Mortgage Finance Boosts Pakistan’s Economy

November 23, 2021

By Zia Ur Rehman and Rafia Saleem

After losing his job abroad in 2019, 40-year-old Abid Jan returned to his native Pakistan hoping to build a house in his hometown, Peshawar.

But after buying a vacant plot of land, Jan struggled to find a bank that would lend him the money he needed to construct a home. With finances tight and Pakistan’s economy laboring under the fallout of COVID-19, he was eventually forced to sell his plot at a loss.

“I checked with a few local banks for a loan but some of them denied me while others had complex conditions and interest rates,” says Jan.

His struggles were not unique.

Pakistan is one of the most difficult countries in the world to get a home loan. Relatively few banks offer and actively market mortgages, and those that do often have onerous rules. That, combined with a reluctance among many Pakistanis to borrow from banks, means that mortgage lending is the equivalent of just 0.3 percent of gross domestic product. The rate in the rest of South Asia is 3.4 percent and neighboring India is 10 percent.

That is slowly starting to change. Pakistan’s government has launched an ambitious push to build 5 million affordable homes and relaxed some rules governing mortgages, making it easier for low-income families to secure home loans. International development agencies like IFC are also working to make homeownership a reality for more Pakistanis.

“For decades, it has been almost impossible for the average Pakistani city dweller to buy their own home,” said Shabana Khawar, IFC Regional Head of Operations for Afghanistan and Pakistan. “Changing that will be crucial to building up the country's middle class and driving economic growth.”

Abid Jan at a construction site.
Abid Jan at a construction site. © Basharat Basheer

The housing gap

Pakistan is facing a housing shortage. It requires an estimated 10 million new homes, a number expected to grow by 400,000 units per year.

The demand is being driven by a fast-growing population, now around 208 million, and increasing urbanization. The continued rise in the cost of land and construction materials, fragmented land record, weak foreclosure laws, ineffective public-private partnerships, lack of long-term funding and low levels of mortgage lending are also feeding Pakistan’s housing gap.

Despite a hunger for home loans, especially among low-income families, most financial institutions limit their mortgage products to high-income segment in a few major cities due to low risk appetite, legal hurdles, lack of long-term funding and weak institutional capacity.

Changing that, say industry players, could lead to a surge in real estate investment and create thousands of jobs in the construction industry.

“The housing sector will take off if banks make their loans more accessible and build investors’ knowledge and confidence in mortgage products and services,” said Kashif Khan, a builder in Islamabad.

Kashif Khan with his team.
Kashif Khan with his team. © Adil Anees

External support

IFC and the World Bank have been working together to help develop an affordable housing market in Pakistan.

Last year, IFC and the International Development Association’s Private Sector Window (IDA PSW), invested 500 million Pakistani rupees (approximately $3 million) to further capitalize the Pakistan Mortgage Refinance Company (PMRCL). Pakistan’s central bank set the firm up to provide liquidity to mortgage lenders.

IFC’s investment was designed to address the lack of affordable mortgages, including in the frontier regions of Khyber Pakhtunkhwa and its newly merged districts (Ex-FATA) and Balochistan.

The PMRCL has become an important backer of government housing sector reforms. Among other things, it is helping to finance the Naya Pakistan Housing Program, which will see at least 5 million low-cost houses built countrywide.

“IFC’s support is timely, especially with the economic slowdown further exacerbated by the COVID-19 pandemic,” said Mudassir H. Khan, CEO of PMRCL.

The financing from the IDA PSW, a fund that supports investments in fragile and conflict-affected states, was crucial to the project.

“The support from IDA PSW helps us extend our reach into frontier markets where there is a clear market failure demonstrated by the lack of affordable long-term financing for safe and secure homes,” said Tania Khan Jamal, IFC Senior Investment Officer in Pakistan.

An under construction house in Islamabad, Pakistan.
Under construction houses in Islamabad, Pakistan. © Zia Ur Rehman

Big opportunities

A recent IFC study, Pakistan Housing Finance, revealed there was strong demand for mortgage lending in upper-middle-class families. The report looked at 26 Pakistani cities and found that with the right products, systems and funding, lenders could reach approximately 500,000 potential new borrowers. The study pegged the value of that market at around $4 billion.

Mortgage lenders have largely catered to wealthier borrowers as lack of fixed-rate long-term funding and a series of regulatory hurdles, including issues with land titling and challenges in foreclosing on properties, have made low-income families a riskier bet.

That has fed into a critical housing shortage in Pakistan’s cities. Some 35 million urban residents, or around 17 percent of the country’s population, live in substandard housing.

The number of people living in cities is expected to double between the years 2030 and 2040, intensifying the need for affordable housing.

IFC’s Pakistan Housing Finance study suggests that the lower end of the mortgage market can grow rapidly with the right support.

In neighboring India, IFC invested $4.4 million to help establish the mortgage lender Aadhar Housing Finance, which catered to low-income families. When IFC made the investment in 2010, the company was valued at about $20 million. This year, it filed for an initial public offering that put its worth at $1 billion. In addition, the success of Aadhar has helped pave the way for other housing finance companies in India to achieve up to 60% cumulative average growth in their loan portfolios, a feat which is phenomenal.

Making inroads

Experts say lenders will need to step up their public outreach if the mortgage market is to develop. In Pakistan, only 13 percent of people have a bank account, many by choice.

In places like Peshawar, people eschew bank mortgages due to cumbersome lending processes, high interest rates, and the requirement to pay taxes. Instead, many would-be borrowers turn to informal sources of financing, like family and friends.

“Banks offer a secure place for keeping money, but we have to pay tax on every transaction and an excessive withholding tax in case we buy property,” says Jan, the would-be homeowner.

Changing the perceptions of potential borrowers and spurring more banks to jump into the mortgage market could help jumpstart economic growth in Pakistan, which slipped into recession in 2020 amid the pandemic.

According to IFC’s research, a total of five jobs are created for every new housing unit built.

“Considering the chronic shortage that has prevailed for many decades, financing for affordable housing will help create a new market and promote competitiveness, growth and inclusion in the country,” said Shabana Khawar, IFC Regional Head of Operations for Afghanistan and Pakistan.

Published in November 2021