Housing Financing Overview. Sources of housing financing in Bangladesh
Housing Financing: An Overview
Housing finance is defined as the extension of loans to consumers to acquire houses; leasing of houses to the consumers through financial leasing; and extension of loans to consumers where such loans are secured by the houses that the consumer owns. In addition, loans extended to refinance the loans explained in this context are also included in the housing finance.
Housing Finance Systems in the Developing Countries
Housing finance systems in many developing and emerging economies share several characteristics. First, most housing finance systems are “institutional patchworks” that comprise private sector lenders as well as several government-managed housing finance institutions or programs (Renaud, 1996). From a regional perspective, the mortgage markets in South Asia are small and fragmented with the unorganized sector. Regarding the organized segments, there are distinct commonalities that characterize some of the mortgage markets of South Asia, such as a heavily subsidized monolith-like state run institution, a fledgling private sector catering to the middle and upper income segments and players from the banking sector that provide housing finance as a part of their retail portfolio. The mortgage markets in Sri Lanka, Bangladesh and
Pakistan is such archetypes (Karnad, 2004).
The residential housing sector of Bangladesh is characterized by a three-tier market. First are those households with the highest disposable income (less than 3 percent of the housing market), able to afford high-quality housing in fully serviced neighborhoods, and able to utilize bank financing or specialized housing finance institutions. The second tier is the relatively narrow stratum of middle-income households (represents 12 to 15 per cent of the housing market) that are the main users of specialized housing financial institutions such as Bangladesh House Building Finance Corporation (BHBFC). This group is the major beneficiary of available public subsidies and is composed predominantly of public servants and wage/salary earners of large private companies and public sector corporations. The third and largest of the tiers is the low-income households, for which housing is provided largely by the private sector, often under illegal and unsatisfactory site conditions (ADB, 1995).
Sources of housing financing in Bangladesh
Besides the state-owned BHBFC, other sources of housing finance currently available in Bangladesh are commercial banks, employee loans, life insurance policies, and informal means. In the rural sector, the housing cooperatives are the major providers of housing finance. Recent survey of homeowners of newly constructed houses showed that the most important source of housing finance was household savings (more than one third). Loans from relatives and friends were the second most common form of finance, followed by the sale of other parcels of land.
Besides government efforts, a large number of NGOs are providing micro credits to the poor. The enactment of the Financial Institutions Act 1993 opened the door for private housing finance companies. There are now 23 private companies that extend housing finance in Bangladesh. Prominent among them are the Delta-BRAC Housing Finance Corporation Ltd. and the National Housing Finance and Investment Ltd. These companies make loans for the construction of houses, acquisition of flats and houses, extension and improvement of existing housing, and the purchase of housing plots. Most of the private sector players, though relatively new, have nonperforming loans (NPLs) of below 1%. But their interest rates are very high compared with the nationally owned BHBFC. For example, Delta-BRAC Housing charges interest rates as high as 16%, which is higher than that of BHBFC by 1%. The contribution of microcredit lenders (such as Grameen Bank, BRAC, ASA and Proshika) in this sector is very insignificant.
In the next section, we will briefly describe public, private and private-NGO collaborated financial institutions that are engaged in real estate financing in Bangladesh.
Bangladesh House Building Finance Corporation (BHBFC)
BHBFC provides credit facilities for construction, repair and remodeling of dwelling houses and apartments in cities, towns and other urban areas. In general, priority is given to civil servants, and within that group to those with the most years of service. BHBFC offers 15–20 year mortgages to individual households at commercial interest rates that increase as the loan amount increases.
BHBFC was funded by the Bangladesh Treasury, with a cost of 5% per year, an amount well below the market rate of interest. Moreover, the corporation enjoys a number of advantages – it is exempt from tax, has much laxer capital requirements than other financial institutions in Bangladesh, and its bonds are guaranteed by the national government. But since losing its direct government funding, its volume has stagnated, and its market share of mortgage debt outstanding has dropped in recent years.
Currently, BHBFC provides five types of loans: (1) general loans for construction of single or multi-storied residential houses on land/plots owned by a single person or by a husband and wife jointly; (2) group loans for the construction of flats by a group of borrowers on a plot owned jointly; (3) apartment loans for purchasing under-construction apartments in Dhaka and Chittagong Metropolitan areas; (4) adjustment loans for completion of an under-construction house; and (5) loans for constructing semi-pucca houses in district and selected upazila headquarters. In recent years, two private housing finance companies have been registered as public limited companies. We discuss these along with some other private housing finance companies and their contributions in this sector in the next section.
Delta-BRAC Housing Finance Corporation Ltd. (DBH)
DBH is the pioneer, the largest and the specialist housing finance institution in the private sector in Bangladesh. After commencing operation in the early 1997, the company registered commendable growth in creating home ownership among more than 7,500 families in Dhaka and other major cities of the country. At the same time, the company played an active role in promoting the real estate sector to broad cross sections of prospective clients who had an unfulfilled dream of owning a good home. Mortgage loans have a maximum term of 15 years and are discretionary adjustable-rate mortgages. The present rate is 16.5%. For owner occupied properties, monthly payments cannot exceed 30% of household income and in higher risk cases; third-party guarantees are required.
National Housing Finance and Investment Ltd. (NHFIL)
NHFIL, a private sector housing finance company, provides loans for construction of houses, purchase of flats or houses, extension and improvement of existing houses or flats, and purchase of housing plots. Up to 30 June 2008, the NHFIL provided a total amount of term loans of BDT 5545 million.
IDLC of Bangladesh
IDLC of Bangladesh provides real estate financing for individuals, for developers and for corporate users. For example, IDLC’s “Individual House Loan Scheme” offer financing facilities for the purchase of apartment, construction of house, renovation and extension of house, purchase/construction of house for the employees under corporate house finance scheme, and office chamber/space for professionals. Under the “Developer’s Finance Scheme”, IDLC provides financing for the construction of apartment building, whereas “Corporate Finance Scheme” deals with the purchase of office space/chamber/display centre, construction/purchase of commercial building, Constructions of commercially viable project like schools, hotels and hospitals etc., and constructions of industrial building like factory, warehouse etc.
MIDAS Financing Ltd. (MFL)
MFL has launched “Housing Loan Scheme” to fulfill the dream of the limited income people by extending financial support in the form of term loan for constructing a house and/or purchasing an apartment/readymade house/commercial space. Any Bangladeshi citizen within the age bracket of 30-55 years with recognized sources of income can apply for loan under this scheme. Eligibility for loan is judged on the basis of age, monthly personal and family income, arrangement of own investment, assets and liability position, job/business status, nature of income and savings habit of the applicant. The amount of loan shall be from BDT 0.30 million to BDT 3 million but not exceeding 50 per cent of the construction cost or purchase price of the property. The loan along with the interest is repayable in equal monthly installments over a period from 3 to 15 Years. In case of commercial space, maximum terms will be 8 years. The rate of interest is 15 per cent to 16 per cent per annum. A rebate at 3 per cent on interest is allowed to good borrowers for timely repayment of all installments. The sanctioned loan will be disbursed at a time or in installments after full investment of the borrower’s equity. The loan installments can be paid in advance any time before its maturity. In case of advance payment, the amount should be equal to three or more installments. A non-refundable amount, which is 0.50 per cent of the loan applied for (minimum BDT 2,000 but not exceeding BDT 5,000) is payable at the time of submission of application.