Main issues in expanding the formal housing finance system

There are several constraints that hamper the expansion of formal housing finance system in Bangladesh. They are:

Distortions in the savings rates and resource mobilization
High interest rates offered by various government savings plans compared to that of private deposit taking institutions distort the financial system, which makes it difficult for private sector institutions to raise household funds.

Interest rate subsidies
Interest rate subsidies have some drawbacks apart from suppressing private mortgage market development, such as (1) a below-market interest subsidy encourages people to borrow as much as possible and repay their loans as slowly as possible; (2) the subsidies increase with inflation when interest rates go up, a poor link for subsidization; and (3) the subsidies are not transparent.

Subsidy targeting
The government subsidizes housing for middle- and upper-income households and a scattering of low-income households through BHBFC. The targeting of the existing interest rate subsidy system is inefficient. Subsidized loans are presently provided to those who could participate in the private market without assistance. BHBFC’s sole objective is to provide credit facilities for construction, repair and remodeling of dwelling houses and apartments in cities, towns and other urban areas. So if any subsidy programs are devised, only the city dwellers or government officials benefit.
Risks, affordability and mortgage instruments

There are only a few different mortgage instruments such as fixed rate mortgage (FRM), graduated payment mortgage (GPM) to address the perceived risks in mortgage lending or to make mortgage finance more affordable to middle-income households.

Alternative housing finance system

In recent years, as an alternative to the existing formal financing system, housing microfinance system has evolved. In addition to Grameen Bank, several other microfinance institutions (MFIs), such as Proshika, BRAC, and ASA now provide long- and short-term credit for housing in Bangladesh. Loans are made on the basis of established membership in lending programs instead of collateral and a sound track record of repayments on previous loans. Group pressure and mutual support are used as guarantees for loan repayment. There is no recourse by the financial institution in the case of non-payment other than the persuasive and legal ways to recover the loan and future exclusion of the borrower from the credit program. In the next section, we discuss the contribution of the largest MFIs in housing loan programs.

Grameen Bank
Grameen Bank introduced the “Moderate Housing Loan” program in 1984 with a current loan maximum of BDT 25,000. After the floods of 1987, the Bank introduced a “Basic Housing Loan”, which presently has a loan maximum of BDT 12,000. It targets the poorest rural households, similarly to income-generating credit. This program has remained the most popular among its target population. There is also a loan program for the purchase of small parcels of land and one for the repair of houses. The ratio of basic housing loans to original moderate housing loans is approximately 7:1. Besides these, another kind of housing loan called “Pre-Basic Housing (PBH)” loan amounting BDT 7,500 to 8,500 has been introduced to meet the demand of house dwellers in the northern part of the country. The interest rate of housing loans is 8% per annum. The housing loan, like the other Grameen Bank loans, are provided without collateral, but the borrower must have a title to the land, must sign an individual pledge that includes a repayment obligation, and must obtain a pledge from all members of the group or centre, which commits them to repayment in case the borrower fails to do so. Repayment is made in weekly installments, beginning five weeks after the start of construction of the house. The repayment period is calculated on the basis of repaying BDT 1,000 per year, which is the standard loan repayment for other loans by the Grameen Bank. There is a maximum repayment period of 10 years, but faster repayment is encouraged. To date the loan repayments have been excellent. As of September 1999, a total amount of BDT 7420.62 million (USD 185.09 million) have been disbursed as housing loans for 510,310 houses. The average loan size was about BDT 13,847 (only USD 277)

Proshika started a housing program for rural areas in 1988 and has provided assistance for the construction of more than 30,000 houses to date. Proshika’s housing loans are based within the group and the group selects the member most deserving of a housing loan under strict allocation rules; ie only three housing loans per year per group, housing loans can only be provided to groups that have been in existence for at least three years. Only those that have a loan for income-generating activities are eligible for a housing loan, in order to ensure repayment capacity.

BRAC’s housing loans program started just after the flood of 1988 and focused on the same rural poverty group. Only members who have successfully repaid an income generation loan and have saved an amount equivalent to the monthly repayments for a housing loan are eligible for this loan. BRAC is considering establishing a moderate-income rural housing loan program with loans of up to BDT 20,000. It is also concerned about moving into this market in view of the massive defaults that plagued the housing portfolio of the Grameen Bank after the recent floods.

ASA started a rural housing credit program in 1989–90. ASA’s management considers housing loans to the lowest income group not feasible and intends to target the rural middle class farmers for lending activity. Interestingly, a sizable group of borrowers (close to 15%) use part of the income-generating loans they receive for other purposes such as the improvement of their homes, even though that is explicitly forbidden. This is an indication that the demand for housing loans is large.