The World Bank’s Board of Executive Directors will consider the “Pakistan Housing Finance -Additional Financing” project next month, with the objective to increase access to housing finance for households, and support capital market development in the country.

Official documents revealed that Pakistan Mortgage Refinance Company is the implanting agency of the project with total cost of $85 million, to be financed by the International Bank for Reconstruction and Development (IBRD).

This additional financing of the Housing Finance Project is an integral part of a triad of World Bank (WB) operations designed to develop the housing sector in Pakistan; all three of these operations will be delivered in fiscal year 2022.

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

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

Building on the accomplishments of the 2018 operation, the WB will deliver three complementary projects in the fiscal year 2022. First, the Punjab Urban Land Systems Enhancement project will support the digitisation of land records in urban and rural areas and create a province-wide parcel-based cadastre.

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

Second, the Punjab Affordable Housing Program (PAHP) will help strengthen housing institutions and systems to enhance housing supply, including affordable housing for lower-income households in Punjab. It will also raise awareness of housing finance options among eligible beneficiaries.

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

While PULSE and PHAP will support the Punjab Government in its efforts to increase housing supply for lower-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 the increasing supply of affordable housing.

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

The current administration came into office two months after the Parent Project became effective in 2018 and launched an ambitious affordable housing program in early 2019 (i.e., the Naya Pakistan Housing Program - 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 wide-ranging powers to promote and foster growth in affordable housing. The Authority initially developed four distinct housing products to promote: (a) Tier 0: houses up to,1,250 ft2, built on public or private land, specifically targeted to the microfinance sector with loans up to PKR 2.0 million (US$12,763). (b) Tier 1: 850 ft2 houses, built on public or private land, with mortgage loans up to PKR 2.7 million (US$17,230). (c) Tiers 2 and 3: 1250 to 2,000 ft2 houses, built on private land, with mortgage loans up to Rs6.0 million or 10 million, respectively ($38,290 or 63,816).

The proposed Additional Financing (AF) of the parent project has been conceived to complement and support the government’s ambitious housing program and will entail a capitalization ($85 million) of sub-trust of the Risk Sharing Facility (RSF) under Component 2 of the parent project.

The RSF provides credit risk cover to lenders (50-60 percent) for selected borrowers under the MPMG.

Lenders will pay an upfront premium for this guarantee. The need for larger RSF has become critical given the government’s policy pronouncements, especially given the mandatory targets under MPMG - a borrower segment that is not the traditional client base 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 deep subsidies can potentially be distortive; however, given the very small size of Pakistan’s mortgage market (0.3 percent of GDP) and the very narrow focus of MPMG on lower-income households, at this stage of market development, the risk of a systemic distortion is quite limited. The RSF will only provide risk cover to mortgages being originated under the MPMG. While banks have made steady progress in meeting their broader targets, their progress on MPMG targets has been somewhat muted.

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

The proposed additional funding into the RSF will give banks comfort 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 pilot RSF in the parent project has also been realigned to meet the needs of the MPMG program (i.e. only loans under this scheme qualify for coverage).

The AF will entail the initial capitalization of a sub-trust of the RSF under component 2 of the parent project – the pilot RSF (US$ 10 million) will now be complemented by a scaled-up RSF (US$ 85 million). Like the pilot RSF, the salient features of the scaled-up RSF (RSF – phase 2) will be fully aligned with the Government’s MPMG program.

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

Additionally, the AF design considers the Government’s tight fiscal position, and as such, the salient features and governance of the RSF-phase 2 have been developed to limit the government’s fiscal exposure. The RSF-phase 2 will provide a 50 percent credit risk cover, as opposed to 40 percent in the pilot.

The increase in risk coverage is based on extensive consultations with the regulator, lenders, and other key stakeholders. Coverage accorded under the RSF-phase 2 will likely be revised as more empirical data is generated on portfolio performance as the RSF gains momentum.

Like in the parent project, a premium will be charged by the RSF-phase 2 for coverage. However, going forward the premium will be priced higher for the higher income groups and will range between 2-4 percent.

The premium structure is currently designed to cross-subsidize coverage between tiers; more affluent borrowers (under tier 2 and 3) will be charged a higher premium. The premium structure, like the coverage, will be re-evaluated as more empirical data becomes available to inform the operations and sustainability of the RSF – phase 2.

The coverage model will also carry indicative targets (i.e., tier-wise allocation of the number of loans covered) to ensure that the RSF-phase 2 predominantly benefits lower- and middle-income households.

Pakistan Mortgage Refinance Company will be managing and administering the Risk Sharing Facility on behalf of the Government of Pakistan.

PMRC has developed an operation and governance structure to administer the RSF as part of the parent project; this will be scaled up as the RSF increases in size with the implementation of the AF. An RSF Committee under the PMRC Board will monitor implementation progress and five designated staff will manage the day-to-day operations of the facility.

This staffing may increase as the portfolio under coverage increases. Additionally, a multi-stakeholder RSF Implementation Monitoring Committee will also be established. This Committee will have representatives from the Ministry of Finance, SBP, NaPHDA and PMRC (as Trust Administrator). Its main objective will be to ensure the RSF’s salient features and coverage remains aligned to GoP’s priorities and market realities.

The story was originally published in Business Recorder on January 16, 2022.