a pop­u­la­tion of 21.35 mil­lion with the ur­ban share be­ing 3.87 mil­lion. It is ex­pected that this ur­ban share will grow by 3-4% an­nu­ally. With in­creased ur­ban­iza­tion and high pop­u­la­tion den­sity in cer­tain dis­tricts, the coun­try is fac­ing higher de­mand for houses and thereby hous­ing fi­nance. Sri Lanka’s hous­ing fi­nance sec­tor is cur­rently only 6.8% of its GDP. The mort­gage lend­ing mar­ket has shown growth rates of 10-20% in the past few years and while the coun­try has a sys­tem of di­rected credit with a highly seg­mented mar­ket, it is shift­ing to­ward an in­te­grated, mar­ket driven hous­ing fi­nance sys­tem. The hous­ing fi­nance mar­ket is seg­mented be­tween pri­vate com­mer­cial banks and state-owned banks while other fi­nan­cial in­sti­tu­tions too con­trib­ute in a small mea­sure. Pri­vate com­mer­cial banks have a sway over the mort­gage mar­ket share. What is sig­nif­i­cant about the coun­try is that mi­cro­fi­nance in­sti­tu­tions too of­fer mort­gage fi­nance.

Hous­ing fi­nance in the coun­try is of­ten of­fered as long-term, fixed-rate mort­gages. Some pri­vate banks are also of­fer­ing ad­justable rate loans. The State Mort­gage & In­vest­ment Bank (SMIB) and Na­tional Sav­ings Bank (NSB) of­fer 10-year fixed rate loans, while HDFC Bank of Sri Lanka of­fers fixed rate loans of 10-year du­ra­tion. As a thumb rule, for low- to mid­dle-in­come bor­row­ers, banks of­fer a max­i­mum of 40% of the debt ser­vice to in­come ra­tio, and 60% for higher in­come bor­row­ers.


The gov­ern­ment is in­volved mostly the ex­tent of fa­cil­i­tat­ing a cus­tomer ob­tain a loan un­like in some coun­tries where they act as a di­rect provider of hous­ing fi­nance. Thus, the pri­vate sec­tor has emerged as the ma­jor fund­ing provider for hous­ing fi­nance de­vel­op­ment for mid­dle- to high-in­come groups, while the gov­ern­ment and mi­cro­fi­nance in­sti­tu­tions cater to the lower in­come groups.

Sri Lanka has been see­ing in­creased de­mand for hous­ing loans. Some es­ti­mates show that the hous­ing fi­nance mar­ket has grown at a com­pound rate with the es­ca­la­tion of per capita in­come and chang­ing pat­terns of con­sump­tion and sav­ing habits. Some stud­ies in­di­cate that de­clin­ing in­ter­est rates over the past years have en­cour­aged in­vest­ments in prop­er­ties rather than in low in­come yield­ing gov­ern­ment se­cu­ri­ties and term de­posits. Sim­i­larly, rises in in­come in the pri­vate sec­tor has made hous­ing more af­ford­able. There are tax ben­e­fits for bor­row­ers. Lastly, Sri Lankan mi­grants are in­vest­ing in real es­tate in a big way as an al­ter­na­tive means of in­vest­ment.


While state-owned in­sti­tu­tions do not have a ma­jor role in the hous­ing fi­nance mar­ket in the coun­try, hous­ing de­vel­op­ment strate­gies are mainly ini­ti­ated through th­ese in­sti­tu­tions. The gov­ern­ment has a ma­jor role in cre­at­ing af­ford­able hous­ing for the low and mid­dle-in­come earn­ing groups. The pol­icy in­cludes sub­si­dized hous­ing loans, par­tic­i­pa­tory hous­ing schemes for low­in­come groups and apart­ment com­plexes in ur­ban ar­eas for mid­dle in­come groups.

NDB Hous­ing Bank, which came into ex­is­tence in 2001, is a spe­cial­ized hous­ing fi­nance in­sti­tu­tion in the pri­vate sec­tor. It is a small en­tity. There are also some mi­cro­fi­nance in­sti­tu­tions, which are now of­fer­ing hous­ing loans to their mem­bers as a part of an at­tempt to im­prove the liv­ing con­di­tions of the poor. The pro­cess­ing of loans by th­ese in­sti­tu­tions is less cum­ber­some when com­pared with that of tra­di­tional hous­ing fi­nance. The loans are avail­able on a group guar­an­tee.


Since the debt mar­ket in the coun­try is not yet ad­e­quately de­vel­oped, ac­cess to longterm funds for hous­ing fi­nance still poses dif­fi­cul­ties. Most banks use short-term funds from sav­ings and cur­rent ac­counts and de­ploy th­ese funds to dis­burse long term hous­ing loans, thereby cre­at­ing an as­set-li­a­bil­ity mis­match. Although there are no spe­cific reg­u­la­tory pro­vi­sions, the Cen­tral Bank of Sri Lanka mon­i­tors the as­set li­a­bil­ity mis­match of banks in or­der to en­sure their liq­uid­ity.


A ma­jor­ity of home loan prod­ucts of­fered by the fund­ing in­sti­tu­tions in the coun­try are stan­dard­ized in na­ture be­cause the de­mands for loan prod­ucts are al­most uni­form. Some play­ers tried to be dif­fer­ent like one in­sti­tu­tion of­fer­ing a l oan pack­age that in­cludes build­ing ma­te­ri­als at a dis­counted price. But the re­sponse has not been en­cour­ag­ing. Like­wise, the Na­tional Sav­ings Bank of­fered loans for im­prove­ment of liv­ing con­di­tions.

Loans can be availed of ei­ther on fixed or float­ing rates of in­ter­est. Most of the in­sti­tu­tions have vari­able in­ter­est rates on hous­ing loans. The in­ter­est rate is not fixed dur­ing the ten­ure of the loan. In­stead, it is bench­marked against a cer­tain in­dex. The in­ter­est rate on float­ing rate mort­gages may be re-set at pre­de­ter­mined in­ter­vals so that the in­ter­est com­po­nent ei­ther goes up or down depend­ing on the move­ments of the bench­mark rate.

Sri Lanka is one among few coun­tries where for­eign­ers can freely buy prop­er­ties, but they would be re­quired to pay the land tax for for­eign­ers, which is at 100% of the prop­erty value. They can also lease the land for 99 years, bring­ing the tax down to 7%. All prop­erty trans­ac­tions are done in cash, in ru­pee. Sri Lanka has a stamp duty sys­tem of Lankan Rs 3000 for the first Lankan Rs 100,000 of the price of the prop­erty and Lankan Rs 4000 for each ad­di­tional Lankan Rs 100,000.

Com­pact dwelling units com­ing up in Colombo

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