The dark horse of housing finance – Journal
Not many people know that BankIslami Pakistan, one of the smallest lenders with just 1.3 percent of total banking sector assets, is currently the largest real estate bank in the country.
The minor consumer finance bank’s real estate portfolio puts the biggest banks to shame and even the good old House Building Finance Company (HBFC), the only housing institution that has been in existence since 1952.
Advances on housing from the Sharia-compliant bank stood at nearly 15 billion rupees at the end of March, up 11.4% from the previous quarter.
The government encourages home ownership through subsidized mortgages through commercial banks. The State Bank of Pakistan (SBP) has asked lenders to increase their financing for construction and housing to at least 5% of their total loans to the private sector by December. Only five of the more than two dozen banks currently meet this criterion.
“Our average mortgage amount is around Rs 6 million,” BankIslami Pakistan CEO Syed Amir Ali told Dawn in a recent interview.
Most of its home loans were extended before the government announced the top-up grant program that allows first-time homebuyers to get subsidized mortgages at 3%, 5% and 7% per annum.
BankIslami is rapidly expanding its financing portfolio, which grew 17.3% in just three months to reach 152.7 billion rupees at the end of March
According to SBP data, consumer finance for housing construction stood at Rs 97.8 billion at the end of May, up 18% from a year ago. Still, the number of annual growth seems moderate given all the hubbub about subsidized housing finance available to people belonging to the lower and middle classes.
“Initially, the conditions were too strict when the grant program was announced. I have tried to book a few clients myself. We approved the credit. But none of them could find a house to buy, ”he said, referring to the“ unrealistic ”house price caps of 3.5 million rupees and 6 million rupees that the government had. initially notified under the subsidy program, but who subsequently withdrew them.
“Where will you find a house for Rs3.5m in Karachi?” Even though it is a modest two-story unit of 80 square meters, its construction cost alone will be 5 million rupees. Add another Rs3m for the land, and you have a Rs8m house that should require Rs6m financing from the bank, ”he said. The government has now removed the property value cap and increased the subsidized loan amount up to Rs 10million for high profile clients.
Mr. Ali said that all disbursements under the Surge Grant program have been made within the past five months. BankIslami disbursed 47 loans of 221 million rupees between January and May. Across the industry, 895 borrowers drew 2.2 billion rupees under this program in the same five months, he added.
The numbers may seem unimpressive at the moment, but Mr Ali insists the growth rate will soon be exponential and not linear. “We have approved (but not yet disbursed) loans of 300 million rupees. We have received mortgage applications for an additional 1.2 billion rupees, ”he said.
BankIslami is rapidly expanding its financing portfolio, which grew 17.3% in just three months to reach 152.7 billion rupees at the end of March.
According to Ali, the sudden growth in funding is partly due to the low base effect. The bank has avoided funding for the previous two years as it struggled to improve its capital adequacy ratio in 2019 and faced Covid-19 in 2020.
The bank reported net profit of Rs 390 million in the last quarter, up 5.9% from a year ago. However, profit before provisions fell 61% year-on-year to 684.3 million rupees.
Across the sector, total outstanding loans to private sector companies increased 3.8 percent year-on-year to Rs.5.5 trillion at the end of last month.
Banks have provided subsidized credit to private sector companies under a number of SBP refinancing programs to tackle the coronavirus-induced recession. But most of these programs – for new investment, loan deferrals / restructurings, and salaries – have now come of age.
So the question is: with the SBP removing many of its concessional refinancing facilities, will banks start lazily investing in government debt again? “The loan is the result of investing in capital goods. Capital investment depends on the investor’s outlook on the economy, not the interest rate, ”Ali said.
As an example, he referred to the Temporary Economic Refinancing Facility (TERF) which expired in March with approved funding of Rs 435.7 billion. So many letters of credit or letters of credit have been opened and most of those projects are likely to take place in 2021-2022, he said. “Once these projects are up and running, they will need roughly the same amount of working capital. Thus, over the next two years, banks will generate working capital of around Rs 500 billion. “
Its latest quarterly accounts show that BankIslami funded a financing of Rs 93 million under the TERF. However, the CEO said the number is “underestimated” as the bank has opened but not yet disbursed letters of credit worth 9.5 billion rupees.
“A company may have borrowed 2 billion rupees today to set up a factory, but it will need an additional 2 billion rupees to operate this factory tomorrow,” he said, noting that the banks are ‘expect sustained long-term credit drawdown.
Posted in Dawn, The Business and Finance Weekly, June 28, 2021