Low-cost housing scheme: Cabinet members concerned at absence of foreclosure law

The Federal Cabinet members are said to have raised concerns on the recovery of loans from those who would be allotted low cost houses without foreclosure law, sources close to Minister for Housing & Works told Business Recorder.

Sharing the details of low cost housing scheme, the sources said, Housing and Works Division submitted that the Federal Cabinet, in its meeting held on August 20, 2019, approved, in principle, the concept of an interest-free loan scheme for low-cost housing in the country, to be implemented in partnership with M/s Akhuwat Islamic Microfinance (AIM), the service provider selected through an open and transparent process, for implementation of the program with an allocation of Rs 5 billion.

The Cabinet had also made the following observations: (i) eligibility criteria should be linked to the poverty score card; (ii) geographic spread of the scheme should be expanded ensuring equitable distribution of funds across provinces ;(iii) mechanism should be introduced to include widows as a target group; (iv) effective controls/ independent monitoring should be introduced to ensure that the scheme is implemented as envisaged; and (v) the operational manual should be approved by the Board of the implementing agency.

The Cabinet further decided that Housing Division shall ensure that, instead of per annum collection of service fee on total disbursed amount, one-time service free @ 4.99 per cent will be charged from borrower at the time of disbursement of loan.

Housing & Works Division further said that the observations of the Cabinet were communicated to AIMS for redressal.

After meetings and a detailed analysis, the following submissions have been made for consideration of the federal cabinet: (i) eligibly criteria can be linked with Poverty Score Card (PSC) but the fact remains that it is a loan scheme and payback capacity for monthly loan installments by the borrower will have to be assessed. Generally speaking, a family may spare 1/4th of its monthly income as loan installment. The monthly loan installment in the scheme will be in the range of Rs 6,000 to Rs 15,000 per month. Therefore, the family income from all sources should be up to Rs 60,000 per month to avoid default. However, preference will, surely, be given to those families is around Rs 30,000 per month; (ii) as directed by the Cabinet, the geographical coverage will be ensured. M/s AIMS will start this programme initially in around 100 cities. However, the number of cities will be increased to 200 in due course of time. Initially, the geographical spread will be in 40-50 cities in Punjab, 10-15 cities in Sindh, 12-20 cities in KP (including merged FATA districts), 4-5 cities in Balochistan and 3-5 cities in GB/ AJK.

Widows or female-headed households are top priority provided they have means and capacity to repay regular monthly installment.

For monitoring, Ministry of Housing & Works has hired M/s Riaz Ahmed & Co-Nexia International for carrying out verification and validation procedure for disbursewment and recovery of interest free loan. AIM has been approved by the AIM's Board.

As standard practice, the microfinance service providers receive service charges on the basis of the expenditure incurred on the personal, equipment and transport facilities, etc., which remain deployed during disbursement as well as recovery period. Therefore, these are recurring costs and need to be recovered from the beneficiaries on a continuous basis. However, the service provider has offered to reduce service charges from 4.99 per cent to 4.49 per cent per annum.

Besides the observations recorded in the Cabinet Division, Ministry of Housing & Works also pointed out the issue of collateral against the loan amount. In this regard, it was mentioned that according to the best global practices in more than 150 countries microfinance and interest free loans are given on the basis of social collateral and personal guarantees as poor usually lack physical assets. The recovery of such loans against social collateral has been more than 99 per cent during the last 20 years of operations of Akhuwat.

According to sources, Akhuwat was already managing PPAF program of Rs 3.4 billion along with other partner organisations. However, AIMS has adopted additional security measures for the present scheme according to which original property documents of the borrower will be kept in custody along with an affidavit from the borrower that he/she cannot sell/dispose of the property without clearing the outstanding loan amount. In all cases, the value of land and building was at least double or three times the loan amount given to the borrower.

After presenting its case, the Ministry of Housing & Works requested the Cabinet to authorize it to sign a contract agreement with the service provider organisation i.e. M/s Akhwat Islamic Microfinance, on behalf of the federal government in light of judgment of the Supreme Court of Pakistan in the Mustafa Impex case.

During discussions, a member of the Cabinet raised concern on the recovery of the loans for housing in the absence of foreclosure law. It was opined that while microfinance loans often have a good track record of recoveries, however, there is distinction between productive loans and those meant for construction or renovation of houses as these are typically non-productive in nature.

Queries were also raised on the clauses relating to default and cost of services. Some members of the Cabinet stated that funding for such programmes could also be attracted from the UN Habitat. It was also revealed that Sailani Welfare Trust was also interested in participating in the housing-for-poor initiative.

The Ministry of Housing and & Works clarified that the selected organisation had a 99 per cent recovery rate even for housing loans extended by them. It was further explained that the recoveries will be effected by the partner organisation and the Housing Authority would not be directly involved with recoveries and the relevant clauses of the agreement were clear in that regard. It was also explained that the draft agreement had been vetted by Finance and Law Divisions.

Wrapping up the discussion, the federal cabinet allowed Ministry of Housing & Works to sign a contract with M/S Akhuwat Islamic Microfinance for interest free loan of Rs 5 billion for low cost housing. The Cabinet also directed the Housing & Works Ministry to take necessary steps for early implementation of the scheme.

The Cabinet further directed the Ministry to engage with the UN Habitat as well as Sailani Welfare Trust to see the possibility of seeking their cooperation for government's low cost housing initiative.