The House Building Finance Company Limited (HBFCL) is an unlisted public company incorporated on June 13, 2006, to meet the house financing needs of the country’s populace. The company has replaced the House Building Finance Corporation and as such it is no longer a statutory institute of the government.

To date, HBFCL has financed around 456,256 units for Rs.47.82 billion, successful recoveries of Rs.64 billion (inclusive of markup) and has a housing portfolio of Rs.14.6 billion. At present the company is handling over 77,666 operative accounts with a workforce comprising of 951 officers and supporting staff. HBFCL operates throughout Pakistan including Azad Kashmir and Northern areas.

Chief executive HBFCL, Azhar Jaffri, recently sat down with Business Recorder Research for an in-depth look at the company’s operations, the challenges it faces as well as the efforts that have been made to surmount these.

Azhar Jaffri has worked with various reputed financial institutions including American Express, HSBC and other leading banks. He took over the responsibilities of CEO, HBFCL, back in January 2009.

The following are excerpts from the interview of Azhar Jaffri conducted by BR Research:

BRR: What is the state of mortgage financing in Pakistan?

A J: The housing shortage in Pakistan was at an estimated 7.57 million units in 2009. While the housing finance-to-GDP ratio in the country is below one percent, as opposed to 7 percent in India, 25 percent in Malaysia, and 50-70 percent in developed countries, according to the calculations of the World Bank.

Because of some inherent issues, banks and financial institutions are not focussing much on this sector. But, if we can kick start this industry it will benefit 75 to 80 industries like cement, paint and steel. Moreover, this industry also faces some other major stumbling blocks such as high inflation and interest rates.

India has managed to streamline its policies, significantly. Initially, India followed our HBFC model and established HDFC. But, it has grown much faster than Pakistan on this front from that time.

BRR: What steps have you taken to strengthen HBFCL’s operations?

A J: We proposed the SBP to convert HBFCL into a bank. So far, we are moving in the right direction. By converting HBFC into a bank, it will be able to raise low-cost deposits. At present, banks are raising low- cost deposits and investing in treasury bills. If we are given the mandate, then we can easily raise money at 3 to 4 percent through deposit and lend at 7 to 8 percent.

In order to address the housing shortage, we have launched a very innovative product that will provide loans for house extensions. But, we need to have a comprehensive policy that will extend mortgage loans at lower interest rates to the general public to facilitate the construction of new residences.

BRR: Are you focusing on low-cost housing societies?

A J: Our target market is small and medium. Our average loan size used to be Rs.300,000. Due to the fact that inflation has trended higher in recent years this average has now grown to about Rs.900,000.

We have launched ‘Khuda Ki Basti’ and ‘Saiban’ housing development in Lahore with an average house loan of Rs.300,000. We are also working with Acumen Fund, a US-based fund, to set up low-cost housing societies in other areas.

We have done very well in the past two years. In the first half, we made profits of about Rs.95 million. This year we expect to exceed last year’s profits by 100 percent.

BRR: At present, what is your prime source of funds?

A J: We obtain credit at an average rate of 9.5 percent through a credit line extended by the State Bank of Pakistan. On the other hand, the average rate we charge against loans and credit extended by HBFC is 16 percent.

BRR: So you are just working with 2~3 percent?

A J: That is correct. Also the proportion of our non-performing loans is high because of which our total expenses have remained relatively high. However, HBFC is working towards cutting down these expenditures. The union has been very supportive in these endeavours as the head count has been brought down significantly from 1,400 to 854 people.

Moreover, our investment portfolio has done pretty well and we are very cautious, conservative and risk averse, investing only in T-bills. Our treasury income in 2011 is just a little less than Rs.1 billion as compared to last year’s when it was around Rs.750 million.

BRR: So almost 60 percent will come from advances and 40 percent from interest income?

A J: Yes, because NPLs have been so high historically. They were 50 percent in the past, and then moved up to 70 percent and now we have brought them down to 38 percent. Our infection ratio stands at 50 percent.

BRR: What is your target ratio for next year?

A J: Our target is to bring it down to 48 percent. The new portfolio is almost clean and performing well. We have revised and strengthened the credit policy and based it on the best practises. Previously, in robust recovery we couldn’t auction the property; we couldn’t send a notice. Changes on this front also bode well for improved recovery.

So, as the time passes, these ratios and NPLs will go down. The concerning thing is that if interest rates and inflation remain as they are, people may find it hard to pay the instalments.

One thing is that our portfolio is very different from the rest of the banks. They don’t address this segment but we do.

BRR: So what is your mix, urban and rural?

A J: Actually before going to urban and rural, there is an important point to he highlighted. According to an SBP report, total mortgage lending, classified as home financing, is to the tune of about Rs.53 billion, out of which Rs.14 billion is ours. By number of borrowers, there are only 98,000 borrowers in Pakistan. Out of these 74,000 are our borrowers.

Since our credit policy has been predominantly strict, even if we lend in rural areas, it has to be a declared residential area. This limitation coupled with the fact that the construction style in rural areas doesn’t lend itself the advantage to attain mortgage facility. I don’t know the exact mix, but in rural areas lending will be 10 to 20 percent.

BRR: In your opinion, why are the banks reluctant to invest in these areas?

A J: I think if the banks can lend money risk-free, why would they take on risk? Take the example of USA. The housing development there took place long time ago and interest rates are 4 percent. So you can see that the biggest hurdle to this industry in Pakistan is the lack of incentive for banks and other financial institutions to move into mortgage financing and home loans.

BRR: Can you share with us any estimates or research regarding the housing gap in Pakistan?

A J: Estimates show that there is a shortfall of 7.5 million units but I think this number is on the lower side. World Bank did some research on this long time ago but we did not because demand is already so high and the shortfall is still so large that we have our hands full.

I believe that the housing gap is widening further given the rapid population growth in the country. According to an estimate, there are 98,000 housing rooms in the country. Given the size and scale of expansion of the country’s population, this number is not nearly enough to cater to the demand, adequately.

Our focus is primarily on house construction so new housing stock is added. For the rest of the banks only 20 percent is for construction, rest is on purchases. The banking industry doesn’t seem interested to help finance housing for the time being.

Look at India, Malaysia and Singapore, the banks there are involved in project financing, construction and development financing. And that is how the industry is growing and booming. I think some of these things should be mandated here by the government on the financial institutions.

BRR: What is the mortgage multiplier of the housing industry compared with the rest of the industries?

Different numbers have been quoted; the highest is 70 industries while the lowest estimation is in the mid 30s, and all these are supporting industries. When a house is constructed, many different materials and skills are required from cement and other building materials to paints, light fixtures, furniture and so on. So the cumulative impact of the construction of new homes is stellar in terms of generating demand for the products and services of other businesses and for generating employment as well.

Exclusive interview with Chief Executive House Building Finance Company Limited

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