PAKISTAN HOUSING FINANCE Is there a business case for FINANCIAL INSTITUTIONS ? The International Finance Corporation (IFC), a member of the World Bank Group, is committed to supporting the growth in the housing sector. To help realize the full potential of the opportunity in Pakistan’s housing finance sector, IFC undertook this study to underline the volume in mortgage finance market that could be tapped by expanding portfolios across different income segments in small, medium, and large cities. The study also focuses on potential returns on assets that could be achieved on mortgage finance portfolios by banks/DFI. The study combines information from various secondary sources such as the Population Census of Pakistan (2017), studies of Pakistan Bureau of Statistics, Pakistan Social and Living Standards Measurement (PSLM) surveys, research articles, as well as information from banks/DFI, and Presenting views from industry experts. the Business Case for TAILORED HOUSING FINANCE PAKISTAN HOUSING FINANCE THE GAP B E T W EE N HOU SING SUP P LY A N D D E M A ND IN PAK ISTAN 1 There is a high demand for housing units from Pakistan’s low- income segment, however the current supply is negligible. Only 1% of housing supply caters to 68% of the population earning a monthly income of up to US$ 188. Most of the housing supply targets the high and affluent class in line with commercial viability and affordability. Approximately 56% of housing units cater to 12% of the population earning monthly income of more than US$ 625. Housing Finance (HF) has the potential to expand in Pakistan Despite a low national With the appropriate products, mortgage/GDP ratio, systems, and funding, mortgage Financial Institutions (FIs) finance can be expanded to 26 (except for the House cities (Tiers 1, 2 and 3), with the Building Finance Company potential to reach approximately Limited (HBFC)) are only 500,000 additional clients limited to Tier 1 cities for their across different income mortgage finance products. segments. TAILORED HOUSING FINANCE IS THE RIGHT MIX OF: CUSTOMER PROFILE QUANTUM OF INCOME GEOGRAPHICAL LOCATION MODE & PRODUCT OF FINANCING 1 https://aurora.dawn.com/news/1141727 PROPERT Y USE, SIZE, AND PRICE PAKISTAN HOUSING FINANCE HOUSING DEMAND BY INCOME LEVE L AN D C I T Y T I E R IN PAK ISTA N INCOME SEGMENTS The PSLM Survey and banks/DFI An additional loan volume of outline the following customer US$ 3.8 billion can be created in segments according to their monthly income: the mortgage finance market by Upper: US$ 6,250+ existing and new Housing Finance Upper Middle: US$ 3,125-6,250 players, to serve approximately Middle Middle: US$ 688-3,125 500,000 customers. Lower Middle: US$ 250-688 EXPECTED CAPITAL OUTLAYS FOR PROPERTY ACROSS INCOME SEGMENTS ** City Potential (in US$ million) Tier**** Households* Upper Middle Lower Upper TOTAL Middle Middle Middle*** Tier 1 360,267 132 1,246 638 760 2,776 Tier 2 96,790 35 335 172 204 746 Tier 3 42,784 16 148 76 90 330 TOTAL 499,841 183 1,729 886 1,054 3,852 * All cities with a population of >300,000 have been selected from the Census of Pakistan 2017 and further categorized into Tier-1, Tier-2 and Tier-3 (based on HBFC tiering system for cities and focus of the banks). Population then has been adjusted into households and discounted with an 80% factor to remove the risks of overage/underage persons, income correction, households with already owned properties, joint families etc. ** Expected capital outlays have been calculated by taking independent pricing indexing by property valuers in target cities for housing units of up to 125 square yards, average loan amounts required and desired monthly incomes. *** This income segment is also currently being targeted through mark-up subsidy scheme of the Government of Pakistan (GoP). **** Tier-1 includes major cities like Karachi, Lahore and Islamabad. Tier-2 includes medium-size cities like Gujranwala, Multan and Sargodha while tier-3 encompasses small cities e.g. Larkana, Sheikhupura and Gwadar. PAKISTAN HOUSING FINANCE ARE THERE OPPORTUNITIES BEYOND AFFORDABLE HOUSING FINANCE? W H AT I S TH E P O TE NTIAL ROA? The GoP is currently providing a mark-up subsidy for housing finance whereby housing units of up to 250 square yards and flats/apartments with covered areas of up to 2,000 square feet are being financed by the FIs for first time home-owners. The finance carries a subsidized pricing of up to 9% per annum for a maximum tenor of 10 years and a maximum loan size of US$ 62,500. The markup subsidy scheme is complemented by provision of low-cost housing to low-income groups by Naya Pakistan Housing and Development Authority (NAPHDA), where housing finance is available from FIs for a maximum amount of US$ 16,875 for a unit of up to 125 square yards and flat/apartment with a covered area of up to 850 square feet. However, the opportunity in housing finance is not just limited to income segments currently covered by the markup subsidy scheme. Even if the whole markup subsidy allocation is utilized by the banks to build mortgage portfolio, an additional opportunity of US$ 1.8 billion will remain untapped across upper- middle income segment. This segment will have better ROA along with lower risk of default.  Pakistan’s housing supply across all tiers and locations in 26 focused cities is above US$ 18,000 on average. A supply of affordable housing units/apartments (up to 125 square yards) is as critical as affordable mortgage financing. Without adequate affordable housing supply, a ‘housing for all’ agenda could be difficult to achieve. RETURN ON ASSETS (ROA) Assuming higher degree of credit risks as compared to other lending segments, average returns on low income mortgage finance portfolio (currently also covered under mark-up subsidy scheme of the Government) could be up to 2% per annum. In addition to ROAs, such mortgage financing could also offer product cross-sell and higher business growth opportunities. ROA on mortgage finance to income segments other than those targeted by the markup subsidy scheme could range between 3.50%-4.75%, as estimated from the analysis of FIs’ returns on existing consumer mortgage finance portfolio. This also includes the returns on developer finance. Moreover, mortgage finance products could also be expanded to cover internal employees of FIs, leading to higher staff motivation and retention. PAKISTAN HOUSING FINANCE M O R T G A G E F I N A N C E I N P A K I S TA N GROWTH ‘ENABLERS’ CHALLENGES Mortgage and Housing Finance Challenges in Housing Demand vs. Supply END USERS lack of affordable housing supply • URBAN POPULATION IS AROUND 25% more than 208 million people, LAWS AND REGULATIONS expected to double between 2030-40. issues with land titling, registration, administration, and record keeping • MORTGAGE TO GDP RATIO IS 0.3% South Asia’s average is 3.4%. LACK OF FUNDS limited medium- to long-term funding • CURRENT HOUSING DEFICIT for on-lending purposes for mortgages. IS +10 MILLION UNITS nascent capital markets for raising expected to increase by long-term funding. 0.4 million units per year. FINANCIAL PROVIDERS • LARGE UNDERSERVED MARKET limited capacity of Financial Institutions FOR LOW-COST HOUSING to offer and manage housing finance. Policy and Regulatory Environment • Active regulators like State Bank FINANCE AND CONSTRUCTION of Pakistan (SBP) and Securities and INCENTIVES POST COVID-19 Exchange Commission of Pakistan (SECP). • Introduction of National Financial • Policy rate slashed by 625bps Inclusion Strategy. Establishment of to 7% post Covid-19. Housing Task Force and NAPHDA. • Relaxation of Debt Burden Risk-sharing facility by Pakistan Mortgage Ratio for consumer loans and Refinance Company (PMRC). Mandatory regulatory criteria for restructuring/ targets for banks for construction and rescheduling of loans. Reduction housing finance. in Capital Conservation Buffer. • Relaxation in general reserve Deferment of principal payment on requirements and risk weightages for FIs loan obligations. lending to low-income segment. Relaxation in taxes on low-cost housing projects. • Construction stimulus package including tax incentives. • Markup subsidies for affordable housing finance. Relaxation in regulation for informal income assessment. PAKISTAN HOUSING FINANCE WORLD BANK GROUP (WBG): HOU SING SECTOR ENGAGEMENTS IN PAKISTAN Pakistan’s IFC’s Role Housing Finance in Pakistan’s Sector Development Housing Finance Sector 2007 World Bank and IFC, as part of the SBP Housing Advisory to Group, recommend the establishment of PMRC 2010 and other key reforms SBP issues Prudential 2013 regulation on HF to 2014 Inauguration of PMRC 2015 IFC provides advisory services to PMRC to support the to establishment and operation of the refinancing facility 2016 WB and SBP draft National Financial Inclusion Strategy with Housing Finance as a priority area 2017 WB approves a $140 million IFC develops a comprehensive Naya Pakistan to package for PMRC and $5 housing program, leveraging Housing Program 2020 million in technical assistance WB efforts PMRC commences to GOP WB disburses US$140 million operations WBG’s Housing Finance financing package to PMRC Conference supports comprising of Risk-sharing institutional readiness for the Facility, convertible sub- Naya Pakistan Housing Program debt, and line of credit 2021 IFC disburses approximately US$ 3 million in equity investment to PMRC WB proposes US$ 350 million additional financing to support GoP efforts to enhance access and affordability of Housing Finance for the bottom three income quintiles. Package includes lines of credit, Risk-sharing Facility, Subsidy Fund and technical assistance to SBP Onward IFC: Goals: Institution building in housing finance; market study; Housing Finance knowledge-sharing. Improve Mortgage/ GDP from 0.3% Enhancing access to mortgage finance (beyond low-cost housing), potential investments in Housing Finance Companies Establish a thriving (HFCs), promoting green affordable housing, mortgage mortgage and insurance, scaling Real Estate Investment Trusts. housing market Support in implementing Real Estate Regulatory Authority Act and revised foreclosure laws, improvement in housing finance Establish an effective companies’ regulations. legal framework to support housing World Bank: Additional financing of Housing Finance Project, support for finance improving access to land, infrastructure and related services. PAKISTAN HOUSING FINANCE IFC FINANCIAL INSTITUTIONS GROUP (FIG) GLOBAL HOUSING SECTOR PROJECTS IFC FIG had an aggregated exposure of US$ 2.2 billion with over 60 committed projects in the Housing Sector as of 2020. Investments in the sector include equity, senior and subordinated loans. Sub Saharan Africa $78 million committed 9 projects Latin America Middle East & & Caribbean Europe & North Africa $833 million Central Asia $48 million committed $456 million committed 15 projects committed 3 projects 9 projects South Asia $737 million committed East Asia 21 projects & Pacific $58 million committed 4 projects PAKISTAN HOUSING FINANCE FI G A F F O R D A B L E HOU SING F IN A NCE AD V IS O RY S UP PORT: C U STOM IZED IN S T IT U TI O N A L A D V ISORY Financial Institution/ Housing Finance Sectoral/ Practitioner Apex Institutions Refine existing business and Business Define the strategic vision and operating model to deepen Model identifying the right mix of market penetration; market capabilities to reach the vision. and analysis to define size and Apply international best practices specifics of target segment. Strategy for capital market development. Refined customer segmentation; Identify requirements of new product drill down to detailed customer offerings (rental housing, credit Product profiling and maximizing wallet guarantee schemes, informal income) share; develop an array of Development for better coverage of target segment. housing loan products. Work closely with the FIs for implementation. Refine existing appraisal framework Identify, design and promote to assess informality; Integrating Credit standardization of credit parameters underwriting with analytics; Management and documents for better assessment develop credit scoring capabilities. of the informal segment. Gap assessment of data architecture; Support best practice sharing in focus on opex reduction; Digitization/ implementing digitization to support apply business intelligence informal segment housing finance, Analytics to improve monitoring; including designing and developing increase efficiencies training programs Focus on creating specialized skill Design Training of Trainer (ToT) sets for informal client acquisition; Organization programmes focused on upskilling retention of quality staff; Structure/ partner FIs by creating specialized skill continual upgrading of training Human sets required for informal segment content. Resources assessment. Refine RM strategy – early warning Support in defining risk management signals; detailed and nuanced RM Risk framework required for informal framework for informal lending. Management segment and implementation of the (RM) same with partner FIs. PAKISTAN HOUSING FINANCE IFC T EC H N I C A L BE NC H MA RK ING: AF FO R D A B L E H OU SING D IAGNOSTI C TOOLK I T Development of Diagnostic Toolkit for Benchmarking of Affordable Housing Finance Institutions WHY? We have synthesized our learnings from managing a Housing Finance Investment Portfolio of more than US$ 2 billion across 60 projects globally, into a toolkit to help Financial Institutions benchmark their existing Housing Finance Operations against best-in-class practices in affordable housing finance. The outcome of the toolkit is a gap analysis document which helps OUTCOME the institution understand critical gaps which need to be filled in order to meet future aspirations and goals in Housing Finance. The toolkit covers the following aspects of Housing Finance Operations HOW of a Financial Institution: DOES IT 1. Strategy & Business Model 5. Data Analytics & Technology Penetration WORK? 2. Operating Model 6. Risk Management 3. Product Design 7. HR & Organization Structure 4. Credit Underwriting 8. Collections Illustration of a Business Model classified as Emerging E me r g i n g Standard Advanced Bes t i n Cl as s C u s t o me r S e g me n t a t i o n Sal es channel C r e d i t Un d e r wr i t i n g Op e r a t i n g Mo d e l Ser vi ce Channel PAKISTAN HOUSING FINANCE CA S E S TU DY: A AD H A R T h rou g h I n vest m en t a nd A d v i s o r y S e r v i c e s , IFC H e lp ed Aadh ar Hou s i ng F i na nc e L a unc h a nd Scale up Its Affordable Housing Business in I ndia AADHAR was established in 2010 with IFC’s equity investment of US$ 4.4 million (20% equity) to provide housing loans to low income segments in low income states. IFC also provided advisory services to Aadhar to enable it to become the first housing finance company in India that is focused on low income customer segments. OPERATIONALIZATION CUSTOMER PROFILE AND IFC’S INVESTMENT Home loans with average ticket size of INR Ticket 840,000 (~US$ 11,700) in urban and semi-urban 2010 AADHAR was awarded Size geographies of India. 90% disbursement up to a license of Housing INR 20 lakhs ticket size (~US$ 28,000) Finance Company and IFC provided equity of Client Aadhar customers include people from informal segment who do not have adequate income US$ 4.4 million Segment proof documents. Composition - Salaried (66%), (20% equity) Self-employed and others (34%) Innovation 2014 Introduces Innovative for low- IFC’S INVESTMENT ACHIEVEMENTS income Product: No Income households Proof Product for • IFC helped mobilize US$ 10 million for informal segment the greenfield company Established 2016 Housing loan • Success of Aadhar helped spur other market- portfolio reached HFCs in India to achieve CAGR between player US$ 280 million (76% 30%-60% of their loan portfolios. cumulative average growth rate (CAGR)) since inception IFC’S ADVISORY SUPPORT Key 2019 Blackstone (world’s • Helped Aadhar develop and launch new alliance largest alternate asset housing finance products targeting manager) acquires lower income households. 97.7% stake in Aadhar • Introduction of Responsible Finance Strengthening 2021 Aadhar files for initial Framework for client protection and foundations public offering of up awareness. to US$ 999.7 million Note: Portfolio numbers as of Annual Report 2019-20 PAKISTAN HOUSING FINANCE C AS E S TU DY: A AVAS IF C h elped Aavas F ina nc i e rs S c a l e Up i ts Aff ord a ble Hou sin g B us i ne s s i n I nd i a an d Ven tu r e in t o Af f o rd a b l e G re e n H o us i ng AAVAS FINANCIERS LIMITED (erstwhile Au Housing Finance Limited) was incorporated in Aavas 2012 Extensive February 2011 to provide housing finance for begins handholding and operations guidance from IFC low and middle income customers in rural and during inception semi-urban areas of India. The majority of its portfolio is for self-constructed houses, hence Strong 2017 IFC Investment of the dependence on developers is quite low. The business US$ 20 million for and supporting housing majority of Aavas customers have limited access operating finance to individuals to formal banking credit to finance their housing model in low- and middle- needs because of limited availability of income income groups proof documents, minimum banking history and Listing 2018 As of March 2020, non-availability of credit bureau scores. on Stock Aavas market Exchange valuation was Ticket Home loan average ticket size of INR 850,000 approximately Size (~US$ 12,000) in rural and semi-urban India US$ 1.8 billion. 100,000+ active customers; asset under Business Established 2019 IFC Investment of management (AUM) growth at a CAGR of Performance 41.2% (industry average: 14.7%), AUM of US$ player in US$ 50 million for 1.32 billion market expansion of Aavas’ 65% of cases from low income states in India, operations in frontier Client 40% of customers have no previous loan states of India Segment with a financial institution. Composition: 40% salaried; 60% self-employed Re-engineering of business processes through Technology Diversifying 2020 extensive use of technology and digital IFC Advisory signs & Analytics (60% of cases disbursed in <10 days) product project with Aavas to portfolio introduce and scale Asset Healthy Asset Liability Management profile up affordable green with positive asset liability gap for next housing finance Liability three years product in India Growth Demonstrated track record of high growth NPL and healthy asset quality (NPL<1%) and ROA profitability (ROAs>2.5% each year FY15-20). Note: Portfolio numbers as of Annual Report 2020-21 PAKISTAN HOUSING FINANCE CASE STUDY: BANCO L A HIPOTECARIA IF C is a lon g- t im e partne r o f B a nc o La H i p o te car ia, a primary mortgage lender in Latin America, specializing in serving low and middle-income s e g me n t s LH 1997 Company licensed commences in Panama operations LA HIPOTECARIA (LH) is a full-service housing finance bank, based in Panama, IFC’s first 2004 IFC provides 3-year credit that specializes in the origination and investment line of US$15 million servicing of residential mortgage loans IFC provides 7-year credit for low to middle-income population, line of US$ 20 million for with a proven capacity to securitize opening in El Salvador these loans. LH is a pioneer in IFC’s 2009 IFC provides a US$ 25 million residential mortgage backed securities second credit line to holding company. (RMBS) in Central America (out of which investment IFC makes equity investment eight have been cross-border). IFC in the holding company of US$ helped expand LH’s operations in El 3.5 million (13.5% ownership) Salvador and Colombia. Became a 2010 LH becomes a regulated regulated bank in Panama IFC’S INVESTMENT ACHIEVEMENTS bank • IFC has provided revolving long-term 2011 With IFC’s support, LH credit lines, not readily available in the begins operations in market, to meet LH’s business model Colombia of securitizing mortgage assets. • With IFC’s equity investment in LH, 2012 IFC invests in loan the company was able to expand of US$10 million into Colombia, thereby increasing the access of low to middle-income 2014 population to long-term mortgage IFC provides credit line and invests in bond of US$ 30 financing in El Salvador, Panama, and million Colombia. • IFC helped LH tap international 2021 IFC and LH sign a US$ 50 investors for mortgage-backed million credit line to expand securities thereby increasing the mortgage financing in Panama funding required to address the and El Salvador, with a housing finance needs of the low to focus on women-headed middle-income population. households. PAKISTAN HOUSING FINANCE CASE STUDY: PRIORBANK Throu g h I n vest m en t a nd K no wl e d g e s up p o rt, IFC helped Pr ior ban k in B e l a rus to e nha nc e Mo rt gage F in a n c e p or t f olio an d i ntro d uc e G re e n Mo rtg ages PRIORBANK is the sixth largest bank in Belarus and the largest private bank KEY MILESTONES in a country dominated by state-owned banks. Historically focused on corporate lending, Priorbank’s strategy has seen a Priorbank 1989 Minsk Innovative starts Bank, Priorbank’s shift towards SMEs and retail lending, with operations predecessor, is a focus on mortgages. Target client base founded for mortgages has been the upper-middle income population. Strengthening 1994 Priorbank became first payment system Belarusian FI to join IFC’S INVESTMENT ACHIEVEMENTS Visa, MasterCard • IFC’s housing loans have provided IFC’s first 2003 IFC Investment of US$ Priorbank much-needed long- investment 14 million in Priorbank term local currency funding which in Belarus’ for on-lending to is enabling them to realize their financial private enterprises mortgage lending strategy. sector • IFC has also supported Priorbank IFC’s 2004 IFC Investment of to increase their knowledge and investment in US$ 20 million for capacity for green housing finance mortgage in on-lending in many through training and introduction of Belarus sectors including the Excellence in Design for Greater leasing and mortgages Efficiencies (EDGE) certification system for green mortgages.  IFC’s first 2020 IFC Investment of US$ green housing 50 million in senior finance project loan to grow housing in Belarus finance and residential energy efficiency loan portfolios as well as to offer green mortgages PAKISTAN HOUSING FINANCE Acronyms ALM Asset Liability Management AUM Asset Under Management CAGR Cumulative Average Growth Rate DFI Development Finance Institution EDGE Excellence in Design for Greater Efficiencies FIG Financial Institutions Group FIs Financial Institutions GDP Gross Domestic Product GoP Government of Pakistan HBFC House Building Finance Company Limited HF Housing Finance HFCs Housing Finance Companies IFC International Finance Corporation INR Indian Rupee LH La Hipotecaria NAPHDA Naya Pakistan Housing and Development Authority NPL Non-performing Loan PMRC Pakistan Mortgage Refinance Company PSLM Pakistan Social and Living Standards Measurement REIT Real Estate Investment Trust RERA Real Estate Regulatory Authority RM Risk Management RMBS Residential Mortgage Backed Securities ROA Return on Assets SBP State Bank of Pakistan SECP Securities and Exchange Commission of Pakistan ToT Training of Trainers WB World Bank WBG World Bank Group For more information, please contact: International Finance Corporation 20-A, Shahrah-e-Jamhuriat, Ramna 5, G-5/1, Islamabad, Pakistan. 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