MORTGAGE REFINANCE COMPANY IN PAKISTAN

1. Introduction: Addressing Pakistan’s Housing Crisis

Mortgage refinance plays a fundamental role in ensuring quality of life and economic stability. In Pakistan, housing shortages have reached a critical point. As per a World Bank estimate (2006), the country faced a deficit of 6 million housing units, with an annual shortfall of 270,000 units. Over half the urban population lives in slums due to substandard housing conditions, a lack of infrastructure, and a high average room density of 3.1 persons per room — much higher than the global standard of 1.1.

The growing demand, driven by increased remittances, economic growth, and commercial bank participation in housing finance, has not been matched by supply, leading to rising property prices and an acute need for financial instruments to support home ownership.

2. The Role of a Mortgage Refinance Company (MRC)

A Mortgage Refinance Company (MRC) is designed to support long-term lending activities of Primary Mortgage Lenders (PMLs). MRCs function as intermediaries between capital markets and housing lenders, providing long-term liquidity at better terms than what PMLs could obtain independently.

In countries like Malaysia (Chagamas), Jordan, and Egypt, such institutions have played a pivotal role in stabilizing housing finance systems. Pakistan is following suit by planning to set up its own MRC — the Pakistan Mortgage Refinance Company (PMRC).

3. Economic and Financial Background

3.1 Economic Conditions

Between 2002 and 2007, Pakistan experienced remarkable GDP growth averaging around 7%, raising per capita income to $878 by FY07. However, this was built on expansionary policies, rising consumption, and low savings, making the economy vulnerable to external shocks like commodity price hikes and the global recession.

This resulted in fiscal and current account deficits peaking at 9.6% and 8.4% of GDP, respectively. By 2009, economic growth had slowed to 2%. Despite efforts at stabilization through IMF programs, the need for reform remained substantial.

3.2 Capital and Debt Markets

Pakistan’s stock market surged during the 1990s due to liberalization, privatization, and investor confidence. However, by 2008–09, it experienced sharp declines due to macroeconomic instability and capital flight. Bond markets, including PIBs and Islamic Sukuks, showed growing potential.

The government also expanded the National Savings Scheme (NSS), which by March 2009 had mobilized Rs. 1324 billion — 35% of total domestic debt.

4. State of the Financial Sector

Pakistan’s banking sector serves approximately 6 million borrowers and 25 million depositors. Despite this, penetration remains low: 3.6% for borrowers and 15% for depositors. The sector includes 40 banks, dominated by the top 10 institutions. Foreign ownership constitutes 47% of paid-up capital.

The Capital Adequacy Ratio (CAR) of the sector stood at a healthy 12.9% in 2009. However, access to long-term funding remains a challenge, especially for housing finance, as banks rely on short-term deposits, creating asset-liability mismatches.

5. Mortgage Market in Pakistan

Pakistan’s housing market suffers from poor planning, high urbanization, and undercapitalization. Though mortgage lending grew during 2003–09 — with the number of lenders increasing from 10 to 28 and the Mortgage Debt Outstanding (MDO) growing at a CAGR of 43% — MDO remains only 0.8% of GDP (US$1 billion), far behind the MENA average (4.7%) or developed nations like the US (78%).

Average loan sizes range from Rs. 1–2.5 million for banks and Rs. 750,000 for HBFC, reflecting different target segments. Mortgage interest rates average 17.5–19%, largely unaffordable for most Pakistanis.

5.1 Constraints to Market Development

• Poor land titling and documentation.

• Lack of low-cost housing stock.

• Weak foreclosure and recovery laws.

• Short-term funding and high markups.

• Inefficient access to capital markets.

Though reforms have been introduced — such as the Financial Institutions Recovery Ordinance (2001), National Housing Policy (2001), and favorable budgetary incentives — progress remains slow.

6. PMRC: Creating a Mortgage Liquidity Facility

The SBP proposes the Pakistan Mortgage Refinance Company (PMRC) as a long-term solution to these structural challenges.

6.1 Objectives and Benefits

PMRC will:

• Provide long-term funds to PMLs at competitive rates.

• Reduce asset-liability mismatches.

• Support fixed-rate and hybrid mortgage structures.

• Improve affordability and expand borrower eligibility.

• Encourage home ownership and market stability.

In times of liquidity crunches, PMRC would offer emergency support to PMLs, prevent fire-sale of assets, and link long-term investors with mortgage portfolios.

7. PMRC’s Operational Model

PMRC will:

• Be a non-depository Development Finance Institution (DFI).

• Be regulated by SBP and overseen by SECP for market operations.

• Initially raise funds via equity from the government, PMLs, and international agencies (e.g., IFC, ADB).

• Raise capital through corporate bonds, TFCs, and sukuks.

• Provide refinancing to PMLs against high-quality mortgage portfolios (with over-collateralization and recourse).

• Eventually securitize mortgages via SPVs.

7.1 Islamic Housing Finance Inclusion

PMRC will cater to Islamic as well as conventional institutions. Discussions with scholars confirm the feasibility of Shariah-compliant operations, with segregated revenue streams. In time, separate liquidity facilities may be created for Islamic finance.

8. Proposed Shareholding Structure

9. Global Best Practices and Comparisons

To guide PMRC’s design, Pakistan can draw inspiration from international models:

a) Egypt – EMRC

• Joint-stock company since 2006.

• 27 shareholders; 61.4% private PMLs.

• Offers over-collateralized refinancing with full recourse.

• Bonds are tax-exempt and suitable for liquidity requirements.

b) France – CRH

• Founded in 1985; publicly listed.

• 90% owned by 5 financial institutions.

• Over-collateralization of 25%.

• Bonds rated AAA and accepted as central bank collateral.

c) Palestine – PMHC

• Started 2000; capital of $14.9 million.

• Offers refinancing (PHFC) and mortgage insurance (PMIF).

• Challenges include market overlap with banks and tied products.

d) USA – FHLBs & Fannie Mae

• FHLBs: Cooperative, secure advances for member institutions.

• Fannie Mae: Buys high-quality mortgage loans; guarantees MBS; major player in housing finance with deep impact on loan availability and capital markets.

e) Malaysia – Cagamas Berhad

• PPP model since 1986.

• Offers both conventional and Islamic products.

• Exemptions provided to increase market participation.

• Entered securitization in 2004.

10. Conclusion

The creation of PMRC is a foundational step toward resolving Pakistan’s housing finance constraints. By mobilizing long-term funding, lowering mortgage costs, supporting Islamic and conventional finance, and linking capital markets with housing assets, PMRC can stimulate home ownership and foster economic growth.

However, success depends on:

• Effective regulation and governance.

• Robust risk assessment and recourse mechanisms.

• Active engagement from both public and private stakeholders.

• Phased development with scalability in mind.

PMRC has the potential to reshape Pakistan’s mortgage finance landscape and help bridge the country’s housing deficit — if supported by strong policy frameworks and sustained commitment.

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