Housing crisis in Pakistan: Islamic banks in a limbo

Called to help fund Prime Minister Imran Khan’s low-cost housing construction program that aims to tackle the country’s urban housing crisis, Islamic banks are considering stepping in but much remains to be done. MARC ROUSSOT has more.

Slums have been expanding over the years in Pakistan where the decades-long housing crisis has left more than 30 million people vulnerable to diseases, including polio, partly due to little access to sanitation and drinking water.

Addressing the issue, Imran Khan launched an ambitious housing project for the construction of five million low-cost houses. Worth an estimated PKR15-17 trillion (US$107.79-122.16 billion), the government’s program will be partly funded by domestic financial institutions including Islamic banks like Meezan Bank.

“As a leading Islamic financial institution, Meezan Bank considers participation in this government initiative as a vital step toward financial inclusion and reaching out to the unbanked segments of the economy and foster economic growth by offering interest-free housing finance products and making Islamic banking as a banking of first choice in line with its vision and mission,” Sohail Khan, Meezan Bank’s secretary, tells IFN.

Policy in the making
Before taking a final decision, Meezan Bank is waiting for the State Bank of Pakistan (SBP) to issue its Policy for Promotion of Low-Cost Housing Finance. A draft guideline released in July last year proposes that the SBP provides liquidity to financial institutions at a subsidized rate.

“The SBP will provide refinance up to PKR1 million (US$7,157.3) or 50% of the loan amount at a rate of 1% to banks/development financial institutions (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 a fixed rate of up to 12% or variable rate of one-year KIBOR plus risk premium up to 4%. The facility will be provided for both individual house borrowers and housing builders/developers. [A] Similar financing facility will also be provided through Islamic financial institutions,” the document specifies.

While things are relatively clear on the conventional side, details are lacking on the Shariah solutions to be offered and the structures to be used have yet to be outlined, for instance.

However, two models are likely to be utilized, according to Sohail. Diminishing Musharakah could be leveraged for individual house borrowers, while a hybrid structure comprising diminishing Musharakah and Istisnah could be offered to housing builders/developers.

In or out
Once the policy is in place with all details ironed out, banks will then have to develop their own roadmaps and financing targets will be assigned to them by the SBP, which has called for all Islamic banks to join the government plan.

“Islamic banks have a significant share in the total banking industry, therefore, without their participation, it will not be easy to achieve the government’s target of building five million new houses,” explains Abid Qamar, the chief spokesman of the SBP.

The government’s plan certainly opens up interesting prospects to large Islamic financiers which have the capacity to tap the real estate market but smaller players, like Al Baraka Bank Pakistan, seem not to be particularly attracted.

“Al Baraka is a very small bank in Pakistan and I really do not think we will be able to participate,” says Umer Fareed, the head of communications of Al Baraka Bank Pakistan.

Regulatory hurdle
Whether the government can successfully onboard Islamic banks remains to be seen, but even if they join the funding effort, risk management regulations could limit their involvement.

Currently, the limit on exposure to the real estate sector is 10% of the aggregate of banks’ advances and investments (excluding investments in government securities) as defined in Prudential Regulations for Housing Finance, details Sohail.

Although there seems to be a number of odds stacked against it, Imran’s low-cost housing program could partially answer the country’s slum issue by providing a real roof over the heads of millions of people, but another plan would immediately be needed as Pakistan’s housing deficit is estimated at 10 million units and growing.

This article first appeared in IFN Volume 16 Issue 09 on the 6th of March 2019

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