FINAL DRAFT REPORT BANGLADESH October 26, 2009 Table of Contents 1. Overview ...... 1 2. Housing Demand...... 2 3. Housing Supply...... 4 3.1 Current State of Housing...... 4 3.2 Development of the Housing Stock...... 6 3.2.1 Steep Rise in Population Density...... 6 3.2.2 Rise in Cost of Construction Materials ...... 8 3.2.3 The Development of Residential Infrastructure and Serviced Land in Dhaka...... 9 3.3 Role of RAJUK ...... 10 3.4 Role of Private Developers...... 10 3.4.1 Indirect Developer Financing Through Installment Loan (Mortgage Finance)...... 11 3.4.2 Role of Developers Association, REHAB ...... 12 3.5 The Secondary Property Market...... 12 4. Housing Finance...... 13 4.1 The Housing Finance Market...... 15 4.2 BHBFC...... 18 4.3 Traditional Mortgage Lending ...... 22 4.4 Specialized Mortgage Lending...... 23 4.4.1 Delta-BRAC Housing Finance Corporation Limited...... 24 4.4.2 National Housing and Finance Corporation (NHFC)...... 24 4.5 Islamic Mortgage Finance...... 25 4.6 Prudential Framework for Housing Finance, and Recent Policies...... 27 4.7 Recent Regulatory Policies on Housing Finance ...... 28 4.8 Homeowners’ Insurance:...... 29 4.9 Risk Management...... 29 4.10 Interest Rates Market Benchmarks...... 30 4.11 Growth potential of the Mortgage Debt Industry...... 32 5. Low Income and Microfinance Housing...... 33 5.1 The Microfinance Market and Potential Demand for Housing Microfinance ...... 33 5.2 Products, Funding Sources, and Challenges in Housing Microfinance ...... 33
i 5.3 Government and NGO Programs in Housing and Housing-Related Social Services ...... 38 6. Mortgage Market Infrastructure (Regulatory Framework) ...... 39 6.1 Land Registration and Administration ...... 39 6.2 Land Titling...... 44 6.3 Capacity Building in Housing and Housing Finance ...... 44 6.4 Property Valuation Standards...... 45 6.5 Constraints for Women ...... 45 6.6 Foreclosure and Eviction...... 45 6.7 Credit Bureaus...... 47 7. Policy Framework and State Intervention...... 47 7.1 Strengthening the Regulatory Framework, and Improving Enforcement ...... 48 7.2 Efficient System for Land Administration...... 49 7.3 Collateral / Lien Registry ...... 51 7.4 Housing Observatory...... 51 7.5 Capacity Building for Financial Institutions and Housing-Related Professionals.....52 7.6 Re-Vamping BHBFC ...... 52 7.7 Strengthening Low-Income (Micro-Finance) Housing Lending...... 53 7.8 Mortgage Product Innovation...... 55 7.9 Mortgage Refinancing Facility...... 56 7.10 Enabling Large Scale Developers and Builders...... 57 ANNEX –A1 ...... 58 1. Doing Business - Explore Economies...... 58 1.1 Economic Data - Bangladesh ...... 58 1.2 Starting a Business ...... 58 1.3 Dealing with Construction Permits ...... 59 1.4 Employing Workers ...... 59 1.5 Registering Property...... 59 1.6 Getting Credit...... 60 1.7 Protecting Investors...... 60 1.8 Paying Taxes ...... 61 1.9 Trading Across Borders...... 61 1.10 Enforcing Contracts...... 62
ii 1.11 Closing a Business...... 62
iii 1. OVERVIEW
Bangladesh averaged a healthy growth rate of 6.7% for the last six years. With a GDP at around US$ 62Bn, and a per capita GNI of US$ 490, Bangladesh is the third largest country in the South Asia region. Bangladesh continues to be heavily agrarian economy (19.6% of GDP); however, over the years, the service sector has emerged as the dominant sector in the economy, accounting for more than 52.5% of the GDP. Overall GDP growth in FY09 is projected at around 5.5%. Minimal exposure to global financial markets has staved off most effects of the global financial crisis, though secondary effects can be expected, mainly through lower growth in remittances and export demand. Price increases of construction materials in 2008 have hampered the housing sector, raising the cost of new housing, while land prices have continued their upward trend as well.
Bangladesh has also made good progress in recent years in the banking sector, as reflected in the growth of credit and deposits. The commercial banks dominate the financial sector with banking assets of around 52.8% of the GDP. The country’s four nationalized commercial banks (NCBs) dominate the banking system, accounting for more than 52% of assets and operating 65% of the branches (3,384) as of March 2007. 1 The Non-performing loans in the banking sector have declined from 13% in 2007 to 10.79% in 2008. At the same time non-performing loans of state owned commercial banks decreased from 30% to 25%.
The country of 154 million is densely populated with one of the lowest land-person ratios in the world (the density is 1,198 people/ km 2). Bangladesh is situated in a zone prone to natural disasters (river erosion, flooding, storms, cyclones, and fires) and constrained by the shortage of high land, making for a limited permanent housing stock. Bangladesh is comprised of 80% of rural population, and 50% of its GDP comes from this sector, setting development priority in rural areas (including on housing). The annual growth rate of the population is 1.75%. There are about 20 million households, with average household size of 5.4 persons. Some 44.3% of the people are literate, and the primary school enrollment rate is 86%. The youth in Bangladesh constitute 36% of the total civilian labor force.
1 Getting Finance in South Asia 2009. The World Bank, p. 14.
1 Dhaka, the biggest city with a population of 8.5 million, is the capital of the country and the main economic hub. Unofficial sources quote the Dhaka population to be much higher, with massive urbanization. According to World Bank estimation Dhaka will become the 2nd most populous city by the year 2025. The urbanization of Bangladesh is quite low at about 20%; however, the growth rate of urban population, spurred both by population growth and urban migration, is high at about 4.5%. This is creating pressure on the supply of housing stocks in urban areas.
2. HOUSING DEMAND
Bangladesh’s housing market is characterized by a surplus of upper echelon housing stock, and an acute shortage of affordable housing for the great majority of middle and lower income population groups. Estimates suggest a shortage of about 5 million houses in Bangladesh. In urban areas of Bangladesh, the annual estimated demand amounts to 300,000 to 500,000 houses.
Of the larger cities and town in Bangladesh, Dhaka is the most hard pressed in terms of unsatisfied housing demand. The population of Dhaka city is currently estimated at around 12.3 million. According to the Bureau of Bangladesh Statistics (BBS-2007) the average household size in Dhaka is 4.8 persons per household. Therefore about 2.5 million housing units are needed for Dhaka city only. According to estimates made by REHAB the Dhaka city has 0.225 million residential buildings, which could at highest occupation level could accommodate 10 million people (2 million families), still leaving a housing shortage of 0.5 million units in Dhaka only. 2 Considering the annual population growth of Dhaka at 4.34 %, due to both normal population growth and urbanization, (yearly addition of 0.5 million people), the city of Dhaka would need more than 100,000 additional units per year. The supply, however, is far less than, and that too is not affordable by a larger section of the city population.
The housing needs of lower-middle and lower income groups are considerable and remain largely unfulfilled. There is considerable demand for moderately priced houses between BDT 600,000 to 1,000,000, but supply of these categories of dwellings is almost nonexistent, due to high land prices in downtown areas of metropolitan cities, particularly in Dhaka city. In city
2 “Prospects of Private Housing Sector and Future Obligations.” REHAB, Bangladesh, 2009.
2 periphery areas land prices are lower; however, there is no practical transportation method for farther outskirt dwellers to access the city and their workplaces on a regular basis. Careful market-based demand studies are not available and there is a need to carry out further research/study on the housing demand of lower to medium income groups in Bangladesh. A good example of such a study was created for India by Monitor.3
Paradoxically, housing supply caters to upper income groups, and the market is glutted with new luxury housing units. There are around 800 developers in Bangladesh, and among these 453 are the members of the Real Estate and Housing association of Bangladesh (REHAB). The housing supply market is active and relatively competitive. Private developers, focused mostly on Dhaka city, typically engage in the building of dwelling units covering 1000 to 1500 ft 2. New formal construction accounts for about 3% of all housing (permanent and temporary) being constructed whether formally or informally in the country. Such development is exclusively limited to the upper-income urban groups, and is undertaken mostly for investment and rental purposes, not for use as the primary residence.
Approximately one third of all houses in urban areas were constructed outside of the formal regulatory system, mostly on land to which the homeowner does not have a formal title. While the population density of Bangladesh is 1040 persons per km 2, the population density of Dhaka is 8036. Compounding this already existing housing shortage and very high population density in Dhaka, more than 0.5 million people per yearly are adding to the habitat of Dhaka due to population growth and urbanization. This adds a further need of 0.1 million more to the already existing backlog of more than 0.5 million units. A 1993 survey of Greater Dhaka counted 2,100 slums. Currently, more than 2 million people in the capital city live either in slums or are without any proper shelter.
3 Bureau of Statistics, Bangladesh, 2007; and “REHAB: For Social Development,” REHAB, 2009. See also, “Expanding the Housing Finance Market to Cover Lower Middle Income Segments in India,” a Study conducted by Monitor-India for the First Initiative and the World Bank, June-2007.
3 3. HOUSING SUPPLY
3.1 CURRENT STATE OF HOUSING
Bangladesh has a high population density - about 1,040 persons per km 2. For a population of 154 million people, it has a limited area of 147,000 km 2, which is frequently inundated during the summer months. Leaving aside Chana at 640 persons, nowhere in the world do more than 450 people live in a km 2. Major metropolitan areas like Dhaka and Chittagong present even a worst position, with Dhaka at 8,000 persons per km 2. In such difficult conditions, only 40% of housing in urban areas and merely 5% in rural areas is permanent housing. Close to half of all housing units in the urban country are made of temporary materials. This non-durable housing requires replacement within 1-5 years after construction. Even among the housing defined as permanent, there are many types of dwelling places with some degree of permanency, ranging from construction with brick masonry and RCC (reinforced concrete construction) pillars to tin- roofed and tin-walled houses. The heterogeneity of housing makes it difficult to estimate construction and housing materials costs, as well as complicates the measurement of real estate price indices. The table below shows some characteristics of the housing sector.
Table 1 Housing Sector Characteristics of Bangladesh Bangladesh Rural Urban Total number of dwelling units 19,020,489 15,474,566 3,545,923 Per capita floor space 54.9 ft 2 53.5 ft 2 62.3 ft 2 Occupancy level 5.48 pp/dwelling -- -- unit Proportion permanent structures -- 21% 46% Proportion of rental unit n.a. (Dhaka 65%) 5% 40% Access to clean water 78% 42% Source: Center for Urban Studies quoted by Marja C. Hoek-Smi, for UNDP/UNCHS (Habitat), 1998 (Though no latest figures are available, it is safely assumed that composition has, by and large, remained the same)
The higher and middle-income groups are housed in either low-rise single-family houses, or, increasingly, in multi-family apartment buildings. The lower income households, approximately 70% of the urban households, are housed in a variety of house-types. Approximately half of the low-income housing units are in bustees (slums), informal settlements areas that include both
4 private rental and private ownership housing, built either on privately owned land or on illegally occupied public land. Conventional tenement slums (rental and owner occupied) take up another quarter of the low-income sector. These multi-unit buildings were originally built to compliance with the code, but are presently seriously overcrowded and ill maintained. Overcrowding in these buildings has increased over the last years due to an influx of rural migrants to work in the expanding garment industry. Other categories of low-income housing include: government provided squatter resettlement camps, plots of land with basic services that are provided on a leasehold basis; employee housing consisting mostly of small apartments in high-rise complexes provided by the government; squatters who have built makeshift houses on illegally occupied public or private land; and pavement dwellers.
Table 2 Dhaka Urban Area Housing Sub-Systems by Income Groups and Land Coverage Income Groups/ Housing Approximate Proportion Approximate Coverage of Approximate Sub-system of City Population (%) City’s Residential Land (%) Upper Income Group 2 15
Middle Income Group 28 65 Source: Marja C. Hoek-Smit, for UNDP/UNCHS (Habitat), 1998.
Several organizations and rural innovators in Bangladesh developed and modified various designs of rural low-cost housing after the devastating flood of 1987 and are now developing designs for the SIDAR 4 affected people. The houses vary in appearance throughout the country but have similar basic structural components. 5
4 Cyclone Sidr (also known as Super Cyclonic Storm Sidr) was the strongest named cyclone in the Bay of Bengal. The fourth named storm of the 2007 North Indian Ocean cyclone season, making landfall in Bangladesh on November 15, 2007. The storm caused large-scale evacuations. Officially, 3,447 deaths were blamed on the storm. “Save the Children Fund” estimated the number of deaths to be between 5,000 and 10,000, while the Red Crescent Society reported on November 18 that the number of deaths could be up to 10,000. International groups pledged US$95 million to repair the damage, which was estimated at US$1.7 billion (in 2007). (Source: http://en.wikipedia.org/wiki/Cyclone_Sidr ). 5 There are four reinforced concrete pillars on brick foundations at the corners of the house and six intermediary bamboo posts, with bamboo tie beams, wooden rafters and purlins supporting corrugated iron roofing sheets. This provides stability in the flood and strong monsoon wind and protection form the heavy rain during monsoon. Pillars and sanitary latrine are being provided by the concerned NGO. The housing program of NGOs is usually linked with livelihood promotion activities to improve the income and food security of the families. A range of skills is gained as a result of the integrated program including construction (carpentry, RCC pillar making, masonry, brick/stone cutting, rope making, bamboo treatment, black smithy, plumbing, etc. ), forestry, livestock-raising, home-based micro enterprises, etc.
5 3.2 DEVELOPMENT OF THE HOUSING STOCK
Supply of housing is greatly affected by the land development process in Bangladesh. The process for the entire country is centrally controlled from Dhaka, with little autonomy at the local level. The housing development process is slow and costly, due to poor preparation of master plans and the dearth of planning professionals in the Bangladesh public sector, as well as inadequate infrastructure provision, land acquisition, development and construction financing, and mortgage financing. This raises development costs and makes affordability for a large portion of the population increasingly elusive. The problem is most acute in Dhaka, where the city development authority, Rajdhani Unnayan Kartripakkha (RAJUK), suffers from administrative inadequacies, impeding more than enabling the city planning process. Yet other regional planning authorities ( e.g., for Chittagong, Khulna, and Rajshahi) have even less resources and power to implement planning and development, and are barely functional. The matter is further aggravated by the scarcity of information on housing supply and shortages for urban areas other than Dhaka, preventing adequate policymaking attention to these areas.
The development of housing stock is primarily hampered by the following factors, elaborated here using the statistics of Dhaka, since not much information is available for other cities.
3.2.1 Steep Rise in Population Density
While land is getting scarce in Dhaka, having limitations on city expansion, the massive urbanization has made Dhaka the densest city in the world, with a population density of 8,036 persons per km 2. The following Table illustrates the growing population density of Dhaka:
Table 3 Dhaka’s Population Density Growth Period Year Population Area, km 2 Density / km 2 1974 1683503 366 5010 1981 3431047 510 6725 Bangladesh 1991 6887459 1353 5090 Period 2001 9912206 1530 6478 2007 12295728 1530 8036 Source: Bureau of Statistics, Bangladesh, 2007
6 Rise in land Prices: The land prices in Dhaka city have skyrocketed in the recent past, although there has always been a gradual rise. A comparison of land prices in main areas of Dhaka is given in Table 4 according to a Survey carried out by Shelteck (Private) Limited.
Table 4 Gradual Rise in Land Price Area 1975 1990 2000 2007 BDT/m 2 BDT/m 2 BDT/m 2 BDT/m 2 Within Metropolitan Dhaka: Baridhara 373 8,955 37,361 134,328 Gulshan 373 8,955 32,877 119,403 Banani 375 8,955 29,888 119,403 Mohakhali 375 8,955 26,900 119,403 Dhanmondi 375 8,955 32,877 141,791 Lalmatia 300 8,955 26,900 85,552 Azimpur 261 8,955 23,911 52,239 Mohammadpur 375 7,463 17,933 59,701 Shantinagar 300 7,463 22,417 89,552 Defense 300 7,463 23,911 89552 Officers Housing Society (DOHS) Shamali 265 4,478 14,944 44,776 Uttara 300 4,478 14,944 52,238 Cantonment 300 5,970 14,9444 44,776 Kamalpur 265 5,970 11,956 37,313 Gandaria 150 5,970 10,461 29,850 Basabo 30 4,478 11,956 29,850 Kalaynpur 265 4,878 11,956 29,850 Mirpur 150 2,985 10,416 29,850 Badda 60 2,985 8,967 29,850 Goran 60 2,985 8,967 26,865 Demra 60 2,985 8,967 22,388 Motijheel 750 17,910 52,305 164,179 Karwan Bazar 620 14,925 37,361 119,403 Areas around Dhaka city: Ashulia - - - 5,000-6,000 Savar - - - 4,000-4,500 Gazipur - - - 4,500-6,000
7 Kamrangirchar - - - 4,500-7,500 Keraniganj - - - 2,500-4,500 Source: Shelteck [private] Limited-2007
Land prices have been particularly high in Dhaka, where the need for middle- and lower-income housing is the most severe. Town planning is difficult, given the dense population, saturation of constructed areas, scarce city land, and poor transportation network to the farther outskirts, where housing infrastructure is also poor. Residential land in Dhanmondi, the most expensive area in Dhaka, was BDT 25,000/katha in 1975, and in 2007 it was around BDT 9.5MM/katha. Prices are by far more affordable on the periphery of the city—Uttara, Pallabi, and Shyamali— but those areas involve a long and expensive commute to employment centers. The provision of planned, efficient and inexpensive transport facilities from the outskirts of Dhaka to the heart of the city would shift the burden of housing needs from the centre to the more affordable periphery.
The Bangladesh University of Engineering and Technology planning faculty estimates that land costs in Khulna are similar to those in Dhaka, whereas in Chittagong they are about 15% lower (although the most expensive areas there match Dhaka) and in other cities 30–40% lower. Yet even in the lowest-cost areas prices are inordinately high.
3.2.2 Rise in Cost of Construction Materials
There has been a gradual rise in the cost of construction material in Bangladesh. Table 5 shows the gradual rise in cost of construction material since 1988. The prices have increased more than four times during the last 20 years, since 1988. The rise in land prices has been very steep, and more so during the last 10 years. The average rise in land prices in some “posh” localities of Dhaka, like Dhanmandi, during the last 20 years has been much higher than the rise in cost of construction materials. The rise in the cost of construction materials more or less matches the inflationary trend, and thus the rise in income levels. This indicates that it is the rise in land prices which has really pushed the property prices to unaffordable levels.
8 Table 5 Rise in the Prices of Construction Materials Price of Price of sand Cement per Iron rod per Year brick per per cft bag ton piece Local Sylhet 1988 1.00 3.60 5.25 105 11,000 1989 1.10 3.68 6.30 110 11,000 1990 1.10 4.73 6.70 115 11,500 1991 1.12 5.10 7.50 125 11,700 1992 1.13 6.80 7.90 125 12,000 1993 1.15 7.00 8.10 125 12,300 1994 1.20 7.63 8.20 150 12,700 1995 1.50 7.00 8.50 162 13,500 1996 1.50 7.50 9.00 170 14,000 1997 1.75 7.50 9.20 175 15,200 1998 2.00 7.10 9.00 182 17,500 1999 2.10 7.50 9.80 190 21,300 2000 2.50 7.80 10.50 193 21,300 2001 3.00 7.95 11.50 195 21,700 2002 3.50 8.00 13.50 198 23,800 2003 3.40 8.00 14.00 225 31,500 2004 3.25 9.00 15.00 240 37,000 2005 3.15 8.00 22.00 283 39,700 2006 3.90 9.00 20.00 313 42,700 2007 4.20 9.50 21.50 337 49,200
3.2.3 The Development of Residential Infrastructure and Serviced Land in Dhaka
The process of residential infrastructure development in Dhaka is fraught with market failures. RAJUK regulates city development and carries out a planning role, charges itself with residential infrastructure provision, provides urban land for development, and carries out residential construction in its own right. Each of these functions could benefit from an overhaul and increased effectiveness. RAJUK plays an important role in providing serviced land, but in a way that constrains rather than fosters the contribution of private developers and the widening of housing supply.
9 3.3 ROLE OF RAJUK
RAJUK’s role in the development of land allocation is distortive and is largely criticized by the stakeholders who claim that the agency has obtained a vast share of Dhaka urban land at artificially low prices (via its ability to impose the sale of land upon its owners - local government entities). This gives RAJUK an unfair advantage against private developers, compounded by the fact that RAJUK developments benefit from municipal financing of residential service infrastructure, a cost which private developers bear themselves. Further, RAJUK requires end clients to pay early installments during construction, thus restricting its subsidized new apartments to well-off customers. RAJUK’s construction activities are also inefficient, and vastly inadequate given housing demand realities. RAJUK’s inadequate advances in the provision of residential serviced land globally restrict land supply. Since its formation in 1959, the agency has produced serviced parcels sufficient for 16,000 housing units, fewer than 400 units per year. Over this time, the area within RAJUK’s jurisdiction has grown by at least 6 million people, or more than a million households. Despite this, RAJUK has only been able to provide serviced land to meet between 1 and 2% of the demand for such parcels. A transparent land allocation at true market prices and the creation of a level playing field among developers is a crucial condition to increase the availability of urban land and meet the growing demand of the middle range income group.
3.4 ROLE OF PRIVATE DEVELOPERS
In the case where the land to be developed is owned by a private party, the development process is inefficient as well. The developer does not acquire the property—rather; he receives a power of attorney from the owner that gives the developer permission to build on the property. Upon completion of construction, the land is transferred to the developer, in exchange for the ownership of a certain share of apartment units in the constructed property. Permits are required from at least eight different agencies, each fraught with delays and suffering from a lack of transparency and governance problems. Further delays are caused by an inadequate legal and financing framework.
Developer financing is limited due to the underlying risks involved. As a result, land acquisition for housing development is mostly funded by equity from the developers themselves. That in
10 turn limits development projects to an inefficiently small-scale, due to capital constraints. While construction loans are available, they have low loan-to-value ratios (typically 50% or less) and carry such high rates of interest (often more than 16%) that developers view them as having little value. This is in contrast to other countries, where very often construction costs will be financed at 100%, with an interest rate that carries some margin above the central bank’s prime lending rates. The reluctance of banks to fund developers is also rooted in strong preferences by developers to hoard land and time the market as land prices increase. Given the shortage of land for middle and lower income housing, these practices further aggravate the supply problem.
3.4.1 Indirect Developer Financing Through Installment Loan (Mortgage Finance)
Owing to the lack of robust construction financing in Bangladesh the ultimate buyer of the property usually finances the construction costs through installment payments. This slows down construction, as developers wait for installments before they can top-off projects. In a typical case, while the actual construction might take 14 months, delays arising from financing and other issues often add another six months to a year to the process. These frictions are estimated to add 10 to 20% to the cost of construction.
Even if used, construction loans run into an asset security problem. Specifically, until a developer fully repays a construction loan, end-buyers of the apartment units cannot obtain financing secured by the same lien. There is no “release” structure in construction financing in the case of leasehold land, where title is released to the home buyer, until construction of the entire project is complete. Currently, this risk is mitigated by lenders working with reputable developers only, as well as requiring third party guarantees. A simplification of property transfer approval procedures could permit transfer during the construction (currently the authorization of the public title owner is required).
These loans also transfer risk from the developer to home buyers, as the latter pays significant advances to developers prior to completion of the construction, but are not protected against delays, project failure, developer bankruptcy, or failure to meet contractual specifications for price or quality. Given these risks, financial institutions are reluctant to lend to home buyers for
11 new developments. That in turn limits the market for new construction to clients who can pay fully up front, or the upper-income groups.
3.4.2 Role of Developers Association, REHAB
After independence in 1971, Dhaka became the capital resulting in massive influx of the city’s population. The population of Dhaka increased from 1.7MM in 1974 to 9.91MM in 2001 and 12.3MM by 2007. The population density increased from 5010 in 1974 to 8038 by 2007. The resulting housing shortage and land scarcity was introduced into the urban lifestyle. The developers started building flats and apartments at suitable locations to meet the housing needs of the middle and upper middle income people. Initially, five developer companies were working in the sector.
The builders / developers association, Real Estate & Housing Association of Bangladesh (REHAB), was formed in 1991 with the objective of strengthening the private sectors role in housing developments. It had an initial membership of 11 in 1991. It now has a pivotal role in handling the issues of housing in an organized and modern manner through its 453 members (as of 2008). It is also playing an active role in framing most of the government’s policies and laws relating to this sector, as well as an organized lobby defending developer interests. REHAB members are delivering many different types of apartments/flats, according to the needs and affordability of the people in different areas of the city, and their role is assuming a critical significance on the supply of housing in Bangladesh. The REHAB members and non-member developers are also active in cities like Chittagong, Comilla, Sylhet, Bogra, Mymensingh, etc . The developer industry has also been affected due to recent economic slowdown. In Bangladesh, the growth of the construction industry was 8% (1998), 8.31% (2006), and 7.1% in 2007; further it has slowed down to 5.93% in 2008, and is likely to be around 5% in 2009. It is essential for the Government to take stimulus measures to boost the construction sector, support the builder industry and thus ensure a continued supply of housing in Bangladesh.
3.5 THE SECONDARY PROPERTY MARKET
The flawed land development process has resulted in a limited secondary market for property in Bangladesh. This is compounded by a speculative attitude towards property prices built on the perception of unlimited future land price increases riding on population and economic growth.
12 Consequently, it has developed a culture where real estate is not sold even if the cash flow from rents is not sufficient to cover the mortgage service. The weak market signals in the mortgage market, and lack of foreclosure enforcement, do not help. Institutional mechanisms and the legal framework are not in place to stimulate a smoothly functioning real estate transactions market. Specifically, bottlenecks are created by the lack of secondary housing market infrastructure, and a high transfer tax.
Bangladesh has a dearth of real estate brokers (not registered) and appraisers (not properly trained/qualified), and poor information on property market prices and trends. The absence of a formal mechanism through which buyers and sellers can exchange information about the real- estate market prevents the market from operating properly.
The transfer tax rate is extremely high—at 12.5% of gross price; it strongly discourages the transfer of assets (or at least “official” transfers of assets). Reducing this rate would increase revenue from the tax and, even more important, stimulate sufficient sales to start making accurate determinations of market value—that are crucial to the development of a market for mortgages.
4. HOUSING FINANCE
The combination of high land prices and high interest rates makes housing unaffordable to middle and lower-income groups, and simultaneously causes oversupply of housing for the very top income groups (Box B1). A large part of these inflated prices is due to instructional factors which can be addressed by policy measures. The high land prices are to a large extent due to a faulty land development process, as discussed in Section 3.2. The high interest rates, as will be argued in Section 4, are a result of weak competition, poor transparency, underdeveloped market structural features such as second tier lenders, and the lack of a level playing field for financial institutions. Yet housing finance is growing at very high rates, spurred on by high excess demand and market innovations to increase supply. During the year 2008, Delta Brac’s housing portfolio increased by 34%, while those of commercial banks increased by 16%. The sector as a whole grew by 14% in 2008, and stood at BDT 142.5Bn, or a little over 6% of the total credit to the private sector.
13 The present housing finance system in Bangladesh is extremely small and highly segmented. Formal mortgage finance is available only to households with incomes above BD BDT 25,000 per month (well above the 10 th percentile of the urban income distribution) and is restricted to selected housing submarkets in Dhaka. Within this section of the market, the Government- subsidized housing finance through the Bangladesh House building Finance Corporation (BHBFC) is most prevalent, while the Nationalized Commercial banks (NCBs) are decreasing their housing loan portfolios. The further expansion of the housing sector would be provided through private sector mortgage lenders who have recently started to operate in this market. With existing capital constraints in the financial sector, the competition by government savings and lending institutions and the weak debt market, new Housing Finance Institutions (HFIs) face a challenge in mobilizing funds. These HDIs are faced with shortage of long-term funds, resulting in a tenor mismatch. The medium-term funds being raised by these institutions are relatively expensive and it is unlikely that the cost of such medium to longer-term funds will come down in the short term. In addition, the housing finance market has yet to convince these new HFIs that it can be a profitable investment business for them with long-term potential. However, the NHFIL is a private sector HFI which has a mandate to do both the leasing and housing finance. Finding higher margins on leasing business, in medium-term lease portfolios has motivated it to gradually move its business towards leasing from housing finance. Non- collateralized credit for house construction by MFIs is available to only a small proportion of poor rural households that have participated in income-generation credit programs.
14 Box B1. Market failures in the housing and housing finance market in Bangladesh Consider a typical BDT 2 million unit (see the figure). Improving the loan conditions from 10- 15-year maturity and interest rates of 14–15% to terms of 8% interest and a 20-year maturity would double the population which can afford mortgage finance, reaching the full top decile of the urban income distribution. Lowering the average property price from BDT 2MM to BDT 0.7MM expands the market to 40% of the urban population. Developers have started recognizing the potential depth of the market for moderately priced housing. But, in the absence of fundamental improvements in infrastructure and land and housing development, this nascent trend will not go far.
Urban households: 2003 est. incomes & mortgage affordability
100 cumulative income distribution 90 present affordability range:Tk 2Mln,14.5%, 12 years 80 same price, improved mtge: 8%, 20years 70 Price = Tk 700,000, improved mortgage 60 % (10%= 560,000HH) 50
40
30
20
10
0 0 3 4 5 6 8 9 12 15 25 54 lower income threshold (1,000Tk/mo)
How, in order to lower the mortgage repayments to affordability level, do we need to lower land prices or the interest rates or both, remains a question yet to be answered. The obvious answer for case of Dhaka is to lower the land prices and make these affordable, as a practical answer to the issue. The argument is that in the case of Bangladesh, neither price (the price of land and of money, i.e., interest rate) reflects market conditions. In the case of interest rates, competition, transparency, developed market structural features such as second tier lenders, and a level playing field for financial institutions would all go a long way towards lowering the cost of mortgage financing. Similarly real estate prices reflect not only a physical scarcity of usable land in a high-density country, but to a much larger extent institutional and regulatory inadequacies that could be addressed by appropriate policy measures. India provides an eloquent example of how improving land use policy can considerably lower prices. Land prices started falling in the mid- 1990s after the repeal by several states of the Urban Land Ceiling Act, which was severely restricting land development. Prices fell by a half from levels similar to those in Dhaka. Source: Housing Finance Reforms in Bangladesh (2004).
4.1 THE HOUSING FINANCE MARKET
The financial sector in Bangladesh is fairly well-developed, though it is dominated by the banking sector. The sector is composed of four Nationalized Commercial Banks (NCBs), five
15 government-owned specialized banks, 30 domestic and 9 foreign Private Commercial Banks (PCBs), as well as 29 private non-bank financial institutions (NBFIs), in addition to cooperative banks and insurance companies. The banking sector’s overall assets amount to almost 60% of the GDP. The financial system has seen a gradual growth of Islamic banking in Bangladesh since 1983, with the establishment of the first Islamic bank, the Islami Bank Bangladesh Limited.
Table 6 Panel A: Outstanding Housing Loans in Bangladesh Outstanding as of June 2006 June 2007 June 2008 Lenders (Billion (Billion (Billion (%) (%) (%) BDT) BDT) BDT) SCBs 25.8 25.57 28.9 23.19 33.6 23.58 PCBs 35.1 34.79 43.7 35.07 50.8 35.65 Other banks 3.0 2.97 13.5 10.83 16.6 11.65 Sub total 63.9 -- 86.1 -- 101.0 -- HBFC 26.2 25.97 25.2 20.22 24.4 17.12 DBHF 5.5 5.45 7.1 5.70 9.5 6.67 NHFIL 1.9 1.88 1.9 1.52 1.9 1.33 Other FIs 2.9 2.87 4.1 3.29 5.5 3.86 Sub total 36.5 -- 38.3 -- 41.3 -- MCL & GB 0.4 0.40 0.2 0.16 0.2 0.14 G. Total 100.9 100.00 124.6 100.00 142.5 100.00 Source: Annual Report, Bangladesh Bank (July 2007- June 2008)
Panel B: Housing Industry Overview Number Amount Average/Loan of Loans (BDT MM) (BDT MM) Housing Companies 2,534 15,358 6.00 Urban Housing 58,256 47,174 0.80 Rural Housing 28,218 1,871 0.06 Renovation Loans 2,611 3,150 1.21 BHBFC 41,573 14,336 0.34 Source: Bangladesh Bank data.
In the housing finance market, an important player is the Bangladesh House Building Finance Corporation (BHBFC), a government entity, which pioneered house building finance in the country, and until recently, was the principal source of housing finance in Bangladesh. BHBFC
16 is characterized by its approach to the low and middle-income population, and the countrywide geographical spread of the loan portfolio. In rural areas, NGOs make considerable contribution to the financing of rural housing construction and improvements. The Government also funds lower income housing via a special BDT 500MM fund called the “Grihayan Tahabil,” created in 1998-1999 and disbursed through NGOs.
The multiplicity and diversity of players in Bangladesh has not translated into a vibrant and competitive housing finance market. This is because the primary mortgage market is characterized by: (i) funding distortions and absence of long-term funding sources; (ii) the legacy of a high level of nonperforming loans among nationalized commercial banks; and; (iii) an uneven playing field between the state-owned BHBFC and other lenders. This results in allocating the cheapest financial resources to the least efficient players and pushing up intermediation costs, in turn driving interest rates beyond the affordability level of most Bangladeshis. As a result, interest rates continue to show the fragmentation of the market between BHBFC on one side, which lends at as little as 9%, and the other institutions, which lend between 13% and 16%.6
A survey conducted by the Bangladesh bank in 2007 reveals a wide range in interest rates being charged by different banks and Financial Institutions (Table 7).
Table 7 Interest Rates Being Charged by Banks and FIs in Bangladesh Names of Interest Names of Interest Organizations Rate (%) Organizations Rate (%) Sonali Bank 13.00-14.00 Dhaka Bank 15.50 Agrani Bank 13.00-14.00 Prime Bank 14.50 Janata Bank 14.00-15.00 Dutch-Bangla Bank 13.50 Rupali Bank 13.50 Mercantile Bank 16.00 BASIC Bank 14.00 Premier Bank 15.50 The Citi Bank 15.00-16.00 Trust Bank 15.00-16.00 National Housing Arab Bangladesh Bank 15.00-15.50 14.50-16.50 Finance & Inv (NHFIL) National Bank 15.50 Delta BRAC Housing 13.50-16.00
6 Add-ons include processing and servicing fees, and monthly interest computed on non-amortizing balances within one year.
17 (DBH) Eastern Bank 13.00-14.50 IDLC 14.50-16.00 BHBFC 10-12% Source: Bangladesh Bank Survey-2007.
As at June 30, 2008, the total mortgage debt outstanding stood at BDT 142.5 billion, a 14% increase over that at the end of June 2007 (see Table 6).
Housing loans in Bangladesh have a maturity of 10 to 15 years. Lending criteria reflect a great cautiousness, in particular through restrictive loan-to-value ratio (LTV) maximums (capped at 70% generally, but averaging 50% in practice), and having an upper limit in amount of loans (BDT 2.5 or 3MM for many lenders).
BHBFC maximum loan tenures are 15 years, and LTV of 80:20, and the upper limit of a BHBFC housing finance is BDT 4.0MM. The Delta Brac Housing (DBH) lends up to 70% of the total construction cost, while NHFIL has no specific limit.
4.2 BHBFC
BHBFC is a traditional specialized player, still dominant in the low and middle-income housing finance market, despite its modest size (on the average, less than 1,000 loans were sanctioned annually, with 839 cases sanctioned in the year 2006-07. During the year 2008 BHBFC had sanctioned loans with a value of BDT 2,366MM. The cumulative sanctioned amount up to this year was BDT 33,558 billion.7 The staff strength of BHBFC as of 2008 was 550 employees). The institution is beset with a poor governance structure, misaligned operational incentives, high non-performing loans, and ill-targeted government subsidies. In spite of these shortcomings, BHBFC is the only institution serving the low and middle income housing segment and a wider geographical area focusing beyond Dhaka and a few larger cities.
BHBFC suffers from governance shortcomings that plague many institutions of this kind around the globe. It is wholly owned and closely controlled/administered by the Ministry of Finance, and run in a manner that is more administrative than financial. This stalls flexibility and quick decision-making, and makes it harder for BHBFC to compete in an increasingly competitive housing finance market. Further, from a financial sector stability point of view, Bangladesh
7 BHBFC Annual Report of 2006-07.
18 Bank prudential regulation, if made applicable on BHBFC, would be a more prudent regulation of BHBFC, as compared to the laxer Ministry of Finance rules and regulations. This situation is reflected in its loaning conditions, which are set by the Board of Directors. These loaning policies and regulations apparently have no direct connection to the market conditions—these policies have not changed for several years. Also, the institution is corseted into rigid business limitations—on the asset as well as on the liability side—which prevent it from adjusting to a changing environment or diversifying its risks. BHBFC has become known for inefficient and lengthy loan processing – in the past sometimes the loans have taken as much as a year to be approved.
Recent efficiency improvements at BHBFC have reduced the loan processing time to 3-6 months. The narrowly-defined loan processing steps are restricted, per a recent office circular, currently under implementation, to a total processing time of 15-20 working days for loan approval, with respective deadlines for each process step. However, unless the workflow is redesigned, regrouped and certain independent functions are carried out simultaneously, it does not seem possible to contain the processing time within 15-20 working days in practice. Other aspects of BHBFC’s operational efficiency like manualization, computerization, human resource development, etc., are also plainly lacking and require an upgrade. Administrative cost per loan is prohibitive, as compared to private mortgage providers. Other non-market operational practices in BHBFC’s functioning also need to be reevaluated, such as for example the practice of sanctioning loans on the basis of the valuation of the property instead of giving due weight on borrower repayment capacity.
In 2008 the World Bank carried out a diagnostic study of BHBFC, its issues and possible remedial options. The study had carried out a detailed analysis of its operations and had concluded that with introduction of a comprehensive institutional reforms program, it could be turned into a viable and self-sustainable housing finance organization. Though some of these recommendations were implemented, the recommendations of the study are yet to be formally put into action.
The BHBFC loan portfolio covers 18 cities of the country and shares 71% of the mortgage market in terms of number of loans and 30% in terms of outstanding portfolio value (Table 8).
19 The bulk of BHBFC’s portfolio is in Dhaka (69%), 9% is in Chittagong, with the remaining 22% scattered elsewhere in the country. BHBFC has a limited product range which poorly caters to the variety of clients. It issues six types of loans: general, group loan, apartment loan, adjusted loan, loan for semi-pucca house, and middle and lower-income group loans. Despite a BDT 4MM lending limit, it tends to lend to the higher-income house buyer; in particular, 76% of the borrowers are land owners who build multifamily houses for rental purposes. BHBFC’s lending rates are lower than the market (in June 2008, they were 12% for Dhaka and Chittagong, and 10% elsewhere (effective rate 9.6%), as compared to an average market rate of 14.5%. The maturity of BHBFC loans is 15-20 years, as compared to about 10 year maturity of market- offered mortgages.
Table 8 BHBFC portfolio (2008) Total outstanding portfolio BDT 25,163MM Principal BDT 14,336MM Interest BDT 10,827MM8 Source: BHBFC data.
BHBFC suffers from misaligned operational incentives. In view of its lower-income developmental focus, the institution has enjoyed various privileges regarding taxation, prudential obligations, and capital raising—chief among them government support for its funding. The main source of funding has traditionally been subsidized debentures with government guarantees and SLR-eligibility, though the government has been reluctant since 1998 to allow BHBFC issue fresh Debenturess (last issue was in 1998). Outstanding debentures amount to BDT 12.2Bn at an average cost of capital of around 6%. They are subscribed 75% by Bangladesh Bank and 25% by financial institutions. There is no active secondary market for these debentures. BHBFC would rather benefit from aligning its funding and performance to the market, instead receiving an explicit, transparent, and well-targeted subsidy.
BHBFC has traditionally shown a poor ability to maintain payment discipline among its borrowers. Its poor performance in this field, added to the negative legacy of past government programs in rural areas, has deeply affected the quality of its portfolio. Nonperforming loans
8 Of which suspended BDT 931MM, deferred BDT 2,436MM, and due/due but not received BDT 7,460MM.
20 amount to 18% of the gross loan portfolio, all the more worrisome in view of the more lenient classification of loan arrears of the Ministry of Finance, as compared to the Prudential Regulation standards set by the Bangladesh Bank for commercial banks. 9 The current recovery rate remains below 50%. Worth mentioning however, is the emphasis now put by the management on collection efforts. BHBFC does enforce security rights (foreclosures), in view of legal complications involved in its enforcement and also due to socio-political pressures. The nonperforming loan rate has been decreasing in the past years. BHBFC has been recommended to raise loan-loss provisions to the Bangladesh Bank regulatory level. Because of the restrictions imposed by the government on its funding, BHBFC, which is not allowed to take deposits, has been forced to limit its new lending—essentially to be linked to its recoveries. New loan sanctions have been small: BDT 839MM in FY 2007, and BDT 2,366MM in 2008.
BHBFC is sometimes blamed to be the channel for a nontransparent and ill-targeted government subsidization mechanism. The rates charged on loans are significantly below those of all other lenders as could be seen in the Table 12 on comparison of rates being charged by other Banks/FIs. The BHBFC’s effective lending rates are even lower (9.6%), because of interest computation methods, rescheduling, and rewards to regular payers. The combination of these administered rates, with below-market refinancing through debentures, makes it rather impossible to measure the actual subsidy volume involved. According to its charter, BHBFC should focus on lower-income groups; however, despite a BDT 250,000 lending limit, it tends to lend to higher income house buyers. In particular, 76% of its borrowers are landowners (BHBFC finances only construction, not land), who build multifamily houses for rental purposes. This is mainly in Dhaka which comprises nearly 70% of BHBFC loan portfolio.
In spite of its shortcomings, BHBFC has many positive aspects to harness. Traditionally the oldest mortgage finance provider, it has accumulated institutional knowledge and experience, and is well versed in housing, mortgage lending, titling and documenting issues. As housing needs spiral up, any initiative to meet this backlog through bulk housing finance will be better addressed by BHBFC. It is by far the largest specialized financial institution with wide spread geographic presence, and a very large borrower base. Because of its geographical spread, it is
9 For “classification” of its non-performing portfolio, BHBFC follows the Ministry of Finance Directives, which are less strict than the Prudential Regulations of Bangladesh Bank standard classification of non- performing loans, which would more than double this figure.
21 well placed to further any government programs of providing housing solutions to lower-income groups.
4.3 TRADITIONAL MORTGAGE LENDING
With the entry of commercial banks and financial institutions, the mortgage finance market in Bangladesh is rapidly growing in size, and getting much more competitive in nature. The commercial banks, both in the public and private sector, have either established or are in the process of setting up in-house mortgage finance departments. A few non-bank financial institutions are already very active in the housing finance market, as described in the Section 4.4. Islamic banking, including mortgage lending, is fast growing in Bangladesh as well (Section 4.5). While there are 3-4 Islamic banks now operating in Bangladesh, the “Islamic Bank Bangladesh” is the leading Islamic commercial bank. The banking and financial sector regulator is Bangladesh Bank (BB), the central bank of Bangladesh, which is entrusted with supervision and regulatory oversight of the housing sector, with the exception of BHBFC (Section 4.6).
Nationalized commercial banks (NCBs) are the second important source of housing finance in Bangladesh, after BHBFC. NCBs have low cost of funds, as they receive the bulk of their deposits from government entities, which are statutorily required to deposit at least 75% of their funds with NCBs. Still, NCBs suffer from a term mismatch problem, as they are constrained by the maturities of their deposits, which can only go up to 3 years maximum, and less than a year on average. NCBs thus give priority to corporate short-term lending and set a low ceiling on the amount of mortgage loans they extend (3 to 6% of their outstanding portfolios). Housing finance is only a part of their mortgage portfolios, a significant portion of which is allocated to commercial real estate. NCBs follow a policy of wide intermediation spreads for housing— about 7%—in particular as they seek to offset the poor profitability of their other assets and make up for inadequate provisioning. Despite low loan-to-value ratios, the rate of delinquency is high with NCBs. Due to insufficient capital bases, NCBs tend to restrict their lending activity. Their growing liquidity means that large amounts of cash lie idle, while their widespread branch networks, a potential asset for large-scale retail lending, are underused.
Private and foreign commercial banks (FCBs) are growing providers of housing finance (housing loans make up between 5 to 10% of their loan portfolio). In Bangladesh there are no clear
22 Prudential Regulations on ratio of Mortgage Advances to Total Advances, which in the region are generally up to 10%. The foreign banks use the same deposit-based funding as NCBs, but are less handicapped by delinquencies—the ratio of classified real estate loans seems to be in the range of 5%. The foreign banks do not enjoy the privileges as enjoyed by the NCBs, however, they are efficient and offer a better service quality, product options and expanded branch networks. Housing loans make up between 5 to 10% of their total portfolios. Foreign banks are recent newcomers to this market, and their impact on the market is likely to remain marginal, as they target only upper-class borrowers. The weighted average rate on private commercial bank deposits in June 2008 was 6.85%, as against a weighted average lending rate of 12.09%, leaving a spread of 6%. FCBs are even better in this regard with a weighted average deposit rate of 3.75% and against weighted average lending rate of 11.29%, leaving a spread of 7.5%.
4.4 SPECIALIZED MORTGAGE LENDING
Private institutions specializing in housing finance have made remarkable strides in a short time. The management teams at Delta BRAC Housing, National Housing, and IDLC, aspiring to the same professional standards as their counterparts in other parts of the world, have made substantial progress in mortgage underwriting, loan servicing, streamlining local decisions, eliminating delays, and increasing transparency. Particularly impressive is Delta BRAC’s work in putting together credit histories of potential borrowers and beginning to correlate credit history with loan performance. Still, these institutions remain at the upper and upper-middle income clientele level, as is evident from their average loan size per client, which is nearly three times the already high average loan size of BHBFC.
Specialized financial institutions have also made strides in loan servicing. Because they keep careful track of delinquencies and communicate with borrowers at the first sign of trouble, they have been able to reduce the number of serious nonperforming loans to less than 5% of their business. One thing that keeps nonperforming loans to a minimum is that lenders require owners to put up substantial equity (at least 25% and usually more, sometimes up to 50%). Another is the lender’s insistence on obtaining and keeping title until the loan is paid off. Last, and perhaps most important, is lenders’ ability to persuade borrowers that they would prefer a property whose ownership interest is not disputed. The very presence of a foreclosure proceeding creates a sign of worry for the borrower (acting as a fear factor). Given the high equity stakes the owners have,
23 and given cultural attitudes toward property in Bangladesh, the threat of weakening any property rights, even without actual foreclosure, remains a strong deterrent to loan delinquency and default. These private institutions receive no indirect subsidies and charge relatively high rates, yet their market share in the housing market is exploding at the expense of other institutions.
4.4.1 Delta-BRAC Housing Finance Corporation Limited
Delta-BRAC started housing finance operations in 1998 as a joint venture between Delta-BRAC (an NGO), IFC and the Housing Development Finance Corporation (HDFC) of India. 10 It has a business focus of 80% in Dhaka, and 20% in Chittagong, while in reality it has more than 90% of its loaning concentrated in Dhaka. The portfolio comprises of 60% for new construction and 40% for real-estate purchases. Delta Brac has a diversified funding base including credit from multilateral agencies and local commercial banks, the BB refinance window and public deposits. Delta Brac’s cumulative housing finance portfolio is BDT 8Bn as of Dec 31, 2007.
Delta-BRAC has a strong marketing liaison with the builders, and gets a major portion of its business from large size development projects. Delta-Brac has a vigilant loan surveillance system and thus is maintaining an NPL level of about 0.5%. The institution is using 6 months as a basis for loan classification and initiation of remedial actions, including legal action against a defaulter. Delta-Brac is a very profitable entity with a book-value per share of BDT 250 (par value BDT 100). The EPS for the year 2006-7 was BDT 55.
4.4.2 National Housing and Finance Corporation (NHFC)
NHFC started operations in 1998 and was registered under the Companies Act 1993 as an NBFI, regulated by BB. NHFC has two licenses, for a housing finance company and as a lease finance company, with the requirement to maintain housing finance as its core business (over 51%). NHFC has a geographical focus of 80% in Dhaka and 20% in Chittagong. NHFC funds its lending operations mainly from deposits, which results in a term mismatch of assets and liabilities. NHFC’s cumulative housing finance portfolio as of Dec 31, 2007 is BDT 4,380MM to 3,081 borrowers, resulting in an average loan size of BDT 1.4MM per borrower. The size of the outstanding portfolio is BDT 1,840MM as against 1,744 borrowers.
10 It is currently owned 25% by BRAC, 15% by HDFC (India), 15% by IFC, 20% by insurance companies, and the remainder by the general public.
24 NHFC’s typical lending terms are presented in Table 9. The clients are charged a pre-payment penalty of 2%. The income is assessed based on present and future income, including rental income. The loan to value ratio is 50-70%. The value is based on construction cost only, excluding the cost of land. NHFC also finances land up to 50% of the cost, with a condition that the house will be built within five years. In case of default the NHFC’s has the right to repossess the property and recover its cost with penalties/profits.
Table 9 Typical Lending Terms of NHFC Housing Leasing SML** Rate 15.5% p.a. 18% p.a. 15% Maturity 15 years 3-5 years 3-5 years Ave. Loan Size BDT 1.5MM* BDT 20MM BDT 15MM * The figures as given by the management are based on recent financing. ** Small Ticket Lease Source: Personal interview with NHFC officials during visit to Dhaka in 2008.
NHFC has a very effective loan surveillance system. It takes post-dated checks for the subsequent 12 monthly installments, along with one undated blank check. The checks are deposited on the 1 st , 10 th and 15 th of every month and encashment / default is closely monitored. A borrower must have a cell phone for effective personal contact. Computer generated SMS reminders are also sent to the borrower. If a default persists, the entire outstanding balance is called back through an earlier deposited blank check. Legal action against a defaulter is initiated within 6 months of default. The NPL’s are stated to be less than 2%. Since NHFC makes a higher return on lease finance, which has a shorter loan tenors of 3-5 years, it is inclined to shift its business focus from housing to lease finance.
4.5 ISLAMIC MORTGAGE FINANCE
The Bangladesh market has a considerable potential to absorb Islamic financial opportunities and instruments. This mode of finance can play an important role in this country, since it often targets customers with lower-than-average incomes. Presently 6 full-fledged 11 Islamic banks and 20 Islamic banking branches of conventional banks 12 are operating in Bangladesh – most
11 Source: Ferdous Ahmad at www.islamonline.net. 12 Ibid.
25 prominent among them, with respect to market share, product range, and balance sheet strength, is the Islamic Bank Bangladesh Limited (IBBL).
A premier and pioneer in the sector, Islamic Bank Bangladesh Limited (IBBL) started operations in 1983. Starting with a meager asset portfolio of BDT 56mn in 1989, its asset base touched the level of BDT 174Bn by 2007. IBBL is the largest among the private commercial banks, and second only to Sonali Bank Limited, the largest public sector bank, with the widest network of branches. All of its 103 branches are connected to online banking. While catering the need of Islamic commercial banking for a large segment of the population, it is also playing a prominent role in the social service sector through a poverty alleviation program covering about 500,000 people, and through employment generation for over 1,000,000 people. Among its core financial businesses are real estate investment schemes, housing investment schemes, rural development schemes, and household durable schemes. Though it is better placed in providing housing solutions to a predominantly Muslim population of lower and middle income, its penetration down the income scale is as yet limited.
Table 10 Performance of Investment under Special Investment Scheme of IBBL
Source: Bangladesh Bank data (2008)
The IBBL has a country-wide presence, maintaining about 196-branch network (the bank’s performance is presented in Table 10). IBBL’s investments in the real estate sector, including both retail and project finance have been steadily growing, starting from BDT 4.1MM in 1983, BDT 69.9MM by 1998 to BDT 9.4Bn by 2007. IBBL’s portfolio is 80% urban and 20% rural housing finance. The average loan size in urban housing is BDT 1.5MM. Under IPPB’s rural housing finance program, it has an outstanding portfolio of BDT 1.7Bn for 12,337 clients.
26 4.6 PRUDENTIAL FRAMEWORK FOR HOUSING FINANCE , AND RECENT POLICIES
Bangladesh Bank, which enjoys a high degree of autonomy, supervises and regulates all banks and non-banking financial institutions in the country. Its regulatory role encompasses prudential regulations, including minimum capital requirements, insider borrowing, loan concentration and asset classification. The Bangladesh Bank can enforce its authority through penalties for non- compliance and intervention in the management of problem banks. In continued efforts towards strengthening oversight of the banking sector, the Bangladesh Bank has issued risk management guidelines for commercial banks, mandated banks to conduct systems audits, and placed restrictions on the number and tenure of directors at banks. The existing regulatory and legal frameworks for NBFIs are weaker than bank prudential regulations. Existing rules poorly compensate for the different nature of NBFIs (for example, there is no distinction between deposit-taking outfits and non-deposit-taking ones).
There is no special housing finance prudential regulation, though all housing finance institutions are subject to Bangladesh Bank regulations. The notable exception is BHBFC, which still remains outside the ambit of Bangladesh Bank, and is solely regulated by the much weaker rules of the Ministry of Finance. The MOF does not have the expertise, framework, and dynamism needed to regulate a mortgage finance company. Hence, BHBFC suffers from a very weak regulatory regime resulting in innumerable administrative inefficiencies. To take one example, private housing lenders are under the BB loan classification, whereas BHBFC uses the respective MOF version, thus resulting in applications of different standards of portfolio quality. If BHBFC would have followed Prudential Regulations (PR) of Bangladesh Bank for classifying its loans, it would have to make a substantially higher amount of provisions.
The loan classification guidelines of the Ministry of Finance are very lenient when compared with Prudential Regulations of Bangladesh Bank. Under MoF guidelines, the accounts do not reflect the true health of BHBFC. These guidelines are not frequently revised with the changing needs of financial markets. Bangladesh Bank also has some other regulatory requirements which a Bank/FI should meet along with Loan Classification regulations. For example Banks/FI’s need to take tangible action against NPL on 6-months’ default, and if NPL exceeds 10%, the Bank/FI
27 is restricted from further expansion. Under BB Prudential Regulation, a loan is classified after 6 months of default.
At present housing finance issues are covered under the Prudential Regulations for consumer finance. These generalized arrangements missed out on important rules created exclusively for housing finance activities, such as a regulatory ceiling on the “mortgage debt to advances” ratio on the mortgage lending of commercial banks. The Bangladesh Bank needs to develop separate PRs for housing finance, distinct from PRs for Consumer Finance.
4.7 RECENT REGULATORY POLICIES ON HOUSING FINANCE
In July 2007, Bangladesh Bank started a refinance scheme titled “Housing Sector Refinancing Scheme” to help mid-income people buy homes in cities. The objective of the scheme was to encourage banks and non-bank financial institutions to lower their interest rates on home loans, by getting cheaper refinance from Bangladesh Bank. Initially, a fund of BD BDT 3Bn was created for this scheme, and later it was enhanced to BDT 5Bn. Middle income people having less than BDT 50,000 (initially BDT 30,0000 a month, are eligible to get loans from any participating financial institutions (FIs) up to a maximum BDT 2.0MM (initially BDT 1.5MM) loan to buy an apartment up to 1250ft 2 in six divisional cities along with Tongi, Gazipur, Narayanganj and Savar, for a period of up to 20 years, with a one year grace period, at an interest rate of 9%. The central bank makes 100% refinancing of the loans disbursed under the scheme, meeting the laid down criteria, to the participating financial institutions. The recovery of the loan is the sole responsibility of participating financial institution. 13 As of March 2009, 12 banks and 20 NBFIs had signed up for this scheme, and BDT 2.43Bn was disbursed. The laid down terms of the scheme are not easily met by the NBFIs/FIs. The NBFI cost of funds still ends up higher than that of banks. This scheme is untenable in the long-term, however; Bangladesh Bank cannot be expected to provide development finance at concessionary rates in order to further the creation and growth of a vibrant housing finance market. Bangladesh Bank is also not equipped to monitor the efficiency and targeting of the concessionary credit line, and may not efficiently
13 Banks which have so far signed participating agreements with the central bank for availing the scheme are National Credit and Commerce Bank, Mercantile Bank, Prime Bank, Mutual Trust Bank, Trust Bank, Southeast Bank, National Bank, Asia Bank and One Bank. Among NBFIs Delta Brac Housing, National Housing, IDLC, United Leasing, IIDFC, Lanka Bangla, Fidelity Assets, Midas Financing, Prime Finance, International Leasing, Peoples Leasing, Phoenix Finance and GSP Finance are participating in this scheme.
28 ensure that the liquidity goes to the targeted low income groups. Instead, a specialized mortgage refinance company (a long-term liquidity facility institution) is a more sustainable vehicle to address the maturity mismatch on housing loans helping the growth of the mortgage industry of Bangladesh. At present there are no plans in Bangladesh to set up such an institution, while it was among the conclusions of the World Bank funded study made on BHBFC.
4.8 HOMEOWNERS ’ INSURANCE :
In Bangladesh the loan portfolio risk is generally protected through insurance coverage of the property, and through life insurance coverage of the borrower. However there is no institution providing coverage for Mortgage Insurance. In view of the prevailing high LTV ratios adversely affecting the loan affordability of low income borrowers, the need for a Mortgage Insurance institution can not be overemphasized.
4.9 RISK MANAGEMENT
The ability of Bangladeshi financial institutions to identify and assess risks is crucial to their viability and sustainability. In the Bangladesh financial market, several risks are of particular relevance and present considerable challenges to the housing finance sector.
Liquidity risk perceptions have heightened as a result of the global financial crisis. There is an indication, however, that the Bangladesh commercial banking system is flushed with liquidity, hoarded as insurance against the vagaries of international markets (this does not extend to specialized housing finance outfits like Delta Brac and BHBFC). Since Delta Brac is either funding its loan portfolio through deposits or through refinance from Bangladesh Bank (being so far the main beneficiary of the scheme), it is continuing with its growth of the portfolio. In case of Islamic Bank Bangladesh, it is not faced with any liquidity issue, nor is it experiencing restrained growth of its housing finance operations. In the case of BHBFC, whose ability to attract market funds is severely compromised, lower liquidity translates automatically into reduced lending. BHBFC currently is entirely reliant on recycling loan repayments. BHBFC also maintains large working capital funds (over BDT 3.6Bn), which are invested in low-yield “bank placements.”
29 Independent of current events, NBFIs suffer from a fundamental risk of tenor mismatch. The glaring example is of Delta Brac, which has been funding its housing finance portfolio through short to medium-term deposits. Only after the introduction of the BB Refinance Scheme, is it now funding the mortgages from refinance under the scheme, thus avoiding any tenor or rate mismatch.
Bangladesh has enjoyed a stable macroeconomic environment in the past 10 years. In spite of that, market risk is not well managed by housing finance outfits in Bangladesh, and instead is passed on to the clients, which reduces the affordability of mortgages and limits the outreach of the mortgage market. The property prices have always been on the increase, and any slow down would only mean slow escalation in property values.
On risks associated with Fixed vs. Floating Rate Mortgages, besides BHBFC, the housing finance by Banks/FIs is generally being done on Floating Rates. One reason is the absence of a Long-Term Yield Curve. The Bangladesh Bank has only recently floated long-term Bonds of tenor more than 10 years. These instruments do not have any active secondary market. In fact, BHBFC has not issued any Fixed Rate Debenture for the last 10 years, and if it does so the instrument is not likely to be subscribed by the Banks/FIs except the Bangladesh Bank. That again calls for the need of a long-term liquidity facility institution in Bangladesh.
Credit risk is not particularly problematic for private specialized housing institutions, as their NPLs of 5% show. Commercial banks have limited their credit risk by maintaining trivially small exposure to the housing sector. In contrast, BHBFC has a large NPL portfolio (about 47%, if re-classified on the basis of international prudential loan classification standards). It has more than BDT 10Bn as interest receivable from the problematic portfolio, partly due to the imprudent policy of deferment of interest. This unrealized interest has a sizeable opportunity cost (BDT 500 -1000MM). These portfolio weaknesses have not been adequately provisioned for, creating a sustainability risk for BHBFC.
4.10 INTEREST RATES MARKET BENCHMARKS
The Bangladesh housing finance market benchmarks itself on the long-term yield curve as created by the government securities of maturity up to 20 years (Table 11), though the issue and trading of such securities is thin to non-existent. There is no active secondary market providing
30 vibrant “Inter-Bank Offered Rate” to serve as a benchmark. The financial market is not yet developed for active two-way quotes which would provide benchmarks and a yield curve. The 10-year T-Bonds were first issued in March 2004 at the rate of 10%, which declined up to 8.95% by March 2005 in successive issues, and then started rising. The auction of Treasury Instruments by the central bank to the financial market (open market bid and offer process) on December 2005 was at 12%, and since then it is stable at around 12%. In July 2007, Bangladesh Bank issued a 15-year T-Bond at 14%, for the first time. Since then, through successive issues, the 15- year T-Bond rates have declined to 12.22%. In July 2007, the country had seen the first issue of a 20-year T-Bond, issued at 15.95%, which through successive issues has come down to 13.19%. In the absence of an active secondary financial market no yield pattern is predictable for instruments of tenors beyond 5 years. However, the Bangladesh Bank and the financial institutions are actively working towards the goal of establishing vibrant financial market.
The fixed-income market in Bangladesh remains thin due to a traditionally low formal domestic savings rate, the lack of institutions with long-term liabilities (such as insurance companies and pension funds), and the crowding-out effect of the public sector debt and the National Savings System (NSS). The NSS returns, in particular, are very high, despite being addressed by government since 2001. NSS schemes, although directed at the lowest-income groups, in fact are used by the banks and the corporate sector more widely due to poor enforcement. The NSS demonstrates that untapped savings potential does exist in the system, even among lower-income groups.
Table 11 Yields – Treasury Bills and Bonds (2001-2008) T-Bills T-Bonds 30 D 182 D 362 D 2 Yrs 5 Yrs 10 Yrs 15 Yrs 20 Yrs Jan-01 6.35 6.93 7.50 8.50 10.65 - - - July-01 6.10 7.05 7.25 8.08 10.50 - - - Jan-02 2.74 4.91 5.33 6.85 10.48 - - - July-02 4.98 5.67 5.94 6.90 8.63 - - - Jan-03 8.00 7.75 10.00 10.67 11.23 - - - July-03 6.92 9.25 9.81 10.44 11.00 - - - Jan-04 4.03 6.00 6.50 7.00 8.00 - - - March-04 4.05 6.00 6.40 7.00 7.94 10.00 - - July-04 4.05 6.00 6.30 7.00 7.96 9.91 - - Jan-05 4.04 5.75 6.18 6.75 7.87 9.21 - -
31 July-05 6.65 6.75 7.00 7.25 8.75 10.00 - - Jan-06 7.00 7.20 7.60 8.25 10.50 12.00 - - July-06 7.10 7.80 8.30 9.15 10.65 12.10 - - Discontinued Jan-07 7.35 7.85 8.45 9/06. 10.88 12.50 - - July-07 7.32 7.89 8.48 - 10.79 12.17 14.00 15.95 Feb-08 7.35 7.96 8.46 - 10.60 11.72 12.22 13.19 Source: Bangladesh Bank.
Weighted average deposit and lending rates (as on June 30, 2008) of housing finance lending institutions are given in Table 12.
Table 12 Housing Finance Rates Deposit Lending Institutions Rate (%) Rate (%) All banks 7.0 12.3 All housing finance companies 12.16 13.5-14.00 (excluding BHBFC) 12% (For Dhaka & BHBFC n.a. Chittagong) 10% for others Source: Annual Report, Bangladesh Bank (July 2007- June 2008), BHBFC report.
4.11 GROWTH POTENTIAL OF THE MORTGAGE DEBT INDUSTRY
Bangladesh, with a housing backlog of about five million units offers a great potential for the housing supply market to grow. The access to finance, with a specific reference to housing finance is quite limited in Bangladesh. Except BHBFC, which has its presence and housing finance operations in 22 Districts of Bangladesh, all other banks/financial institutions have practically confined their mortgage finance business to Dkaka and Chittagong. Even in Dkaka and Chittagong, the mortgage finance by Banks and NBFIs are geared towards the middle and high end of the population. Once the measures are taken to boost housing supply for the low and middle segment of the population, the need to empower them for affordability through mortgage finance will enhance the mortgage industry.
32 5. LOW INCOME AND MICROFINANCE HOUSING
5.1 THE MICROFINANCE MARKET AND POTENTIAL DEMAND FOR HOUSING MICROFINANCE
The majority of Bangladesh’s population is located in rural areas (80%), representing 123 million people or around 120 million households, almost all classified among the lower- income groups. The country has 64 Districts, 533 Upazilas/Thanas and 305 municipalities, but for urbanization, the migrant predominantly choose Dhaka, followed by Chittagong. Therefore these two cities present the major part of low-income housing issues. The rural poor live predominantly in temporary housing, and estimates of rural temporary housing stand around 3.3 million dwelling units.
Roughly half of the low-income dwellings are estimated to be located in slums, both owner- occupied and rented, sometimes on squatted land. Formal slums (with full land ownership but in bad maintenance condition and badly overcrowded due to urbanization) take another quarter of the dwellings in this group. Other categories of low-income housing include: government provided squatter resettlement camps, plots of land with basic services that are provided on a leasehold basis; employee housing consisting mostly of small apartments in high-rise complexes provided by the government; squatters who have built makeshift houses on illegally occupied public or private land; and pavement dwellers.
Among the lowest-income groups, housing needs are greatest for incremental construction and repair. The potential housing finance demand is considerable, provided housing credit is made affordable.
5.2 PRODUCTS , FUNDING SOURCES , AND CHALLENGES IN HOUSING MICROFINANCE
The two main institutions serving the needs of micro housing and housing finance are Grameen Bank and Islamic Bank Bangladesh. The Grameen bank has a special product to finance fishermen huts (Chhappar Finance). These two institutions have a wide access to finance. While Grameen bank provides conventional finance, the Islamic Bank Bangladesh caters to the needs of faith based clients.
33 As of June 2009, the Grameen Bank's housing portfolio was at US$3.3MM. The rate of repayment for all loans is 89%. However that does not mean that 11% of the portfolio is “Bad,” since there are issues of temporary defaults. The primary issue with the borrowers of housing microfinance is sustainability of income. That calls for specific products, which would address occasional issues related to sustainability/continuity of borrowers income. Grameen Banks overall experience in microfinance is exceptionally good with non-performing loans at 1-2% levels. The cumulative number of houses financed so far is 674,435. 14 Grameen Bank introduced the “moderate housing loan” in 1984, with a current loan maximum of BDT 25,000. The micro-housing program got a considerable boost after the devastating floods of 1987 that destroyed 2 million houses in rural areas in Bangladesh. At that time Grameen introduced the “Basic Housing Loan ,” which presently has a loan maximum of BDT 12,000. It targets the poorest rural households, similarly to its 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 maximum amount for a homestead purchase loan is BDT10,000 ($202) and the house repair loan is BDT5,000 ($101). The ratio of basic housing loans to original moderate housing loans is approximately 7:1. Besides these, another kind of housing loan called the “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 lending is via group loans, cum insurance provisions against default, death, accident, etc . About 94% of Grameen Bank borrowers are female, and women also comprise the large majority of housing loan borrowers. In fact Grameen Bank is a living example that microfinance, and more so housing microfinance, should have no gender bias even in a country with predominant Muslim population.
Usually the loan application process takes 3 to 4 weeks, although in urgent cases members can receive money in less than 10 days. Only 4 to 5% of loan applications are rejected, usually for lack of paperwork regarding land ownership. 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
14 http://grameen-info.org/index.php?option=com_content&task=view&id=453&Itemid=527.
34 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 420.62MM (USD 185.09MM) have been disbursed. The average loan size was about BDT 13,847 (only USD 277).
The basic house proposed by the bank's housing program measures 12' by 18' and has a two- sided tin roof, four RCC (road cement and concrete) pillars, one wooden door, and two windows; it can be extended and modernized if desired. The standard house measures 15' by 21' and has a four-sided tin roof, eight RCC pillars, one wooden door, four windows, and a fence. For loans of BDT10,000 ($202) or less, members pay BDT 1,000 ($20) per year, and for loans greater than BDT10,000, they divide the amount over a ten-year period. There is a maximum repayment period of ten years. Repayment is weekly, usually around BDT 20 (40 cents) per week. The borrower is responsible for the design of the house, but the bank makes sure basic health and safety requirements are met. The house must meet minimum Grameen standards, including having a pit latrine (since mid-1998, the bank has required members to install a latrine manufactured by the Grameen production facilities). The homes built under the program represent a substantial improvement over traditional low-income housing, proving to be markedly sturdier to heavy rain or flooding, and requiring less and cheaper annual upkeep.
In addition to Grameen Bank, several other microfinance institutions (MFIs), such as Proshika, BRAC, Islamic Bank Bangladesh and ASA now provide long- and short-term credit for housing in Bangladesh. 15 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.
15 The remaining part of this section is based on: Proceedings of the IFC Conference on "Measuring financial innovation and its impact,” Basel, 26–27 August 2008, IFC Bulletin No 31, July 2009.
35 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. The lending is group-based and subject to strict conditions – only three housing loans per year per group, and 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 rural poor. 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.
36 Box B2. The Role of NGOs in housing-related social services Housing Construction Financing : There is no direct housing provision by NGOs in urban areas due to land availability constraints. New housing construction is also not funded in urban areas, as most lower-income groups do not own land. Some NGOs are seeking funds to build houses for its project beneficiaries, and recover the cost through an affordable schedule. Some are generating funds through members' savings and income generating activities. A few large NGOs are planning to introduce urban housing credit subject to finding viable methods to overcome the landownership problem. Service Provision : The NGOs have undertaken limited projects improving sanitary and drainage systems, providing potable water, regularizing garbage clearance, and paving roads. The beneficiaries participate in some stages of the project, such as advocacy and identification, decision making, negotiation, construction, toll collection, monitoring and maintenance. The NGOs are operating several successful and innovative urban water supply and sanitation projects, where they’ve mobilized the households, negotiated for them with the Authorities who do not cover bastees and given guarantee that the facilities would be maintained, costs would be met and bills would be paid regularly. Some NGOs and CBOs have promoted door-to-door garbage collection, and have taken charge of the general cleanliness and neighborhood street sweeping. A few self-sustaining waste recycling plants have been set up as well. Housing Improvement Credit : Credit has been provided in a few cases after the client income generating activities were hampered by natural disaster leaving the beneficiaries homeless. Some NGOs motivated the landowners, negotiated bank loans and initiated slum-upgrading projects involving physical construction. These housing improvement loans would not have been possible without the NGO intermediating with the financial institution, as the latter generally require clean title of ownership, which is rarely available to lower-income households. Special Housing : Several NGOs are catering to the housing needs of specific groups like garments workers, destitute and delinquent women and youth, street children, orphans, mentally and physically retarded children, and working mothers. These dorm-type rental accommodations are part of the empowerment or rehabilitation programs comprising literacy and skills training, legal, social and entrepreneur support, health, mother and childcare facilities, and others. Some NGOs, run by women, have successfully acquired funds to construct their own buildings, which would cross-subsidize loan repayment costs, maintenance, and operation costs via partly commercial rental use. Slum Development : The Government-initiated Slum Improvement Program is undertaken by a few NGOs. These focus on income generation, health and family planning, education, infrastructure and services like roads, drainage, water supply, and sanitation, aimed at environmental upgrading and enhancement of affordability to improve the housing situation indirectly. Along with the NGOs and CBOs, several clubs, youth organizations and social welfare societies are also engaged, in various components of the overall programs. Management Support : Several NGOs and CBOs have undertaken the housing maintenance and utilities management functions, for the implementing housing agencies. The outsourced functions can include operation and maintenance of water supply, sanitation, drainage and garbage collection services, collection of fees, bills and maintenance expenditure, collection of technicians and management staffs' salary, collection and deposition of loan repayment, dealing with banks and filling up of documents, monitoring of housing and utility services, and credit management of a large number of beneficiaries. Advocacy : Some NGOs and CBOs offer legal aid to low-income households facing eviction. Additional advocacy programs include seminars, workshops, gatherings, street processions, celebration of important days, group meetings, training and symposia, exhibition of building materials and demonstration houses. These target both the urban poor and policymakers, and cover housing and environmental rights, role of savings and micro-credit, human rights, and gender issues. Source: Study carried by Professor Mahbubur Rahman of North South University, Dhaka.
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 middleclass farmers
37 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.
The challenges facing housing micro-finance programs include affordability constraints (especially for rural households), high land prices in the case of urban clients, commercial viability of the microfinance lenders, the issues related to income sustainability, the need for new products including savings-for-housing instruments, and mechanisms limiting disaster and disability / death risk in housing lending. Careful blending of government policies, smart subsidies, planning, public-private partnerships, and technical assistance for housing micro- lending would be required to develop the low-income housing and housing finance market further. Success stories, such as the new lending mechanisms for low-income housing in India, would be useful in endeavors for housing microfinance in Bangladesh.
5.3 GOVERNMENT AND NGO PROGRAMS IN HOUSING AND HOUSING - RELATED SOCIAL SERVICES
There are several government programs in support of low-income housing. In 1998 the Bangladesh Government started Grihayan Tahabil, a housing fund for homeless and low-income groups. This scheme is operating in 400 upazilas over 64 districts. The funds are disbursed through a little over 400 NGOs. The current fund size is BDT 1,600Bn, of which BDT 1,144.6Bn has been disbursed as of March 2009, making it possible to construct 46,128 new houses. A similar government program in rural areas, Asrayan, targets to provide and fund the construction of low income barrack type houses.
Government programs, however, are not as efficient as could be achieved under a commercially- based approach, and have been known to be poorly-targeted in certain cases, to households with incomes higher than the lower-income groups, or excessively directed at civil-force staff. One relevant example is the National Housing Authority (NHA). NHA provides subsidized housing development. The institution manages a considerable supply of government land (at their current construction rates, the existing land owned alone would permit their continuous operation for the next 20 years). NHA obtains the land at a multiple of its registry value (150%), which permits it
38 to offer the housing at levels considerably below market prices. In the past two years, NHA constructed only 1,000 units of 60-120m 2, which it distributed by lottery among the 200,000 applicants who demanded the flats (mostly civil servants). NHA housing is more popular than that provided by the private sector not only due to its subsidized pricing, but also due to the fact that NHA can obtain a clean title but private developers can not.
A more efficient approach to government housing provision to the lower-income groups would be to rely on public-private partnerships. NHA could scale up its operations in partnership with private developers where NHA provides the land and requires that some fraction of the flats constructed will be provided to low-income households. A low cost flat constriction plan NHA has recently proposed involves 22,000 units of 25-30m 2 units, at the price of BDT 400,000 each (implying a monthly payment of 2,500). An alternative (and not mutually exclusive) strategy to scale up would involve cross-subsidies between the middle-income units pricing and the low- income ones, permitting NHA to increase its leverage and invest the additional funds in low-cost housing construction, servicing the loans in part with profits from middle-income housing sold (the middle-income housing prices would still remain below market levels). Such an approach would also permit the NHA to leverage the housing production by generating additional incomes that would permit the repay of the financial expenditures of any debt contracted by NHA (which has not so far issued any debt and therefore cannot scale up its activities.
Other lower-income housing initiatives include public-private partnerships involving Bangladesh NGOs in the area of housing-related social activities (Box B2). Bangladesh has a long enviable history of NGOs playing an active role in uplifting socio-economic conditions for lower-income groups, particularly those living in rural areas. Some NGOs have quite successfully spread their network throughout Bangladesh, and are carrying out efficient operations.
6. MORTGAGE MARKET INFRASTRUCTURE (REGULATORY FRAMEWORK)
6.1 LAND REGISTRATION AND ADMINISTRATION
The structure of land administration and the land record system in Bangladesh contains weaknesses and dysfunctional elements. The present land laws and supporting regulations are complicated and there is no effective legal framework. The absence of an updated, systematic
39 and universally accepted source of information on land resource availability and land rights is one of the principal barriers to the successful implementation of land reform programs leading to the effective adjudication of land disputes.
Land surveys are an important tool for identifying land, documenting names of the rightful owners, measuring the area, and other related matters. Outdated processes, corruption and irregularities in the land survey deprive the illiterate, landless and minority groups of ownership rights to their land. Even the government is being deprived of state-owned khas 16 land. There is also a general lack of public awareness on land resources, procedures and regulations.
Box B3. Property Registration in Bangladesh The longest delay is in registering a property at the municipal deed registry office, which takes between 180 and 540 days. The buyer may obtain a certified registration document within a week, but obtaining the original certificate may require about 6 months to 1½ years, or even up to 2 years in some cases. By contrast, in Sri Lanka it takes only 36 days to register at the land registry. In Pakistan, 38 days. In Nepal, it takes only 1 to 2 days for registration of the deed at the land revenue office and issuance of a new title certificate. Obtaining the permission from the municipality office, the RAJUK, to transfer property ownership, one of the early steps in the process, adds 60 days to the process in Bangladesh. Verification of the record of rights from the land revenue office adds another 15 to 60 days.
The ease of registering property varies by city. While there are seven common registration procedures throughout the country, for the land being developed by the City Development Authority (for instance, RAJUK’s development of model towns in Gulshan, Banani, Baridhara, Uttara and the Nikunja Residential Area) one additional step is required—obtaining permission from the City Development Authority to transfer ownership of the property—which makes the registration process in Dhaka lengthier and costlier than in the rest of the country. This obligation is also a source of distortion since HBFC, contrarily to other lenders, is exempted from it. In the case of Bogra and Chittagong it takes 391 days and costs 10% of property value and in Khulna it takes 373 days and costs 9% of property value, compared to Dhaka (425 days and 10.5% of property value).
Reforms to make property registration easier have started. A Land Registration Act came into force on July 1, 2005. It will help reduce false and multiple registrations of land. Registration fees were also cut by 1%, although they remain high overall at 10.5%. A pilot project to computerize land records has been completed in the Demra thana of the Dhaka district. Title deed requirements are being simplified—with the title, the location of the land and the map on a single page and all other documents in a backup database. The government is moving ahead in replicating the pilot model in phases in other thanas (Upa- Zillas) of the country under a public private partnership. Simple reforms can also have a big impact. Bangladesh can encourage formal property transactions by further reducing the registration fees and stamp duties, which cost 3% and 5%, respectively, of the property value. By contrast, in Pakistan the stamp duty is 3% and registration fee is 1% of the property value. In Sri Lanka, there is no separate registration fee; it is subsumed within a stamp duty set at 4% of the property value. In India, while the stamp duty is 5% of property value, the registration fee is only 1%. Typically reductions in fees lead to more revenues, as more properties are registered and with less underreporting of property values. Source: Doing Business in South Asia in 2007.
16 “Khas land” are state land under administration of Ministry of Land arising either seizure of land in excess of 3.3 acres ceiling under land reform legislation, or formation of new land.
40 Land surveys have been conducted over different periods, beginning with the Cadastral Survey (CS), the State Acquisition (SA) survey and the Provisional Settlement (PS) which is still in use to this day. 17 CS and SA records are kept with the Zila (District) Collector's office and RS with the Assistant Commissioner's (Land) office.
The present structure of land administration is built around three core functions - land settlement or survey, land registration, and record keeping. Land settlement identifies the utilization purpose of land i.e. , usage for agriculture, housing, ponds, roads, waterways and all other information related to the land. Registration deals with registering land transfers and preparing the deeds. Record keeping records the ownership rights to the land. Registration and record keeping are based on information gathered from the land settlement.
Three separate offices deal with the different functions of land administration. The Tahsil office is responsible for land record keeping and collection of land revenue; registration is entrusted to the Sub-Registrar's office; and the settlement office handles land settlement. The Tahsil office and the settlement office have a chain of command extending to the Ministry of Land, while the Sub-Registrar's office is under the purview of the Ministry of Law. The overlap in ministerial functions is problematic in case of conflicting land claims, where resolving the dispute would require proof of ownership. Diverging ownership proof from the Tahsil office, the Sub Registrar's and the Settlement office render it extremely difficult to adjudicate ownership as each document seemingly bears the legitimacy of the authority. This multiplicity of documents or records of rights is the central flaw in the system of land administration.
17 CS surveys were conducted between 1890 and 1940. SA surveys were conducted from 1956 to 1962. RS surveys began in 1965. The 'khatian' (code number related to ownership of a particular land area) surveyed is known as CS, DS, or Zila khatian . CS records consist of land ownership of the Indian Emperor, Zamindari (landlords), and the general public. The SA records consist of land ownership of the general public and the government. After the abolition of the Zamindari system in 1950, lands belonging to them were converted into khas land and recorded under khatian 1. They consist of land ownership of the general public and the government.
41 Table 13 Property Registration Process and Cost in Bangladesh No: Procedure Time to Complete: Cost to Complete:
Verify the record of rights from 15 - 60 days 1. the Land Office (also known as (simultaneous with BDT 2,000 Land Revenue Office) procedures 2 and 3)
60 days (simultaneous Conduct RS Mutation on 2. with procedures 1 and BDT 6000 approximately property 3) 60 days (simultaneous Obtain inspection for RS 3. with procedures 1 and included in procedure 2 Mutation 2)
Obtain the non-encumbrance 4. certificate from the relevant 2-3 days BDT 500-700 Sub-registry office
Prepare deed of transfer and 5% of property value (Stamp 5. 1 day pay stamp duty duty)
Pay capital gains tax, Capital Gains Tax (5%)+ VAT 6. registration fee, VAT and other 1 day (1.5%) + local government tax taxes at a designated bank (2%) + registration fee (2.5%)
180 days Apply for registration at the 7. (simultaneous with Already paid in Procedure 6 relevant Sub-registry procedure 8) Register the change in 45 - 60 days 8. ownership at the Land Revenue (simultaneous with BDT 5,000 Office procedure 7) Source: http://www.doingbusiness.org/Exploretopics/registeringproperty (country: Bangladesh)
Another flaw is that registration officers are not entitled to question the validity of documents brought for registration. Further, their office does not store supporting documents for verification. Hence, even if registration officers register false transfers knowingly, they cannot be prosecuted. The breakdown of information and lack of checks and balances among the three offices allow for the registration of numerous false land transfers. The bulk of civil and criminal litigation in the country arises from such conflicting claims of ownership. To this, and compounding the problem, is an inefficient system of dispute resolution. Doing Business 2009
42 ranks Bangladesh as the fourth worst country in the world on contract enforcement. 18 As a result, land remains in a legal vacuum for many years, making it difficult to develop, finance, or sell properties. These problems stunt the mobilization of land for urban needs, block creation of a market for existing housing, and considerably undermine the potential scope and the security of formal housing finance. The weak enforcement regime also stunts foreclosure, as discussed in the following section. A third problem facing land administration is the excessive backlog of land related documents awaiting printing. Certain records have also been intentionally destroyed or were damaged during the Bangladesh independence war. The land registration system is also greatly marred by corruption. According to Transparency International, almost 40% of all bribes are paid in land administration departments. 19
Doing Business (2010)20 rates property registration procedures in Bangladesh among the 10 slowest in the world (Annex- A1). In Bangladesh, registering property involves 8 procedures, takes 245 days, and costs 10.24% of the property value. In contrast, the procedures are 5 in India, and they are completed in 44 days at the cost of 7.43% of the property value. The figures in Pakistan and Sri Lanka are also much better than those for Bangladesh. 21
The government owns large amounts of khas land in different parts of the country. With no single conclusive record or document related to land, however, the distribution of these lands amongst the poorest sections of the population is a daunting proposition. The government does not have firm statistics on the total area available, whether the land is in control of the authorities or not, and whether certain areas have been affected by river erosion and so forth. There have been previous attempts to redistribute khas land and different laws have been passed for this purpose. The lack of proper implementation, however, has resulted in the landless being
18 Doing Business: 2009, World Bank Report, reports that Bangladesh ranks 180 out of 183 countries. 19 Transparency International, National/Local Corruption Diagnostics and Measurement Tools in Asia (February 2005). 20 http://www.ashoka.org/node/2494 . Also found at http://www.doingbusiness.org/Exploretopics/registeringproperty. 21 In Pakistan, the procedures are 6, completed for 50 days at the cost of 7.25% of property value. In Sri Lanka, the corresponding figures are 8 procedures, 83 days, and 5.11%.
43 invariably left out. 22 Some of these lands are being grabbed by land mafia and illegal habitat and squatters.
6.2 LAND TITLING
Land title authentication is much easier in the case of government-owned land. The verification of title for private land is rather cumbersome and time consuming. Assuming that the client has already completed all transfer formalities (mutations, etc .) and has paid all taxes and dues, it usually takes about 60 days.23 The regulation requires the process to be completed in 2-3 days, in contrast.
Titling is even more complicated in the case of new developments where property sales are made before construction is completed, involving advance payments before the transfer of property rights. Buyers are not protected against the developers’ insolvency during the development process. The subdivision of new multi-unit complexes tends to hamper the financing of the construction cycle and to favor buyers who can make large down payments. The formal registration of transfer of ownership is generally the responsibility of the developers, who tend to wait for the complete marketing of the project before transferring ownership, thus creating a legal vacuum for the buyer that can last several years. Some lenders provide loans during this time, sometimes through a three-party agreement with the developer and the purchaser, but the financial mechanism is not secured other than by personal assessments of the borrowers and the developers. It would seem difficult for such a mechanism to be extended to large-scale lending, new developers, or moderate-income borrowers. Financial institutions, faced with such uncertainties, either abstain from lending or restrict their services to wealthy borrowers by relying on income creditworthiness alone instead of considering property collateral when making underwriting decisions.
6.3 CAPACITY BUILDING IN HOUSING AND HOUSING FINANCE
Housing finance in Bangladesh by Banks/FIs is primarily concentrated in the two cities of Dhaka and Chitagong. One reason for this is a shortage of professionals having adequate training in
22 http://www.ashoka.org/node/2494 . Also found at http://www.doingbusiness.org/Exploretopics/registeringproperty. 23 With the exception of certain relatively better managed areas of Dhaka City.
44 security valuation, title search, property valuation and credit appraisal. There is a need to develop and run training/capacity building programs in different parts of the country covering all these areas. In order to design and develop such capacity building programs, multilateral agencies like the World Bank Group may be approached to provide initial support under some form of technical assistance.
6.4 PROPERTY VALUATION STANDARDS
Bangladesh has a dearth of real estate brokers and appraisers, and there is no formal training and education for this purpose. At BHBFC the assessment of Property Value is performed by the civil engineering department of BHBFC, which is present in all BHBFC loan processing centers. These experts perform the functions of site inspection, review of drawings to assess covered area, review of structural design/drawings, preparation of cost estimates, using approved construction rates, verification of construction progress (in case of staged loan disbursements), review of necessary approvals by competent authorities, and issuance of a letter of permission to mortgage. Many of the housing finance institutions do not go into such engineering detail and rely on the approval of the relevant Government Departments. They use the covered area as per drawings and approved construction rates to assess the construction value. Private mortgage lenders also outsource part of the function to approved “valuation” firms.
6.5 CONSTRAINTS FOR WOMEN
In Bangladesh there are no gender issues for availing finance in general, regardless of the size of financing. This is even truer for microfinance, and housing microfinance. The living example of Grameen Bank proves that point, where more than 90% of the clientele are women.
6.6 FORECLOSURE AND EVICTION
The inability to enforce collateral weakens the ability of financial institutions to efficiently manage credit risk. The enforcement of property liens is largely annihilated by the length and cost of cumbersome judicial procedures. Foreclosure is regulated by the Bangladesh Arthorin Adalat Ain 2003 (The Money Loan Court Act of 2003).24 Through this Act a special court was
24 Besides traditional civil courts and criminal courts, a separate type of courts for handling loans and finance claims and default settlements have been established under Bangladesh Money Loan Act 2003
45 set up to deal exclusively with loan defaults exceeding 5 lakhs, prescribed time limits for granting judgments and imposed restrictions on appeals, purporting to expedite procedures and to establish a new method of dispute settlement under the supervision of magistrates. In addition, a new provision was adopted in 2004 to enable lenders to request judiciary support when evicting convicted defaulters. It remains to be seen if these changes will remedy the inefficiencies of the enforcement process, which is plagued by delaying tactics, difficulties in vacating properties to be auctioned, and huge backlogs of cases despite the inception of Money Loan Courts in 1990. Other impediments remain, notably the cumbersome auction procedures, and the weak demand for repossessed properties. Currently, in spite of recent improvements, foreclosure remains a complex, lengthy and ultimately ineffective procedure. The weak enforcement of the legal framework in Bangladesh, as discussed above, further aggravates the foreclosure regime, to the extent of encouraging willful defaults among higher-end borrowers. For example, in case of the weakness of the formal procedures have pushed private financial institutions into using alternative means of enforcement, such as post-dated checks, while BHBFC has accumulated a considerable non-performing portfolio.
BHBFC benefits from special foreclosure rights which might strengthen BHBFC’s unfair advantage against private mortgage lenders. Presidential Order-1973 regulates BHBFC’s power to enforce a mortgage security through the court, while the Direct Sales Rule 1977 allows BHBFC a non-judicial procedure of foreclosure. The court case is tried by a civil judge (district level), followed by a further case for the execution of the court decreed. Appeal is at the High Court level, but appeal actions do not stay BHBFC’s recovery process. The direct sale option allows, after a stage of due notification to the delinquent borrower, for an outright sale of the mortgaged property by BHBFC, either by public auction or by calling a public tender. 25 The direct sale procedure allows excessive appeals, challenging the direct sale of the property and causing delay. As a result, to the extent foreclosure is exercised (which is extremely rare), BHBFC would be better advised to use the safer option of using a court case to establish default, followed by a direct sale. This excessively lengthens the procedure, in effect negating the advantages of a direct sale and rendering foreclosure ineffective. However in instances where
(Bangladesh Artgorin Adalat Ain 2003). In these courts one of the parties are invariably the banks and financial institutions. 25 If no bidder comes forward at a bid above the reserve price, even after three consecutive bids, then the mortgaged property is purchased by BHBFC.
46 BHBFC has exercised its right of foreclosure and pursues a public auction, the Courts restrained the process citing that the auction price is not acceptable to the defaulter/owner. This has practically made the Direct Sale an ineffective tool.
6.7 CREDIT BUREAUS
A public credit registry functions reasonably well in Bangladesh, providing satisfactory if not rapid information about potential borrowers. More effective information sharing can be further encouraged by computerizing credit information, making available at least 2 years of historical data, expanding the registry’s coverage to include information on loans under $800, and expending the credit registry to cover information from microfinance institutions and non- financial institutions such as utilities, retailers, and trade creditors. While there is a credit rating agency effectively functioning in Bangladesh, there is no Credit Bureau on consumer credit. The Bangladesh Bank needs to initiate steps in this direction, and also develop a database on small individual borrowers from the banking and leasing sector, to be followed by including the data on such borrowers from utility firms.
7. POLICY FRAMEWORK AND STATE INTERVENTION
Access to housing is important to meet urbanization and demographics challenges, and prevent slum proliferation. An active system of housing finance provides key economic benefits and positively impacts savings, investment, and household wealth. In turn, each dollar invested in the housing sector catalyzes economic activity in other sectors, exerting an indirect positive impact on employment levels, the retirement system, fiscal returns, and consumption. Housing finance development plays a role in boosting equitable economic growth and reducing poverty through helping households build assets, improving living conditions, and empowering the middle and lower income population and strengthening communities.
Bangladesh requires a careful reform strategy to be addressed effectively, thereby spurring a growth in home financing to a wider population group at a lower cost. Housing finance in the country is limited to the top income group, titling is not fool-proof, mortgage lenders have to rely on short-term funding for financing the loans they give out, and the legal, regulatory, and taxation frameworks are not enabling the development of a primary and secondary housing
47 finance market. The timing for further reforms is appropriate as the production of accessible housing for a larger part of the urban population is a national priority by authorities, and as both banks and private non-bank finance companies are scaling up their mortgage production. However, housing finance reform work cannot be effective in a vacuum – without radical improvements in regulatory enforcement as well as property registration, housing finance development will not be effective.
The policy options below include a strengthening of the regulatory framework and its enforcement, customizing prudential norms to housing finance, more effective collateral and foreclosure regime, improved housing and mortgage information availability, as well as an overhaul of land administration. The policy options address (1) the re-vamping of BHBFC; (2) the promotion of long-term financing via a refinancing facility and a national savings-for- housing scheme; (3) the encouragement of a secondary housing market via a level playing field among all market participants; and (4) improving affordability of mortgage financing via promotion of micro-lending for housing and innovative housing finance instruments.
7.1 STRENGTHENING THE REGULATORY FRAMEWORK , AND IMPROVING ENFORCEMENT
The most pressing elements for reforms in the institutional and regulatory sphere are:
To even out the playing field among housing finance providers, eliminating all privileges enjoyed by BHBFC, or by banks as compared to specialized housing institutions, while at the same time preparing these entities for better ability to compete in a dynamic market. Customized Prudential Regulations for housing finance will improve the sustainability of housing finance operations and incentivize the efficient management of credit risk. Like in many countries of the region, the Prudential Regulations on consumer finance are also being applied to housing finance. Real estate finance involves specificities – property collateralization, price cycles, market and financial risks of property development, balance sheet mismatches induced by long-term lending or fixed interest rates that require special prudential rules. The prudential framework could be customized to housing finance in order to reflect these specificities of the sector. 26
26 First, asset/liability management could be strengthened by requiring that long-term lenders be appropriately equipped to monitor, and measure paper interest rate and liquidity risks. Second, the framework should induce lenders to follow sound risk management practices. Two areas are worth mentioning in this regard. The lending criteria raise some concern insofar they include without “haircut”
48 Favorable tax incentives can encourage desired behavior to stimulate the secondary mortgage market. Promising directions include tax relief on mortgage payments, 27 the limitation of the income tax exemption of competing savings instruments such as NSS interest, the introduction of levies on speculative gains and idle properties, and the use of property taxes to spread the infrastructure cost. 28 Age-old Insurance and Trust Acts are not facilitating lending by long-term investors in the housing sector. Sometimes developers are accused of not properly following the procedures for borrowing money from financial organizations. The involvement of all three parties (the developer, the landowner from whom the land was leased, and the house/apartment buyer) in the process makes the borrowing cumbersome.
7.2 EFFICIENT SYSTEM FOR LAND ADMINISTRATION
A functional registration / titling registry is a vital precondition for mortgage lending. Computerization and modernization of the titling registries, scaling up the Dhaka pilots, is a priority reform in land administration, to improve property rights and decrease mortgage lender risks as to collateral values, as well as eliminate accumulated backlogs. That would also speed up title verifications, which are currently cumbersome and time consuming. A systematic cadastral survey must be implemented, to safeguard property values, provide information, and improve transparency and good governance practices. An updated, systematic and universally accepted source of information on land resource availability and land rights is needed, to aid in the implementation of land reform programs and in the resolution of land disputes. Further, streamlining of jurisdiction between the Ministries of Law and Land would enable the better
rental income to assess the ability of borrowers to repay the loans, when this type of income is directly exposed to a (real estate) market risk. Valuation standards should be defined to make collateralized lending rely more on market values – and in particular resale values in case of foreclosure- than on construction cost as is often the case now. Such standards would also be needed for the provisioning of non-performing loans. Prudential regulations should recognize the lower credit risk profile of residential mortgage lending. Specifically, the capital-adequacy risk weighing of residential mortgage loans can be lowered. Similarly, the risk weighing of credit lines granted by banks to specialized institutions can also be lowered. Explicit guidelines can be defined for institutional investors regarding the purchase of mortgage-related securities. 27 There is an opportunity to offer tax relief on mortgage payments that can be an efficient driver for increasing the real estate turnover without necessarily be socially regressive. The affordability issue leads one to wonder whether a larger part of the potential demand could be made effective by means of income- tax alleviations for mortgage takers. This method has been forcefully applied in India, and more recently in Pakistan. Its impact on mortgage lending is undeniable, but the question is whether its fiscal social cost and its redistributive effect are not too high a price to pay. 28 However, altering tax provisions may raise issues beyond the narrow approach that motivates to suggest it. If attention were given to these recommendations, a comprehensive assessment of their impact – on fiscal and economic points of view should be undertaken.
49 checks and balances and coordination of land administration activities and diminish the scope for property disputes.
The registration and transfer taxes require a downward revision. Bangladesh can encourage formal property transactions by further reducing stamp duties, currently at 5% of the property value. By contrast, in Pakistan the National Housing Policy of 2001 desired a stamp duty of 3% and a registration fee of 1% of the property value, which has been implemented in the Prince of Punjab, and other provinces are being asked by the Federal Government to follow the provisions of National Housing policy. In Sri Lanka, there is no separate registration fee; it is subsumed within a stamp duty set at 4% of the property value. In India, while the stamp duty is 5% of property value, the registration fee is only 1%. Typically reductions in fees lead to more revenues, as more properties are registered and with less underreporting of property values.
The property registration procedure could be streamlined, using the one-stop-shop model. 29 Reforms to make property registration easier have already started. A Land Registration Act that came into force on July 1, 2005, helped reduce false and multiple registrations of land. Registration fees were cut by 1%, although they remain high overall at 10.5%. Title deed requirements are being simplified—with the title, the location of the land and the map on a single page and all other documents in a backup database.
An urgent set of measures involves the overhaul and institutional fortifying of the land policy framework , including urban planning, state-owned land provisions in under-used urban spaces, incentives (in particular through specific taxation), and the building of related professional expertise. It is crucial to decentralize, empower, and revamp resources and capacity of RAJUK and the other city development authorities. Capacity is required in terms of public sector planning professionals, overhauled master plans, faster processed and improved efficiency.
29 For example, one of the procedures involved, in the case of government-owned leased land is the need for the mortgage lender to obtain permission from the government to transfer usage rights to the new homeowner, and record the mortgage. This procedure has no legal rationale, but is justified currently by the need for good mortgage records, given the state of the property registry and its poor functioning. Nevertheless, the procedure could be significantly streamlined, for example by limiting the process to recording of the mortgage, without the delay created by the necessity for an express ex-ante government permission of the property transfer.
50 7.3 COLLATERAL / LIEN REGISTRY
The inability to enforce collateral weakens the ability of financial institutions to efficiently manage credit risk. The enforcement of property liens is largely annihilated by the length and cost of cumbersome judicial procedures. Foreclosure procedures require an overhaul, transforming them into a quicker, and more simplified, process of collateral disposal in case of default. A recent reform illustrating the importance of this is the out of court “ parate ” right in Sri Lanka.
Several improvements to the public credit registry are advisable. More effective information sharing can be further encouraged by computerizing the credit information, making available at least 2 years of historical data, expanding the registry’s coverage to include information on loans under $800, and expending the credit registry to cover information from microfinance institutions and non-financial institutions such as utilities, retailers, and trade creditors. In Pakistan the House Building Finance Corporation (HBFC) has developed its Lien Registry, which is accessible by the public through the HBFC website. A credit bureau is also working in this direction, with the support of the State Bank of Pakistan.
7.4 HOUSING OBSERVATORY
At present there is no single repository responsible for gathering, processing and disseminating the data/information relating to housing and housing finance. Bangladesh Bank gathers some data on housing finance from the banks/financial institutions. However, critical databases on housing, real estate and land pricing, construction costs, and housing finance data used by modern housing finance instructions are not available. It is further important to have such a database which would also be responsible for developing policy suggestions in the real estate sector, for consideration by the relevant government institutions and regulators.
There is a need to set up a Housing Observatory either at the Ministry of Housing, Ministry of Planning, the Bangladesh Bank or as an independent entity supported by all the stakeholders. The observatory would maintain the following databases:
Database on changes of real-estate prices, overtime and between different localities. Database on cost of construction.
51 Database on land price movements. Supply of housing in different price categories, that is, small, medium and large. Housing demand and demand supply gap. Affordable housing solutions Review of existing operational policies like LTV, mortgage rates, loan tenures, income and affordability.
7.5 CAPACITY BUILDING FOR FINANCIAL INSTITUTIONS AND HOUSING - RELATED PROFESSIONALS
Capacity and institutional building is strongly needed among all the main stake holders, who are actively engaged in housing finance related activities - activities which, for many, are still relatively new or radically different from past policies and procedures. Capacity building activities include training of both public and private sector agents and institutions: bank supervisors, members of the Ministries of Finance and of Housing, magistrates and other judicial communities, as well as financial institutions staff, developers and builders, brokers, appraisers, and lawyers.
7.6 RE-VAMPING BHBFC
National housing finance systems have failed to prove themselves competitive in mobilizing and allocating capital efficiently. BHBFC has made only very limited progress in becoming self- sustained or in reaching lower-income households. Instead, it is currently subsidized, not competitive, crowds out private sector mortgage lending, and mis-targets subsidies to others than the lower income groups. It also suffers from improper procedures and systems, an inadequate credit underwriting and servicing policy, a high proportion of NPLs, and weak debt recovery. The corporation could considerably benefit from overhauling its pricing and product mix, risk management, resources, corporate governance, legal status, financial and business planning, and identification of a viable recapitalization strategy and an optimal capital structure. Last but not least, BHBFC needs to be put under Bangladesh Bank regulations, like all other housing finance lenders. It is important to implement the findings and recommendations of the diagnostic study carried out with the technical assistance of the World Bank in 2008.
52 7.7 STRENGTHENING LOW-INCOME (M ICRO -FINANCE ) HOUSING LENDING
Enhancing access to housing finance towards lower-income groups is a priority in the Bangladesh context, where less than the top 10% of the population by income currently benefits from such access. The customer base will broaden naturally in response to reduced intermediation costs, more competition, more efficient institutions, fixed (and lower) interest rates, and longer loan maturities. Tax-deductible mortgage payments would make mortgages further affordable to the middle-income groups. Strengthening of the enforceability of mortgage rights would have the additional effect of extending mortgage finance to lower-income groups, as financial institutions will become less sensitive to client income and rely more on the value of the enforced collateral instead. Stretching affordability further down the income range would require assistance programs that would target bankable lower-income households, and a scheme designed to leverage public spending by market resources. The most efficient subsidy schemes are those that are directly allocated to the beneficiaries and that include a preliminary savings requirement as an eligibility criterion in order to trigger a leverage effect with private resources. The assistance scheme could be linked to the savings-for-housing scheme (section 7.7), given the synergies between the two mechanisms. Savings-for-housing schemes would go a long way towards spreading housing finance outreach, helping lower-income savers in building up down- payments. Islamic finance can play a considerable role in enlarging housing finance access since it often targets customers of lower-than-average income.
Microfinance, which is particularly developed in Bangladesh, a pioneer country in this field, can play a considerable role in developing the housing finance market. This is particularly so in rural areas, also for house upgrades and maintenance in urban slums. In other to solidify the link between microfinance and housing, the policymaker would need to tackle two challenges: (1) improve the commercial sustainability of microfinance housing products; and (2) extend microfinance for housing to urban households. 30
To be viable and profitable, housing microfinance cannot rely on internal cross-subsidization by other microfinance products. That increases the cost of micro credit and limits the scale of MFI housing programs. MFI housing programs should be separated, customized to client needs,
30 Proceedings of the IFC Conference on "Measuring financial innovation and its impact,” Basel, 26–27 August 2008, IFC Bulletin No 31, July 2009.
53 matched with appropriate longer-term funding sources, and defined by its own lending terms and conditions such that it breaks even or turns a profit. A second consideration to make housing credit programs more sustainable is to target households that have already established a solid income base through previous income-generating credit programs or microfinance loans. Thirdly, a more stringent savings requirement could be built into the housing loan package, not only for upfront payment for part of the house, but also as a savings account that would be accessible in case of possible delinquency. Finally, the lending process should carefully assess housing quality and location in view of disaster vulnerability.
Extending microfinance for housing to urban households would prove more challenging, given high land prices caused by poorly designed land administration policy in Bangladesh. A housing improvement loan program for owners of informal housing may be a starting point for the extension of micro credit to urban households, for example, in conjunction with existing services improvement projects of UNICEF in bustees .31 Second, lending options for new urban lower- income housing should be carefully analyzed, to explore the feasibility of a public-private partnership with local government land allocation and development programs. In addition, NGOs / MFIs could experiment with joint land ownership forms for low-income housing projects, where credit for ownership housing is provided for the unit only, but the land remains the ownership of the group. Finally, in order to serve urban households, MFI programs would require a different set of underwriting criteria, equity and savings arrangements and interest rate structures based on the actual risks to which they are exposed. Subsidies may have to shift more towards land cost than the cost of finance.
31 UNISEF understands the stressful needs of service improvements in hygiene and sanitation in rural and urban bastee (slum) areas through community services. In 2007, in collaboration with the Government, it started the programme of Sanitation, Hygiene Education and Water Supply in Bangladesh project, or SHEWA-B. This project was built on UNICEF's previous projects: the Environmental Sanitation, Hygiene and Water Supply in Urban Slums and Fringes Project, which ran from 1999 to 2006. This project worked to promote better hygiene and sanitation behaviors in slum communities through the establishment of adolescent groups, women's courtyard meetings, school hygiene brigades and men's advocacy groups. Adolescent groups and school brigades empowered children to monitor and report publicly on the sanitation behaviors of their peers and neighbours. All these groups are known as community hygiene promoters (CHPs). (Source: http://www.unicef.org/bangladesh/4926_4974.htm)
54 Box B4. Contractual Saving Schemes for Housing – a primer Contractual Saving Schemes for Housing (CSH) has been a traditional means of raising housing finance (e.g., Germany, France, Mexico), and has most recently been adopted by Eastern and Central Europe, Nicaragua, Peru, Tunisia, Morocco, China and India. Several public housing institutions in Asia, Latin America and Africa have also started running CSH as a means to attract low-cost deposits. The concept is simple, requiring the potential borrower to save money in fixed installments over a number of years, thus building up some equity, whilst at the same time demonstrating to the bank his reliability and capacity to repay a debt. The savings can be withdrawn at any time; however, the bank does not give out a housing loan if funds are withdrawn early. This incentive structure converts an ostensibly short-term deposit into a de-facto long-term deposit, mitigating liquidity risk. Once the saving period is over, the bank advances a loan proportional to the amount already saved, providing an incentive to the client to save more. Interest rates for savings are generally fixed below the market rate, and the rates on the loan are also fixed below market, protecting the client from interest rate risk, in a sustainable and profitable (for the bank) manner. CSH loan pricing is generally identical for all savers, because the savings behavior already reveals the borrower quality and promise. This makes CSH administration cheap and easy. CSH schemes have been justified based on three central arguments: • CSH fills the void left by the lack of long-term funding instruments, hindering specifically the development of fixed-rate mortgage products. The aggregate liquidity management depends crucially on how credible the scheme is as a generator of loans. • CSH addresses the problems of access to mortgage finance for young and low-income households due to high down-payments and high credit risk management costs. • In countries where credit information on borrowers is scarce, CSH will enable financial institutions to accumulate credit information for a large number of individual borrowers and thus lower credit risk . • CSH acts as a means to generate lacking loan supply in areas not covered by standard mortgage finance and characterized by low loan volumes and high servicing costs, especially modernization and small transaction loans. • CSH contribute to a greater mobilization of savings and therefore economic investment. • CSH has a comparative advantage in addressing risk of mortgage products, which are especially high in emerging markets characterized by high credit and inflation risk levels. CSH can be structured in a way to provide considerable protection from interest rate risk to the home buyer, which is more valuable in countries with higher volatility of interest rates.
7.8 MORTGAGE PRODUCT INNOVATION
Further housing finance market development crucially hinges on product innovation, which would bring down lending costs, customize loans to client needs, enable the financial institutions to better manage risk, and help extend supply further down the income scale. A well-studied example of a success product is the contractual savings scheme, or savings-for-housing (Box B4). The product involves several years of saving (generally 4-5 years) by the client, who thus establishes a good reputation with the financial institution, as well as accumulates a down- payment on the future home. Following this period, the client receives a proper mortgage loan and purchases the home. This instrument is very appropriate in developing countries, where credit records are not widespread, the population is mainly young, and savings are not
55 customary. In view of the savings habits in Bangladesh, as evidenced by the outreach of the NSS and its use as a source of pension supplements, a savings-for-housing scheme will prove popular. It will also boost national savings, provide a stable source for long-term funds in the financial system, and widen access to mortgage finance among lower-income groups.
7.9 MORTGAGE REFINANCING FACILITY
The Bangladesh housing market lacks long-term funds. This puts NBFIs on a non-level playing field with banks, which can benefit from their deposits as a source of cheap funding. To address the twin issues of liquidity and term mismatch risk, international best practice suggests the creation of a mortgage refinancing facility, a type of housing fund serving to take mortgages off the balance sheet of financial institutions, and inject the required liquidity so further mortgage lending is possible. The same effect can be achieved by securitization, in countries where the institutional and developmental prerequisites for securitization are present. The current liquidity facility maintained by Bangladesh Bank serves somewhat such functions, but is not sustainable in the long term, is not organized on a market basis, and is not equipped to monitor that subsidies are precisely targeted to lower income groups.
The current Bangladesh Bank housing credit line would therefore benefit from being transformed, in the long-term, into a liquidity facility capable of issuing its own private bonds. This will separate market long-term debt from interest rate subsidies, enabling more efficient and transparent targeting of the subsidy. A facility could refinance all eligible lenders (both banks and finance companies) that provide as collateral high quality mortgage loans. The facility would issue low-risk private bonds among institutional investors (a key success factor to keep the price attractive among lenders would be the eligibility of these bonds to SLR assets). This mechanism would centralize funding requirements, catalyze the primary market for housing finance, provide matching finance at an acceptable cost, encourage discipline by requiring higher lending and servicing standards, as well as provide some form of institutional support to help build the linkage to securitization in the long term (following the best practice of Malaysia’s Cagamas). The World Bank Group has helped countries like Jordan, Palestine, and Egypt in setting up such long-term funding facility institutions, and is currently assisting State Bank of Pakistan in setting up Pakistan Mortgage Refinance Company.
56 7.10 ENABLING LARGE SCALE DEVELOPERS AND BUILDERS
Further work is needed to examine options to secure advances made by clients to developers, including the possibility to introduce either escrowing or insurance guarantee schemes in Bangladesh to protect advances and secure the completion of projects. In particular, an insurance guarantee scheme could be devised under the management of REHAB with fees paid by developers. Both ways may imply additional costs and field inspectors. Solutions should be discussed through REHAB with the best developers, as a way to improve the standards of their profession and therefore scale up their activities.
The legal framework on titling in the case of new developments should be clarified and revised for robustness, avoiding a legal vacuum for the ownership title of buying homeowners, and protecting them from the bankruptcy/under performance of specifications by the developer as well as from ownership uncertainty. A simplification of property transfer approval procedures could permit title transfer during the construction.
57 ANNEX –A1
1. DOING BUSINESS - EXPLORE ECONOMIES
1.1 ECONOMIC DATA - BANGLADESH
This page shows summary Doing Business 2010 data for the Bangladesh economy. The first table lists the overall "Ease of Doing Business" rank (out of 183 economies) and the rankings by each topic. The rest of the tables summarize the key indicators for each topic and benchmark against regional and high-income economy (OECD) averages.
Region: Income category: Population: GNI per capita: South Asia Low income 160,000,128 US$ 516.06
Doing Business Doing Business Ease of... Change in rank 2010 rank 2009 rank Doing Business 119 115 -4 Starting a Business 98 93 -5 Dealing with Construction Permits 118 110 -8 Employing Workers 124 121 -3 Registering Property 176 177 +1 Getting Credit 71 68 -3 Protecting Investors 20 19 -1 Paying Taxes 89 85 -4 Trading Across Borders 107 108 +1 Enforcing Contracts 180 179 -1 Closing a Business 108 108 0
1.2 STARTING A BUSINESS
The challenges of launching a business are shown below. Included are: the number of steps entrepreneurs can expect to go through to launch, the time it takes on average, and the cost and minimum capital required as a percentage of gross national income (GNI) per capita.
58 Starting a Business DB10 rank: 98 DB09 rank: 93 Change in rank: -5
Indicator Bangladesh South Asia OECD Average Procedures (number) 7.0 7.3 5.7 Time (days) 44.0 28.1 13.0 Cost (% of income per capita) 36.2 27.0 4.7 Min. capital (% of income per 0.0 26.9 15.5 capita)
1.3 DEALING WITH CONSTRUCTION PERMITS
Shown below are the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections.
Dealing with Construction Permits DB10 rank: 118 DB09 rank: 110 Change in rank: -8
Indicator Bangladesh South Asia OECD Average Procedures (number) 14.0 18.4 15.1 Time (days) 231.0 241.0 157.0 Cost (% of income per capita) 645.1 2,310.6 56.1
1.4 EMPLOYING WORKERS
The difficulties that employers face in hiring and firing workers are shown below. Each index assigns values between 0 and 100, with higher values representing more rigid regulations. The Rigidity of Employment Index is an average of the three indices.
Employing Workers DB10 rank: 124 DB09 rank: 121 Change in rank: -3
Indicator Bangladesh South Asia OECD Average Difficulty of hiring index (0-100) 44 27.8 26.5 Rigidity of hours index (0-100) 0 10.0 30.1 Difficulty of redundancy index (0-100) 40 41.3 22.6 Rigidity of employment index (0-100) 28 26.3 26.4 Redundancy costs (weeks of salary) 104 75.8 26.6
1.5 REGISTERING PROPERTY
The ease with which businesses can secure rights to property is shown below. Included are the number of steps, time, and cost involved in registering property.
59
Registering Property DB10: 176 DB09: 177 Change in rank: +1
Indicator Bangladesh South Asia OECD Average Procedures (number) 8.0 6.3 4.7 Time (days) 245.0 105.9 25.0 Cost (% of property value) 10.2 5.6 4.6
1.6 GETTING CREDIT
Measures on credit information sharing and the legal rights of borrowers and lenders are shown below. The Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. It ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau.
Getting Credit DB10: 71 DB09: 68 Change in rank: -3
Indicator Bangladesh South Asia OECD Average Strength of legal rights index 7.0 5.3 6.8 (0-10) Depth of credit information 2.0 2.1 4.9 index (0-6) Public registry coverage (% of 0.9 0.8 8.8 adults) Private bureau coverage (% of 0.0 3.3 59.6 adults)
1.7 PROTECTING INVESTORS
The indicators below describe three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection.
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Protecting Investors DB10: 20 DB09: 19 Change in rank: -1
Indicator Bangladesh South Asia OECD Average Extent of disclosure index (0- 6.0 4.3 5.9 10) Extent of direc tor liability 7.0 4.3 5.0 index (0-10) Ease of shareholder suits 7.0 6.4 6.6 index (0-10) Strength of investor protection 6.7 5.0 5.8 index (0-10)
1.8 PAYING TAXES
The data below shows the tax that a medium-size company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes. These measures include the number of payments an entrepreneur must make; the number of hours spent preparing, filing, and paying; and the percentage of their profits they must pay in taxes.
Paying Tax DB10: 89 DB09: 85 Change in rank: -4
Indicator Bangladesh South Asia OECD Average Payments (number per year) 21.0 31.3 12.8 Time (hours per year) 302.0 284.5 194.1 Profit tax (%) 25.7 17.9 16.1 Labor tax and contributions 0.0 7.8 24.3 (%) Other taxes (%) 9.2 14.2 4.1 Total tax rate (% profit) 35.0 40.0 44.5
1.9 TRADING ACROSS BORDERS
The costs and procedures involved in importing and exporting a standardized shipment of goods are detailed under this topic. Every official procedure involved is recorded - starting from the final contractual agreement between the two parties, and ending with the delivery of the goods.
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Trading Across Borders DB10: 107 DB09: 108 Change in rank: -1
Indicator Bangladesh South Asia OECD Average Documents to export (number) 6 8.5 4.3 Time to export (days) 25 32.4 10.5 Cost to export (US$ per container) 970 1,364.1 1,089.7 Documents to import (number) 8 9.0 4.9 Time to import (days) 29 32.2 11.0 Cost to import (US$ per container) 1,375 1,509.1 1,145.9
1.10 ENFORCING CONTRACTS
The ease or difficulty of enforcing commercial contracts is measured below. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment.
Enforcing Contracts DB10: 180 DB09: 179 Change in rank: -1
Indicator Bangladesh South Asia OECD Average Procedures (number) 41.0 43.5 30.6 Time (days) 1,442.0 1,052.9 462.4 Cost (% of claim) 63.3 27.2 19.2
1.11 CLOSING A BUSINESS
The time and cost required to resolve bankruptcies is shown below. The data identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is also shown.
Closing a Business DB10: 108 DB09: 108 Change in rank: -
Indicator Bangladesh South Asia OECD Average Time (years) 4.0 4.5 1.7 Cost (% of estate) 8.0 6.5 8.4 Recovery rate (cents on the 23.2 20.4 68.6 dollar) Source: http://www.doingbusiness.org/ExploreEconomies/?economyid=17.
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