Mortgage Financing in Pakistan – A Long Way to Go

If we see Pakistani nation in a broad-spectrum, we will get to know that people are likely to pay huge sum in form of monthly rent than to put up collateral against which they can mortgage a home. It is because of the innate fear of losing everything you own due to bank loan and not just few but many harbour it. Pakistan lags behind most of the other Asian countries in the mortgage financing sector because of lack of enforcement and enactment of foreclosure laws.

And this is not just cultural thing but a report based on facts and figures also depicts that the trend has persisted due to a weak valuation mechanism for real estate, hampering the check and balance activity in Pakistan real estate sector. Let' s analyze all factors at play in this sector.

A Cultural Norm

Yes! It is true that taking a loan (especially, bank loan) seems to be a stigma on our financial status. Majority of people here believe in collectivist culture – whereby preferring to live together in the same home. However, if we see the capitalist societies, people believe in having their own home as soon as possible.

However, experts say that if you are the one who can manage and plan the finances really well, you must go for mortgage financing option, instead of spending money in form of monthly rental amount. Financial planning is the key factor. However, apart from cultural factor, there are several other reasons due to which the sector could not evolve.

Fear of Bank Loans

People are not afraid to take the loan or pay it back but they are scared of the harassment that most of the debtors face from the bank' s recovery department. Mortgage financing sector needs a huge demand from the customers’ ends in order to get fully established. And it is only done by practice that the ripple effects will set in.

Mortgage Finance Law in Pakistan

The Financial Institution (Recovery of Finance) Ordinance (FIRO) was introduced in 2001 to deal with the recovery process of the bank loans and defaults. However, in 2013, the Supreme Court declared Section 15 of this bill against the provisions of the Constitution. Following this, the State Bank of Pakistan (SBP) started consulting the relevant stakeholders to make amendments in the FIRO. Following which, the Financial Institutions (Recovery of Finances) Bill 2016 has been drafted.

The amendments are meant to facilitate the recovery process of bank loans and to minimise the loan defaults.

With the increase in population, the demand for housing units will also increase. To cover the shortfall of houses, it is essential to build new homes and that is only possible, if the general public will not get haunted by bank loans.