Evolution of the Regulatory Framework In Pakistan Presented at 4th Global Conference on Housing Finance in Emerging markets May 2626-27, 2010, World Bank, Washington
By: Zaigham Mahmood Rizvi, Adviser, Infrastructure and Housing, State Bank of Pakistan 1
South Asia: Population Trends Total
Population
Urban
Urban
Population
Growth % 2007--2015 2007
Population
(mn) 2007
Population % of Total
1,125
1.3
329
Pakistan
162
2.1
Sri Lanka
20
Thailand
Country
Urbanization Growth %
GDP Growth Rate % 2000--07 2000
29
2.5
7.8
58
36
3.3
5.6
0.3
3
15
0.2
5.3
64
0.5
21
33
1.6
5.3
Indonesia
225
1.0
113
50
4.3
5.1
Bangladesh
158
1.6
42
27
3.7
5.7
(mn) 2007
India
2
Pakistan: Demographic Snapshot
Population: 160,000 million Population: 2/3rd rural, 1/3rd urban Poverty Rate: 24% Access to formal finance: 14% Total Housing Stock 20.48 million units Urban Housing Backlog 2.52.5-3.0 million units Candidate for micromicro-housing: 20% of population Candidate for micromicro-housing: 20% of population Average household size: 6.6 Major metropolitans cities like Karachi are facing high rate of urbanization, Karachi needs 100,000 new housing units per year to meet natural growth, address backlog & urbanization pressure
3
Overview of Housing Shortage contd.. Candidate for micromicro-housing:
20% of population
Candidate for smallsmall-housing:
40% of population
Min wage rate:
Rs 7,000 ($84) / month
Total housing backlog
7.6 mn units
Urban housing backlog:
2.5 to 3.0 mn units
Persons/Room Density (Urban):
3.5
Average household size:
6.6 4
National Housing Policy 2001 Government’s as facilitator and regulator to stimulate housing sector.
It outlines the improvement and development of financial and legal measures to facilitate the housing sector.
Provides policy guidelines for Katchi Abadis (slum settlements) as Housing is declared as a Priority industry Housing Finance Companies are allowed to issue secondary market Bonds.
National Housing Authority for Monitoring the implementation of the National Housing Policy
5
Stakeholders: Housing Supply & Demand Housing Supply: Public Sector: PHA, NHA, MoH, and MoF Private Sector: Builders and Developers
Housing Finance: Commercial Banks Development Financial Institutions (HBFC) Microfinance Institutions
Regulators: SBP for Commercial Banks and DFIs SECP for Housing Finance Companies (HFC) SBP for Micro Finance Institutions 6
Regulation & Supervision of the Mortgage Finance Sector SBP (Commercial Banks & HBFC):
Enforcement of Prudential Regulations (PRs) Housing finance is a part of Consumer Finance PRs, until housing specific PRs are framed Annual OnOn-site inspections (by Banking Inspection Department) Off--Site Supervision through OffOff Off-Site Supervision & Enforcement & Banking Surveillance Departments
SECP:
Housing Finance by NBFCs and HFCs are regulated by SECP under NBFI Rules Housing specific regulations are being framed
7
SBP’s Initiatives in Housing Sector
Infrastructure and Housing Finance Department
Setting up Housing Advisory Group
Roadmap of immediate and short term goals
Close coordination with Association of Builders and Mortgage Bankers Association Mechanism to bring on board the Urban Planners at the Federal and Provincial level
8
SBP’s Initiatives in Housing Sector contd..
Implementation of HAG Recommendations Housing Finance Guidelines Housing Finance Prudential Regulations Guidelines on Risk management Long--Term Liquidity Facility Institution Long Capacity Building Program Product Development (Risk and Income Profile) Public Awareness Programs Involving Stakeholders 9
SBP’s Initiatives in Housing Sector contd.. Short Short--term:
Large-Scale Developers’ Finance Model LargeEnhancing Outreach of Housing/Mortgage Finance Housing Observatory Low--Cost Housing Finance Model Low Low--Cost Housing Supply Models Low Expansion of housing finance outreach (Geographical and FaithFaith-Based)
Medium to Long Term: Enhance Mortgage Debt to GDP Ratio at 1% per annum Promote ProPro-Poor Housing by encouraging Low Low--Cost Housing Supply and microfinance institutions 10
Housing Advisory Group of SBP SBP formulated a Housing Advisory Group (HAG), drawing membership from different stakeholders. Its recommendations, given below, are being actively pursued by SBP:
Reforming Legal Framework affecting Foreclosure, Transfer,
Tenancy, Rent Control and Credit bureaus etc. Rationalization of Transaction Costs. Establishing an integrated land registration information system Increasing supply of land for affordable housing. Structuring and streamlining large scale developer’s finance. Facilitate lowlow-cost/low cost/low--income housing models and products. Facilitate Real Estate Investment Trusts (REITs) Provision of long term funding for housing loans. Housing Observatory (housing market information system). Capacity building of the mortgage banking industry in Pakistan. 11
Development of Prudential Regulations for Housing Finance by SBP Currently Housing Finance regulations are covered under Consumer Finance Prudential Regulations.
Since Housing Finance has its distinct nature and
scope, there has been growing demand from all stakeholders to separate Housing Finance from Consumer Finance and to launch fullfull-fledged Housing Finance Prudential Regulations.
SBP is currently developing Guidelines on Housing Finance to cover Conventional Mortgages, ShariaShariaCompatible Mortgages.
SBP intends to announce Housing Specific Prudential Regulations in in 20102010-11.
12
Prudential Regulations Cont’d Though permissible LTV is 85:15, normal practice is 70:30.
Once the Mortgage Insurance is introduced ( under study), LTV may not exceed 80:20, since Sharia compliance calls for sharing of ownership and risk.
Ratio of Mortgage Advances to Total Advances was relaxed from 5% to 10%, and currently there is no cap.
Only Islamic banks have housing portfolio exceeding 10%, while conventional banks average around 5%. 13
Prudential Regulations Cont’d Central bank has recently tightened some PRs relating to Provisioning and Write-Offs:
Benefit of Forced Sale Value Ageing of Overdue Repayments This has resulted in rise in reported NPLs in during 2008-09. Another reason for rise in NPLs is interest rate hike during the same period.
Guidelines on Risk management:
Banks/FIs in mortgage finance need to have Risk Management and Compliance Functions Risk management and Compliance Functions periodically report to the Board of Directors, and send periodic reports to the Central bank on a prescribed format. Risk-weightage Guidelines for mortgage backed instruments of finance 14
Large Scale Builder Finance Model SBP is working to develop financing models to facilitate
large-scale builders/ developers’ access to formal financial largesector.
The models are being developed in consultations with the
Association of the Builders and Developers (ABAD), Investment Bankers and Association of Mortgage Bankers (AMB).
Key challenges include:
Corporatization of largelarge-scale developers. Bankable financial statements Credit rating (Entity and Instrument Ratings) Fiscal issues relating to Book Value and Market Value, declared income and wealth etc 15
Builder Finance Model Cont’d Financial Model are being developed in consultation with the Builders and Mortgage Bakers.
Models to form basis for assessing project cost, cash flow streams, income etc, by the Banks, Tax and Municipal authorities.
For builders not ready for Entity Rating, projects may be floated on Instrument Rating under SPV mechanism.
Fiscal incentives to be designed based on Entity Rating,
Instrument rating, Target Market segment based on income or geographical location.
Extensive consultations are on with Association of Builders and Mortgage Bankers for development of financial and business model.
16
Setting up of Pakistan Mortgage Refinance Company (PMRC) Major impediment in growth of HFCs is absence of LT
Liquidity. Even Commercial banks are running tenor mismatch on housing portfolio. PMRC is being sponsored by Central bank, the financial institutions, insurance companies and Pension Funds. IFC is providing Technical Assistance and will possibly take 20% equity. Hybrid Business Model aims at covering both ShariaCompatible and Conventional Mortgages. Since Islamic Banks are likely to be among sponsors and beneficiaries, it will be a unique model if successfully developed. 17
Sharia--compliant Housing Finance Sharia In 2004 IBs share in total outstanding mortgages was 2% (Rs 0.7 bn). In 2009 it was 12% (Rs 9.0 bn) - a growth rate of 68% per year
For CBs, it moved from 44% (Rs 16.0 bn) to 67% (Rs 49.6 bn) - a growth rate of 25%
The NPLs as %age of total outstanding moved from:
Comm. Banks: 10% in 2008 to 17% in 2009 Islamic Banks: 3% in 2008 to 10% in 2009
The main reasons for rise in NPLs were:
Rise in profit rates Enforcement by SBP of more stringent Prudential Regulations on NPLs and Provisioning. 18
Role of ShariaSharia-Compliant Housing Finance Makes Housing Finance accessible by faithfaith-based clientele (expansion of outreach)
Islamic Housing Finance grew more faster than Conventional Banks
Housing Finance Portfolio as percentage of overall bank financing:
2.5 to 3% for Conventional Banks 10% for Islamic Banks
Housing Portfolio is among the most favored and secure asset class on Islamic principles of finance.
Risk sharing and management ( joint ownership), and not Risk elimination
Financing instruments are asset backed, not paper backed (Derivatives)
19
Pro--poor Housing: Main Issue of Pro Asia--Pacific Region Asia
Asia Asia--Pacific Union for Housing Finance (APUHF): A regional platform has been set primarily to address ProPro-Poor Affordable Housing Issues.
APUHF needs your support and cooperation.
Pro--Poor Housing: Pro Issues We Know Answers We Need 20
Thank You!
[email protected]
21
Housing Continuum Housing Finance Player
Rs 5.0 & above
Rs 2.5 to Rs 5.0
Market Housing
HBFC (SMH)
Rs 1 Lac & above.
1%
High End
Rs.100,000
4%
0.300
Upper Middle
Rs.25,001 to Rs.50,000
15 %
1.125
Rs.10,001 to Rs.25,000
20 %
Rs.4,001 to Rs.10,000
40 %
Upto Rs.4,000
20 %
High - High
Commercial Banks
Rs 1.25 ~ 2.50
Lower Middle
Rs 0.5 ~ 1.25
Rs 0.20~Rs.0.50
HBFC & Social Housing Bank
Income Distribution in %
Market Segment
Small
Social Housing
Micro
0.075
1.500 3.000 1.500
Up to Rs 0.20
Mortgage Affordability
Housing Market
Income Distribution
- Per Capita Income
Rs.7,500 per month
-
Rs.7,000 per month
Minimum Wage Rate
Housing Shortage * (In Million)
(Rupees in Million)
Total existing backlog is estimated at 7.5 Million units. The shortage in various income segments is assumed in the same proportion as per income distribution pattern. However, actual shortage is much higher in low income segments as opposed to higher income segments.
22
Outstanding Mortgage Portfolio Housing Finance Portfolio (Rs million) (end-Dec figures) 90,000 83,786 80,000
76,004
74,382 70,000
61,957 60,000
55,293
50,000
40,000
36,852
30,000
20,000
10,000
0 2004
2005
2006
2007
2008
2009
23
Recent Interest Rates Hikes Weighted Average Interest Rate (%) 18 15.64
16
14.65 14 12.14 12 10.1
10.31 10
9
8 6 4 2 0 2004
2005
2006
2007
2008
2009 24
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