World Bank to consider housing finance project next month

ISLAMABAD: The World Bank’s Board of Directors will consider the “Housing Finance in Pakistan – Supplementary Financing” project next month, with the aim of increasing household access to housing finance and supporting market development capital in the country.

Official documents have revealed that Pakistan Mortgage Refinance Company is the implementing agency for the project costing a total of $85 million, which will be financed by the International Bank for Reconstruction and Development (IBRD).

This Supplementary Housing Finance Project is part of a triad of World Bank (WB) operations aimed at developing the housing sector in Pakistan; these three operations will be delivered during the 2022 financial year.

The WBG’s integrated interventions in the land and housing sectors in Pakistan address both demand and supply side constraints to deepen the housing market; this is aligned with the GoP reform program in the sector. The World Bank’s engagement in the housing sector in Pakistan began in 2018 with the Pakistan Housing Finance Project (the parent project -P162095).

This project aimed to improve access to housing finance for low- and middle-income households.

Building on the achievements of the 2018 operation, the World Bank will deliver three complementary projects in FY22. First, the Punjab Urban Land Systems Improvement Project will support the digitization of land records in areas urban and rural areas and will create a province-wide plot. cadastre.

It will create more secure land rights registries and help developers quickly identify developable land in urban areas through a comprehensive inventory of public land.

Second, the Punjab Affordable Housing Program (PAHP) will help strengthen institutions and housing systems to improve housing supply, including affordable housing for low-income households in Punjab. It will also educate eligible beneficiaries on housing finance options.

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The third component will support a significant scale-up of the credit risk-sharing mechanism under the main project to promote access to mortgage loans for low-income and informal-income households.

While PULSE and PHAP will support the government of Punjab in its efforts to increase the supply of housing for low-income households, where the housing deficit is most acute, the AF will ensure that households of this profile have access to housing finance to benefit from increased supply. affordable housing.

The improved policy environment and revitalized market conditions around housing supply and demand for housing finance have resulted in unprecedented growth in the sector.

The current administration took office two months after the parent project came into effect in 2018 and launched an ambitious affordable housing scheme in early 2019 (i.e. Naya Pakistan Housing Scheme – NPHP ).

The Naya Pakistan Housing and Development Authority (NaPHDA) was established in 2019 under the Prime Minister’s Office to implement the NPHP.

The Authority has broad powers to promote and foster the growth of affordable housing. The Authority initially developed four distinct housing products to promote: (a) Level 0: houses up to 1,250 square feet, built on public or private land, specifically for the microfinance sector with loans up to PKR 2.0 million (USD 12,763). (b) Tier 1: 850 square foot houses, built on public or private land, with mortgages up to PKR 2.7 million (USD 17,230). (c) Levels 2 and 3: 1250 to 2000 square feet, built on private land, with mortgages up to Rs6.0 million or 10 million, respectively ($38,290 or 63,816).

The proposed Supplementary Financing (AF) of the parent project has been designed to complement and support the Government’s ambitious housing program and will involve capitalization ($85 million) from the Risk Sharing Facility (RSF) sub-trust in part of component 2 of the parent project. project.

The RSF provides credit risk coverage to lenders (50-60%) for certain borrowers under the MPMG.

Lenders will pay an upfront premium for this security. The need for a larger RSF has become critical given government policy pronouncements, particularly given the mandatory targets under the MPMG – a segment of borrowers who are not the traditional clientele of PMLs. The SBP has imposed lending targets on banks based on the tacit understanding that, through the RSF, the GoP will share some of the risks of this rapid expansion into an untested market segment.

Direct lending targets complemented by such large grants can potentially create distortions; however, given the very small size of the Pakistani mortgage market (0.3% of GDP) and the very narrow focus of the MPMG on low-income households, at this stage of market development the risk of systemic distortion is quite limited. The RSF will only provide risk cover for mortgages issued under the MPMG. While banks have made steady progress in achieving their broader goals, their progress on MPMG targets has been somewhat mixed.

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Since its inception 10 months ago, there have been 42,956 applications (worth PKR 200 billion – $1.18 billion) under the MPMG and only 17,129 of these applications (worth worth PKR 78 billion – $458 million) were approved (indicating only 40 percent approval rate). Disbursements are still less than PKR 17 billion ($100 million).

The additional funding proposed in the RSF will reassure banks as they move towards lending to an untested market segment and will have a direct impact on the rate of approvals and disbursements going forward. The parent project’s pilot RSF has also been realigned to meet the needs of the MPMG program (i.e. only loans under this program are eligible for coverage).

The AF will involve the initial capitalization of a sub-trust of the FSR under component 2 of the parent project – the pilot FSR (US$10 million) will now be complemented by an expanded FSR (US$85 million). Like the pilot RSF, the main features of the large-scale RSF (RSF – phase 2) will be fully aligned with the government’s MPMG programme.

The premium structure, investment policy and hedging model of RSF-Phase 2 are designed to ensure that it remains a sustainable fund that will remain part of the housing finance market infrastructure well beyond the life of the project.

In addition, the design of the FA takes into account the government’s stretched fiscal position and as such the key features and governance of the RSF Phase 2 have been developed to limit the government’s fiscal exposure. Phase 2 of the RSF will provide 50% credit risk coverage, compared to 40% in the pilot.

The increased risk coverage is based on extensive consultations with the regulator, lenders and other key stakeholders. The coverage granted under Phase 2 of the RSF will likely be revised as more empirical data is generated on portfolio performance as the RSF expands.

As in the parent project, a premium will be charged by RSF-phase 2 for coverage. However, in the future, the premium price will be higher for high income groups and will be between 2-4%.

The premium structure is currently designed to subsidize coverage between tiers; wealthier borrowers (below Tiers 2 and 3) will be charged a higher premium. The premium structure, like the coverage, will be reassessed as more empirical data becomes available to inform the operations and sustainability of the RSF – Phase 2.

The coverage model will also include indicative targets (i.e. a breakdown by level of the number of loans covered) to ensure that Phase 2 of the RSF primarily benefits low- and middle-income households.

Pakistan Mortgage Refinance Company will manage and administer the Risk Sharing Facility on behalf of the Government of Pakistan.

The PMRC has developed an operating and governance structure to administer the FSR under the parent project; this will scale as the size of the RSF increases with the implementation of the FA. An RSF Committee reporting to the PMRC Board of Directors will monitor the progress of the implementation and five designated staff will manage the day-to-day operations of the facility.

This staffing can increase as the portfolio under cover increases. In addition, a committee to monitor the implementation of the multi-stakeholder CSR will also be created. This committee will be made up of representatives from the Ministry of Finance, SBP, NaPHDA and PMRC (as trustee of the Trust). His main objective will be to ensure that the main features and coverage of the RSF remain aligned with GoP priorities and market realities.

Copyright Business Recorder, 2022

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