State Bank of Pakistan takes new initiatives for Housing Finance

With the housing demand and supply gap increasing and housing facilities being available to a small population only, housing and construction finance’s role has become imperative. The government including State Bank of Pakistan has developed and initiated many plans and projects that support the affordable and accessible housing development in Pakistan. Housing sector has been long neglected by multiple governments as some of them made promises and only a few of them achieved success and that too became accessible to the rich only. Housing does not simply mean providing shelter, but it remains the driver for employment opportunities and a growing economy.

Keeping in view the need for housing and its contribution to the economy, the government is aiming to increase the number of housing units manifold in the coming years and has recently announced several measures including commitment to removing hurdles in mortgage and construction financing.

The government is also seeking support and cooperation from banks and other financial institutions to spur the development of housing mortgage market in the country and make housing finance affordable and reachable to many Pakistanis. The State Bank of Pakistan (SBP), for the first time, has taken several regulatory and financial initiatives to motivate banks to provide long-term financing. Recently, State Bank of Pakistan announced a scheme based on incentive and penalty mechanism to promote housing finance in Pakistan.

Under this stick and carrot scheme, banks are required to achieve their mandatory targets which have been agreed by the banks from Dec, 2020 to Dec 2021. According to this mutual agreement, banks will achieve the target of 5 percent of their domestic sector credit in this period.

“Building upon its earlier measure of setting mandatory target for banks to extend mortgage loans and financing for developers and builders, SBP has introduced the mechanism to incentivize meeting these targets,” the SBP said in a statement. “The mechanism also penalizes the banks for any shortfall in meeting the target.”

Effective from this December, banks will receive an inventive such as the amount maintained in Cash Reserve Requirement (CRR) will be reduced by the amount equal to increase in housing and construction finance in current fiscal year. In case, if the banks fail to reach the minimum target, they will be required to maintain extra CRR. Since banks do not receive any return on maintaining CRR, therefore, maintaining excess CRR would work as in penalty for them and a reduction in the amount CRR would be an incentive for them.

“This incentive, however, will be subject to a ceiling of 1 percent of the total demand and time liabilities based on which CRR is calculated,” it said. “Further, the banks shall continue to maintain daily minimum CRR, which is currently at 3 percent.”

State Bank of Pakistan has been keen on developing the sector and has been coming up with initiatives to develop the sector. SBP aims that with carrot and stick or incentives mechanism, CRR structure would be made better, making banks focus on the housing and construction sector. The construction industry plays an essential role in the socio economic development of a country. The activities of the industry have great significance to the achievement of national socio-economic development goals of providing infrastructure, sanctuary and employment. Therefore, it is important that governments and authorities pay due attention on this sector so it can regain the value and impact our economy.

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