Barely a week ago, ordinary Pakistani citizens got a chance to raise their concerns and pour their heart out to Prime Minister Imran Khan in a telethon regarding housing. Many compains pertained to the lengthy process and how draining it all is.

Of course, everyone has known that since ages. Other than investing in risk-free assets, banks in Pakistan are reallly good at ripping off their customers. And when the government is aggressively borrowing, why else do they need to lend to masses anyway?

MHK: As a result, the credit markets in the country were never able to develop, with housing finance being no exception.

Things would have continued in the exact same fashion – with banks making a chunk of their buck through treasuries and a sizeable amount from commissions by duping naive customers – but the government had some other plans. Its ambitious Naya Pakistan Housing Scheme started nudging the financial institutions to start lending to customers for housing and set some targets.

In order to incentivise them, banks were also being provided discounted liquidity with the Pakistan Mortgage Refinance Company coming to the forefront. To better understand what the organisation does and how, Mettis Global interview its Managing Director Mudassir H Khan, a veteran who has previously led consumer banking and IT portfolios at leading financial institutions. He holds an MBA from the Stern School at the New York University.

Below are the edited excerpts.

Please walk us through what products the Pakistan Mortgage Refinancing Company offers?

MHK: Before getting into products, it’s important to understand what role the PMRC has. You see the world over, there are refinancing companies such as Fannie Mae in the US or Cagamas in Malaysia. That success comes from the mortgage-to-GDP ratio, where Pakistan performs quite poorly and stands at about 0.25%. Even in the neighbouring countries, that figure is much higher with Bangladesh more than 3% and India in excess of 11%. So there was a need to improve it and this company was set up by the State Bank and the Government of Pakistan with support of the World Bank Group.

The need for housing is that the product has to be long-term and for that you need a similar-tenor funding as well. These are the two legs: lending and raising capital. Unfortunately, the market for long-term bonds at fixed rates hasn’t developed properly either, which is a challenge for us. Therefore, for initial setup, the World Bank extended us a credit line of $70 million – onlent by the government – which amounted to roughly about Rs11 billion when it was disbursed.

We have products classified into normal housing finance, middle and low income segments. On the refinancing side, banks had very small portfolios, and were almost negligent for the low-income group where only one entity – the House Building Finance Company – was active. We lent to them and based our funding, they have launched a 12-year fixed rate product by the name of Mera Pakistan Mera Ghar. However, where portfolios aren’t available, we even prefinance to encourage those entities to lend to low and middle income groups. Their portfolio is then used as collateral.

But this was one leg, the other side is securing the funds. Right now we have the line from the World Bank but that is not sufficient. To overcome that, we are turning to the capital markets for raising medium-to-long term funding at fixed rates so that this market also develops. Last year, we did our first bond of Rs1bn – a two-year fixed rate PPTFC – which was entirely bought by our investment advisor, Pak-Kuwait Investment Company.

Then by the end of the year, we decided to do a Sukuk. Its structuring took us sometime due to Shariah-compliance and we were finally able to market it early this year. Initially the plan was to raise Rs2bn but based on positive response, we exercised the green shoe option to sell Rs3.1bn for a three-year period at a desired rate of 8.25%.

We have offerings for the conventional and Islamic segments and for both products: refinancing and capital raising – i.e. Sukuks and bonds. With two and three-year fixed rate instruments now floated, we will try for the next to have a five-year tenor and eventually further extend that but it will take some time to develop.

How has the response been from banks have you guys on boarded so far for the prefinancing/refinancing side? Can you tell us about PMRC’s progress?

MHK: There has been some traction from the banks, some of whom are introducing back-to-back products with our funding. For example, BankIslami, through our three-year facility, launched an equal-tenor housing instrument at a rate of 8.99% – even below the yield of a corresponding Pakistan Investment Bond as our lending rates are discounted.

Similarly, Faysal Bank introduced a 5-year product at 9.99% while the HBFC even innovated further and put a 5% floor and 12% cap for a 12-year product. These fixed rates bring the much-needed stability in an otherwise volatile market that is linked to KIBOR. We have also refinanced the portfolio of Orix Modaraba that provides housing loans to corporates for employee housing.

We have partnered with some 15 banks – including HBL, Bank Alfalah, Askari and JS – across different products and have helped them build their housing portfolios. Our actual disbursements as of December 2020 stood at Rs15bn.

Pakistan’s construction sector has a serious trust deficit. Do you believe the amnesty in this regard will actually help promote low-cost housing or serve simply as money-whitening scheme?

MHK: This amnesty scheme is vastly different from those offered previously as it is specifically targeted for construction only, which directly involves over 40 allied industries and more than 70 industries indirectly. Therefore, as it takes off it would generate significant economic activity and productive use of resources.

What do you think of the government’s initiatives of promoting low-cost housing?

MHK: First of all, the provision regarding loan recoveries is now active which has given banks the confidence to start lending to customers again. Then subsidies – both upfront and through interest rates, fixed for the first 5 and 10 years – have been introduced as well by the Government under Naya Pakistan Housing for the low-income group. The good thing is that it works as a rent-replacement as their loan payments would be more or less equivalent to the rents they pay.

If it’s a first-time home owner, as has been envisaged by the Government Markup Subsidy Scheme, then the individual would be living in rented property. So the monthly instalments the borrower would be paying would contribute towards their ownership. The scheme has been designed keeping this in mind.

How big is the country’s mortgage market?

MHK: Pakistan’s mortgage market is not more than 5% of the total value of residential buying and selling and stood roughly around Rs102bn by end of last year. Our share in a short span of two years is already at about 16% for the same period.

How do you see the future of housing demand and access to finance in Pakistan?

MHK: I see the outlook as positive. First reason is that all the stakeholders – banks, the government, SBP, NAPHDA and organisations like us – are all focused on this objective that housing finance has to grow. The chances of success significantly improve when there is such focus and consensus.

Then the government’s schemes will have a role to play. One part of it is the construction that will be done on state land. But for Tiers 2 and 3, meant for private developers, they have mandated a minimum share of units for low-income groups with affordability criteria specified. So when this supply goes live, people – supported by subsidies – will have options to choose from. As a result, the market will become conducive and grow. We have seen this happen in other countries as well.

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