Analysis of Mortgage Industry in Pakistan

By Faheem Aslam (2011750729) ______________________________________________________________________________ Introduction Rapid urbanization has become a common phenomenon for developing countries across the globe. According to the UN-Habitat, half of humanity now lives in cities, and that the urban population will increase to 60% within next two decades. In Pakistan, rapid urbanization has become a challenge for increasing number of people. Lack of finance from a formal source is primarily a supply-side problem. Most of the housing finance is arranged through personal resources. The formal financial sector caters to only 1 to 2 percent of all housing transactions in the country, whereas the informal lending caters up to 10-12% of such transactions. The Government of Pakistan in its Medium Term Development Framework has recognized Housing and Construction as priority sectors that pose substantial potential for employment generation for the poor segments of the society. 1 Within the housing and construction sector in Pakistan, nearly 40 industries are linked, thus providing substantial additional employment opportunities by contributing through a higher multiplier effect with a host of beneficial forward and backward linkages in the economy. With high employment opportunities and growth rate, the Government of Pakistan stipulates that increasing the housing supply can not only reduce the housing shortages, but also give a boost to the 40 allied industries linked with it.2 The need for the government and financial institutions to respond adequately and timely to this resultant increase in housing demand perhaps has never been more critical.3 Table1: General statistics about Pakistan According to the certain estimates the population of Pakistan is over 166 million 1 ; increasing approximately at the rate of 2% per annum1. Urban population as a percentage of total population has been recording a growing trend. Moreover, population density has also increased from 142 persons per km2 in 1990s to 206 persons per km2 by 2007. Table 1 shows general statistics on housing for Pakistan. Like other developing countries, Pakistan too faces a critical shortage of housing units. Housing Finance In Pakistan, At present, 27 commercial banks, House Building Finance Company Limited (HBFCLL), one DFI and two microfinance banks are catering to housing finance needs. HBFCLL is the only specialized housing bank in the country, which has been providing housing finance to public since 1952. Commercial banks entered the mortgage business during 2003 contributing very small share in the housing finance system. Although HBFCLLs share in the total housing finance has reduced in absolute terms, it is still the only institution that continues to cater to the lower-middle and low-income groups and enjoys the largest customer base. Recently microfinance banks have also started serving the lower-middle income groups.

Table 2 shows that by the end of June 2010, share of HBFC reduced from 55% in 2004 to 20% and commercial banks and DFIs are collectively now enjoying 80% share in outstanding. Although HBFCs share in the total housing finance has reduced in absolute terms, it is still the only institution that continues to cater to the lower-middle and low-income groups and enjoys the largest customer base. Table2: Housing Finance Statistics

After demonstrating a promising growth trend till 2008, the housing finance sector has recently been showing a declining trend. The total outstanding reported by banks and DFIs as on December 31, 2011 was Rs. 59.38 billion Declined by Rs. 7.62 billion As compared to Rs. 67 billion as on December 31, 2010 (a decline of 11.37%) and Rs. 61.22 billion at the end of September, 2011. The total number of outstanding borrowers has also decreased from 98,451 to 91,398 since December 31, 2010; showing a fall of 7.16% which was 5.71% decline in the last quarter since September 2010. Gross Outstanding
Fig a: Overall Industry Gross Outstanding (amount in Rs. Billion)

Figure a shows that the total outstanding finance as on December 31, 2011 of all banks and DFIs stood at Rs. 59.38 billion, as compared to Rs. 61.32 billion as on September 30, 2011, showing a decrease of Rs. 1.94 billion (3.16%). Compared to the position as of December 31, 2010, outstanding of all commercial banks and DFIs collectively decreased by 11.39%.4 Banking sector-wise total outstanding on quarters ending December 31, 2010 & 2011 are shown in Figure 1. Of the total outstanding as on December 31, 2011, commercial banks accounted for Rs. 13.237 billion; a 3.4% decline since quarter ending December 31, 2010. Private Banks reported Rs. 28.67 billion followed by Islamic banks at Rs. 8.74 Billion, public

sector banks at Rs. 8.16 billion And foreign banks with Rs. 0.328 Billion. The outstanding loans of HBFCL were Rs. 13.237 billion; down by 3.47% over the last year. Other DFIs have a meager share of Rs. 0.246 billion in outstanding loans. Figure 1: Outstanding as on December 31, 2011& 2010

Share of Banks The overall market share (based on gross outstanding) of commercial banks (excluding DFIs) has shown no change since last year, as 78%. In comparison to the quarter ending Oct - Dec 2010, there was a decline of 1% in overall market share of commercial banks (excluding DFIs). Within commercial banks, the share of private banks in the total outstanding increased marginally from 46% to 48% and the share of foreign banks decreased from 5% to 1% due to take-over of RBS portfolio by Faysal Bank (Figure 2). The share of Islamic Banks in the total outstanding increased from 14% to 15%, over the year. Share of HBFCL has increased by 1%, over the year, to 22%.

The share of Conventional Banking (excluding HBFCL), Islamic Banking Industry and HBFCL in the total outstanding was 61%, 17% and 22% respectively on December 31, 2011 (Figure 2.1). IBDs (13 windows) and Islamic banks (05 banks) have 72% and 28% share in housing finance portfolio of Islamic Banking Industry (Figure 2.2), which shows that conventional banks also consider the Islamic mode of financing an important part of their business strategy.

Number of Borrowers Number of outstanding borrowers decreased from 98,665 to 91,398 since December 31, 2010; a decline of 7.36%. As shown in the Table below, there is a decrease in no. of borrowers in each category except Private Banks, where numbers increased from 11,982 to 13,312. Table 3 shows number of borrowers that has been classified as NPLs as a percentage of total borrowers. In terms of numbers, approximately 57.93% of total borrowers of housing finance borrowers have been classified as non-performing. However, this is primarily due to HBFCLs number (51,119) of non-active borrowers, classified as non-performing, which comes to 70.48% of its total borrowers. Thus, excluding HBFCL in such an analysis will be important as it caters to 79% of the total borrowers in housing finance sector which accounts for only 21% of total outstanding portfolio.

Analysis of Loan Variables adopted by Banks/DFIs & HBFCL Weighted average interest rate The overall weighted average interest rate was 16.0% at the end of the current quarter. Highest weighted average profit rate was reported by Foreign Banks 16.8%, followed by Islamic banks 16.7%, HBFCL 16%, Private Banks 15.8, while public sector banks average came to 15.7%. Average maturity periods Average maturity period of outstanding loans as on December 31, 2011 came to 12.2 years, which is same as compared to quarter ending December 31, 2010 when it was 12.2 years. HBFCLs average maturity period is reported to be 14.1 years, while that of Private Banks is 11.7 years. Table 3 shows that among commercial banks, Islamic Banks have extended housing loans for an average tenure of 9.9 years followed by Foreign Banks with 8.6 years and public sector banks with 8.1 years

Loan to Value ratio (LTV) The percentage of financing (Loan to Value ratio) extended by banks and DFIs decreased during last year (Table 4) from 55.2% to 37.3%. Average LTVs of commercial banks have decreased from 55.2% to 37.3%. The average LTV for HBFCL has decreased from 43.5% to 42.9% over the year. Average loan size Average loan size for disbursements made during the quarter ending December 31, 2011 is Rs. 4.7 million for all banks, except HBFCL. The average loan size for HBFCL is reported to be Rs. 1.3 million for the reporting quarter. Private Banks reported an average financing size of 3.9 million, Foreign Banks as well as Islamic Banks Rs. 1.7 million, Public sector banks 1.4 million and HBFCL Rs. 1.3 million. The housing finance market is still inclined towards lending to high income groups. Products Category-Wise Share The biggest share of housing finance continued to be attracted towards outright purchase (Figure 6). The outstanding for outright purchase stood at Rs. 32.574 billion as on December 31, 2011; a 54.86% share in total outstanding of Rs. 59.38 billion. This is followed by the construction category where outstanding reported at quarter-end stood at Rs. 19.91 billion and that of renovation stood at Rs. 6.89 billion. Active portfolio shows that private banks have taken a lead in financing for two sectors; outright purchase 55% and renovation 36% but HBFCL has taken lead in financing construction category i.e. 43.77%.

Conclusion The quarter ending December 31, 2011 depicted a decrease 11.40% (Rs. 7.62 billion) as compared to quarter ending December 31, 2010, in overall outstanding portfolio of housing finance industry. NPLs of the housing finance portfolio display a rising trend and banks continue to show signs of cautious lending amidst decreased affordability of the borrowers due to inflated prices of property/houses, labor and construction material. Another reason hindering the growth of housing finance in Pakistan is reluctance of banks for lending beyond certain big cities. Average loan size has increased while LTVs and maturity periods have decreased over the last year. However, the lack of a conducive institutional framework and secondary mortgage market and high interest rates are still the major constraints towards the growth of housing and housing finance sector which is one of the potential key drivers of the economy.

Notes 1. The MTDF has also identified agriculture, water development and SMEs as priority sectors in addition to housing and construction. 2. Pakistan economic survey is one of the most reliable source of information about the economy of Pakistan. For further detail, see Pakistan Economic Survey 2006-07, Government of Pakistan. Available at http://www.accountancy.com.pk/docs/economic-survey-of-pakistan-2006-07.pdf 3. See Development of Strategic Goals for Housing Finance in Pakistan,(State Bank of Pakistan 2011), available at http://www.sbp.org.pk/IHFD/pdf/Qreport08-23-Apr-08.pdf 4. State bank of Pakistan publish reports on the housing sector quarterly. see Quarterly Housing Finance Review ,(State Bank of Pakistan 2011), available at http://www.sbp.org.pk/IHFD/pdf/Qreport08-23-Apr-08.pdf