Housing finance records modest 1.33% growth in FY23 amid economic challenges

Housing and construction finance experienced marginal growth, increasing by 1.33% in the fiscal year ending June 2023, as high-interest rates and a sluggish economy restrained banks from expanding their lending portfolios.

According to the State Bank of Pakistan’s (SBP) Governor’s Annual Report, the outstanding amount of housing and construction finance rose to Rs456.8 billion by the end of June 2023, compared to Rs450.8 billion a year earlier.

The report highlighted that despite the potential of construction and housing to stimulate economic activity, create jobs, and enhance living standards, the sector faced challenges.

The SBP implemented initiatives to promote housing finance, including issuing separate prudential regulations, ongoing capacity building, and standardized loan documentation.

The SBP set indicative targets for housing and construction finance, urging banks to increase their portfolio to 7% of their private sector advances by the end of FY2023.

However, the challenging economic conditions, marked by rising interest rates and a tough economic environment contributing to slowed economic growth, limited the substantial growth of housing finance during FY2023.

The fiscal year 2023 faced extraordinary challenges, with various external and domestic shocks leading to persistently high inflation amid a contraction in economic activities, as mentioned in the report. To address these challenges, the SBP maintained a contractionary policy stance, raising the policy rate cumulatively by 825 basis points during FY2023.

Despite the introduction of the Government Markup Subsidy Scheme (MPMG) in October 2020, aimed at providing low-rate financing for housing construction and purchase for the low to middle-income segments, the scheme was discontinued in August 2021.

The IMF's loan program and the discontinuation of mandatory housing lending targets were cited as primary reasons, with the IMF recommending a focus on addressing long-standing structural deficiencies to support private sector lending in its previous staff reports.