Chapter one

Introduction

Introduction:
1

The urbanization of Bangladesh is quite similar to that in Latin America; formerly called over urbanization in 1950s, this is a situation where a rapid rate of urbanization does not lead to corresponding growth in industry and economy but results in a shift of people from low-productivity rural agricultural employment to low-productivity urban employment or underemployment. The major cities of Bangladesh exhibit the clearest symptoms of over-urbanization, where an imbalance between rapid population growth and insufficient employment opportunities led to an increase in poverty and the mushrooming of slum and squatter settlements. Bangladesh has one of the lowest land-person ratios in the world. The situation is further aggravated every year through an irrevocable reduction of per capita share of land for housing, as a result of continuing population growth. The Current trend of urban growth in Bangladesh is about 6-7% per annum. At present 29% of Bangladeshs population live in urban areas, which will be 34% by the year 2025. (REHAB). Considering this situation in this report is to identify the role of Real Estate Entrepreneurs in providing the housing facilities for the growing urban population and how these are influencing the growth pattern of the city and its sustain ability to the trade.

Methodology
The report is mainly focused on the Real estate condition of Bangladesh. For these Report we use some analysis and report published on real estate in Bangladesh. We collect those studies and go through those article and collected necessary data.

Objective
Generally every study is conducted to find one or mere findings, if the findings are predetermined they called the objectives of the study. Thus the main objectives of the study are as follows. The real estate condition of Bangladesh Growth of housing sector in in Bangladesh Housing Demand and Supply of Bangladesh Production and stock of Housing Financing of Housing sector.

Limitation
In the time of conducting the report we face some problem. We mainly use secondary data, there are no clarification of those data Lack of data available for the financing data about the supply side Lack of recent data Lack of data provided by REHAB

Chapter Two

Real Estate Condition in Bangladesh

Real Estate in Bangladesh:

With 154 million people, Bangladesh is one of the most densely populated countries in the world. Land prices are high; natural disasters are frequent; and sturdy, permanent housing is rarebarely 2 percent in rural areas and 23 percent in urban centers. Estimates suggest a shortage of about 5 million houses in Bangladesh, with as many as 500,000 houses added annually in urban areas and 3.5 million added in rural regions. The need for housing upgrades is also high, given the temporary nature of most dwellings and the slum problem in Dhaka City. Housing supply is not forthcoming, however, except for the upper-income groups catered to by private developers. Some nongovernmental organizations (NGOs) and microfinance institutions (MFIs) fund self-construction for lower-income groupsbut on a far smaller scale, relative to the existing need. Government housing provision has not managed to address the issue adequately.

Real Estate Growth in Bangladesh

The economic performance of Bangladesh has provided strong impetus to the real estate sector, which has been witnessing heightened activity in the recent years. Substantial end-user and investor interest, large scale investment in infrastructure and rapid urbanization have contributed to the growth trajectory of real estate In Bangladesh. The real estate growth story is clearly visible in urban areas. High growth in services as well as manufacturing sector has resulted in high demand for commercial and industrial real estate. The following table shows the important factors which are forcing the real estate sector in Bangladesh.

Housing Demand
Bangladeshs 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 mil- lion houses in Bangladesh in 2009. In urban areas, the annual estimated demand amounts to 300,000500,000 houses. In rural areas, with an assumed 2 5

percent new household formation annually, the new demand could be as much as 3.5 million a year. Of the larger cities and towns in Bangladesh, Dhaka is the hardest pressed in terms of unsatisfied housing demand (according to data from the BHBFC). The housing needs of lower- and lower-middle-income groups are considerable and remain largely unfulfilled. The BHBFC reports that there is great demand for houses priced moderately between Tk 600,000 and Tk 1,000,000; but the supply of such dwellings is almost nonexistent because of high land prices in downtown areas of metropolitan cities, particularly in Dhaka City. In areas on the city periphery, land prices are lower; however, there is no practical transportation method for dwellers in farther outskirts to get to the city and to their workplaces on a regular basis. Careful market-based demand studies are not available, and there is a need for further research on the housing demand of lower- and medium-income groups. 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 the market is active and relatively competitive. According to the Real Estate and Housing Association of Bangladesh, private developers (focused mostly on Dhaka City) typically engage in the building of dwelling units covering 1,0001,500 square feet. New formal construction accounts for about 3 percent of all housing (permanent and temporary) being built formally or informally in the country. Such development is exclusively limited to the upper-income urban groups, and it is undertaken mostly for investment and rental purposes, not for use as primary residences. 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. A 1991 Bangladesh national census counted 2,100 slums in Greater Dhaka. Currently, more than 2 million people in the capital city live either in slums or are without any proper shelter.

Growth Prospect

The economic performance of Bangladesh has provided strong impetus to the real estate sector, which has been witnessing heightened activity in the recent years. Substantial end-user and investor interest, large scale investment in infrastructure and rapid urbanization have contributed to the growth trajectory of real estate In Bangladesh. The real estate growth story is clearly visible in urban areas. High growth in services as well as manufacturing sector has resulted in high demand for commercial and industrial real estate. The following table shows the important factors which are forcing the real estate sector in Bangladesh. Booming Real Estate In Bangladesh

Demand Pull Factors

Resultant Impact

Supply Push Factors

Resultant Impact

Robust and sustained Macro economic growth

Increasing occupier base

Policy & Regulatory are going to be reformed such as flexibility of foreign Entry of number of domestic & foreign players increasing Positive outlook of global investors competition & consumer affordability

Significant rise in Upsurge in Industrial & business activities, esp. new economic sectors. Demand for newer avenues Favorable demographic parameters for entertainment, leisure & Shopping demand for office/industrial space

direct investment

Fiscal incentives to developers

Easy access to mean of project financing

Simplification of 7

urban Significant rise in Creation of demand consumerism for new housing.. development guidelines Increases developers risk appetite & allows large Rapid urbanization Growth in services such as IT/ITes, tourism Gamut of financing options at affordable interest rates Scarcity of open space in the important areas of the city. Hazards of purchasing land Hazards of construction of building. Price of land and apartment is creasing day by day. Rent of the apartment is comparatively high than the rent of the 8 Service facilities such as garbage disposal, central satellite TV connection, apartments services serves time, roof top facilities, and so on. Development of new urban areas & effective utilizations of prime land parcels in large cities and hospitality etc. Infrastructure support & development by government Improved quality of real estate assets scale development

The recent times have also witnessed an evolution of the sector - towards greater institutionalization and corporationalisation. With the entry of global players, inflow of foreign capital, evolution of capital markets, geographical diversification and introduction of reforms, the sector has undergone some significant structural changes. Even critical concern areas like transparency in the sector is also improving significantly. The trend is expected to continuing the coming years.

Housing Supply

Current State of Housing

Bangladesh has a high population densityabout 1,200 people per square kilometer and a limited area of 134,000 square kilometers, which is frequently flooded during the summer months. In such difficult conditions, only 23 percent of housing in urban areas and merely 2 percent in rural areas is permanent housing. Close to half of all housing units in the country (approximately 3.3 million) are made of temporary materials. This nondurable housing requires replacement within one to five years after construction. Even among the housing defined as permanent, there are many types of dwellings with only some degree of permanency, ranging from construction with brick masonry and reinforced concrete construction pillars to tinroofed and tin-walled houses. The heterogeneity of housing makes it difficult to estimate construction and housing materials costs, and complicates the measurement of real estate price indexes. Table B.1 shows some characteristics of the housing sector. The higher- and middle-income groups are housed in either low-rise, single-family houses or, increasingly, in multifamily apartment buildings (table B.2). The lower9

income households (approximately 70 percent 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 settlement areas that include both 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 multiunit buildings originally were built in

Table B.1 HousingSector Characteristics,1998

Characteri stic Total number of dwelling units Per capita floor space (sq. ft.) Occupancy level (people per Proportionunit) permanent structures of dwelling Proportion of rental units (%) (%) Access to clean water (% of population)

Bangladesh 19,020,489 Overall 54. 95.4 8 (Dhaka 65)

Rural 15,474,56 Area s 6 53. 5 21 5 78

Urban 3,545,923 Area s 62. 3 46 40 42

Table B.2 Dhaka Urban Area Housing Subsystems, by Income Groupand Land Coverage

Income Group and Hou sing Sub system Upper-income group Middle-income group

Approximate Proportion of City Population (%) 2 28

Approximate Coverage of Residential Land 15 (%) 65

compliance with the building code, but now are seriously overcrowded and poorly maintained. Overcrowding in these buildings has increased during the last several years because of an influx of rural migrants coming to work in the expanding garment industry. Other categories of low-income housing include governmentprovided squatter resettlement camps, plots of land with basic services that are given on a leasehold basis; employee housing that consists mostly of small apartments in high-rise complexes provided by the government; makeshift houses 10

built by squatters on illegally occupied public or private land; and pavement dwellings. Several organizations and rural innovators in Bangladesh developed and modi- fied various designs of rural low-cost housing after the devastating flood of 1987, and are doing the same for the people affected by cyclone SIDR in 2007. The houses vary in appearance throughout the country, but have similar basic structural components.2

11

Development of the Housing Stock

The 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 because of the poor preparation of master plans; the dearth of planning professionals in the public sector; and inadequate infrastructure provision, land acquisition, development and construction financing, and mortgage financing. All of these challenges raise development costs and make affordability increasingly elusive for a large portion of the population. 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. But other regional planning authorities (such as those for Chittagong, Khulna, and Rajshahi) have even fewer resources and less power to implement planning and development, and they are barely functional. The matter is further aggravated by the scarcity of information on housing supply and shortages for urban areas other than Dhaka, thus preventing adequate policy-making attention to these areas. A second but no less pressing issue is the high level of land prices for residential construction. 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 dense population, saturation of constructed areas, scarce city land, and a poor transportation network to the farther outskirts (where housing infrastructure is also poor). According to the Bangladesh Institute of Planners in 2003, residential land in Dhanmondithe most expensive area in Dhakacosts Tk 3,500 per square foot (roughly $60). Prices have grown 1516 percent in upscale areas such as Dhanmondi and Motijheel, much above the general cost of living. Prices are much more afford- able on the periphery of the cityPallabi, Shyamali, and Uttarabut those areas involve a long and expensive commute to employment centers. The provision of planned, efficient, and inexpensive transportation facilities from Dhakas outskirts to the heart of the city could shift the burden of housing needs 12

from the center 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; in Chittagong, they are about 15 percent lower (although the most expensive areas there match Dhaka), and are 3040 percent lower in other cities. Even in the lowest-cost areas, however, prices are inordinately high, relative to GDP. For example, again according to the Bangladesh Institute of Planners, the least-expensive residential land in Dhaka costs approximately Tk 1,600 per square foot (about $27) (table B.3). If the density/price relationship were linear, this would mean that even with a floor-area ratio of 10 (which is extraordinarily high), the land cost of housing development in Dhaka would be at least $2.70 per square foot. The process of residential infrastructure development in Dhaka is fraught with market failures. RAJUK regulates city development and plays a planning role, charges itself with providing residential infrastructure, 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. RAJUKs role in development land allocation is distortive. The agency has obtained a vast share of Dhaka urban land at artificially low prices (through its ability to impose a sale on the lands ownerslocal government entities). Having this land 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 that private developers bear themselves. Furthermore, RAJUK requires end clients to pay early installments during construction, thus restricting its subsidized new apart- ments to well-off customers. RAJUKs construction activities also are inefficient and vastly inadequate, given housing demand realities. Its inadequate advances in providing 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 that time, the area within RAJUKs jurisdiction has grown by at least 6 million people (more 13

than a million households). Against this, RAJUK has been able to provide serviced land to meet between 1 and 2 percent of the demand for such parcels. Transparent land allocation at true market prices and a level playing field among developers are crucial for increasing the availability of urban land and meeting the growing housing demand of the middle-range income group. Where 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 or she receives from the owner a power of attorney 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, and acquiring each one involves delays, lack of transparency, and governance prob- lems. Additional delays are caused by an inadequate legal and financing framework. Developer financing is limited because of the underlying risks involved. As a result, land acquisition for housing development is funded mostly by equity from the developers themselves. Such capital constraints, in turn, limit development projects to an inefficiently small scale. Although construction loans are available, they have low loan-to-value ratios (typically 50 percent or less) and carry such high rates of interest (often more than 16 percent) that developers see little value in them. This sit- uation is in contrast to conditions in other countries, where construction costs very often will be financed at 100 percent, with an interest rate that is some margin above the London interbank offered rate. The reluctance of banks to fund developers also is 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 hous- ing, these practices further aggravate the supply problem. 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 system slows down construction as developers wait for installments before they can top off projects. In a typical case, although the actual construction might take 14 months, delays arising from financing and other issues often add 14

another 612 months to the process. These frictions are estimated to add 1020 per- cent 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 construc- tion financing in the case of leasehold land: title is not 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, and by requiring thirdparty 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 because the buyers pay 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, finan- cial institutions are reluctant to lend to home buyers for new developments. That reluctance, in turn, limits the market for new construction to clients who can pay fully up frontthe upper-income groups. The builders/developers associationReal Estate and Housing Association of Bangladeshwas formed in 1991 to strengthen the private sectors role in housing development. It has a pivotal role in handling the issues of housing in an organized and modern manner through its 540 members. It is also playing an active role in framing most of the governments policies and laws relating to this sector, operating as a well-organized lobby defending developer interests.

15

Chapter 3:

Housing Production
16

Housing production
Suppliers of housing are the public sector, the formal and informal private sector, including owner-households and NGOs.

Rural housing
Housing in the rural areas is mostly produced by owner households in an incremental way. While most owners build on their own or rented land, informal occupation and squatting are increasing in rural areas. The Grameen Bank pioneered a housing loan program that provided basic building materials for a simple new house for which repayment could take place over a 15-year period. Other NGOs have followed this example, with shorter payment periods (see below) and a total of approximately 700,000 housing units have been constructed using micro-finance facilities from the time these programs were put in place in the 1970s. The government has a direct construction program for the rural areas, called Asrayon. It provides low-income barrack-type houses in model villages built by 17

the army. The houses are allocated to low-income households without payment. The program has produced approximately 20,000 units to date.

Urban housing
Because of the scarcity and high cost of buildable land in the large urban areas, most new formal sector residential construction in Dhaka and some other large urban areas has, over the last few decades, been in the form of multifamily units. In small towns single family units prevail. been provided by Islam et. al, 1997. The public sector. Several public agencies are, or have been involved in the financing and development of housing and residential infrastructure projects: the Housing and Settlement Directorate (HSD) and Public Works Department of the Ministry of Housing and Public Works (see Appendix for present projects of the HSD), the Local Government Engineering Department of the MLGRDC, and the City Corporations of the four larger cities. Their funds come mostly from foreign aid and to a lesser extent from national revenues. Corporations and the central government are developing Both City residential Comprehensive production figures are not available, but some estimates for urban areas have

subdivisions for lease to upper and upper middle income households and resettlement programs and site-and-services schemes for lower to middle income groups. The tenant purchase and sales projects require large down payments (25 to 30 percent) and a small number of annual payments. Arrears are a major problem with all government projects. Also, it has always been difficult to reach lower income households with the site-and-services projects and the size of the combined public housing programs has remained extremely small in relation to housing requirements and new construction. Altogether the public sector has only produced approximately one to two percent of total urban residential land and housing requirements (not more than 6000 units per annum) over the past years. These programs have been extensively discussed in ADB, 1993 and Shafi, 1999 forthcoming.

18

 Non-governmental sector.

The NGO sector has only been marginally

involved in urban housing. The discrepancy between urban land and house prices, and incomes of the below median income groups has made sustainable housing solutions difficult to conceive for that income group. Recently, the larger micro-finance institutions have shown an interest in entering the multi-family residential market for moderate and lower income households. Proshika and BRAC have plans to invest in large-scale low-and moderate-income housing developments 30 to 40 km outside of Dhaka. Some projects will receive free government land. The plan is to develop hostel type rental housing for urban workers and small low-cost family apartments for tenant- purchase. The NGOs have access to international funds, which they complement by borrowing and other income sources. Their cheap sources of funds make it possible for them to make long-term investments in social housing. None of these plans, however, have been implemented as yet. The ramifications of NGOs becoming long- term managers and financiers of multifamily low-cost housing developments have not yet been considered in any detail.

The formal private and cooperative development sector.

Private

developers are increasingly important players in the urban land and housing markets, particularly in the market for apartment buildings. A 1995 study by REHAB showed that there were 142 real estate developers in Metropolitan Dhaka, most of whom work in land and apartment development. This sector has produced close to 3 percent of the houses over the last few years, nearly all for the higher income segment of the market, and it is growing rapidly. Private landowners, using the land to finance new construction, are also developing multi-family housing units. They operate either as individuals, as businesses under the Companies Act, or form a housing cooperative, and jointly develop a housing project partly for owneroccupation and partly for rental or sale. Interestingly, private developers feel that the higher income apartment market is becoming saturated and attempt to move down-market (REHAB, Eastern). 19

The most serious constraint in doing so is the lack of mortgage financing. Finding accessible and affordable land for middle income housing construction is another challenge, particularly in Dhaka (see above). One of the largest developers in Dhaka felt, however, that there was sufficient land available for the foreseeable future, but the lack of long-term finance for middle income households would prevent them from expanding a middle income line of housing production. Infrastructure provision is the third main concern hindering private sector production of middle income houses. Services and infrastructure are the responsibility of the City Corporations and priority is given to their own land developments.

The formal or semi-formal individual homeowner construction sector. This is by far the largest housing supply system in all but the main metropolitan areas. Households acquire land, mostly on a freehold basis, and gradually construct their house with or without official approval of plans. Only a small proportion of households access housing finance. Informal private rental housing sector. Landowners in urban areas construct high- density, low-rise housing units for rental, without adequate services, either for individual households or for group living (mess housing). Squatting. People building makeshift houses on public or private land or squatting in buildings.

20

Rise in Cost of Construction Materials

There has been a gradual rise in the cost of construction materials in Bangladesh (table B.4), with prices doubling over the past 10 years and quadrupling over the past 20. Construction material price increases still have lagged behind the phenomenal per sq 3.60 7.10 7.80 9.00 8.00 9.00 9.50 . ft. (Tk) 5.25 9.00 10.50 15.00 22.00 20.00 21.50

Price of Brick , 1988 1998 2000 2004 2005 2006 2007 per 1.0 2.0 0 2.5 0 3.2 0 3.1 5 3.9 5 4.2 0 piece

Price Cem ent , 10 18 5 19 2 24 3 28 0 31 3 33 3

of

Price Iron 11,000 17,500 21,300 37,000 39,700 42,700 49,200

of

0 7 property price escalation in the country, however. The rise in the cost of construction materials has roughly followed the inflationary trend, and thus the rise in income levels. This fact indicates that it is the rise in land prices that really has pushed the property prices to unaffordable levels.

21

The Secondary Property Market

The flawed land development process has resulted in a very limited secondary market for property in Bangladesh. This is compounded by a speculative attitude toward property prices, built on the perception of unlimited future land price increases fueled by population and economic growth. Consequently, 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 and appraisers, and poor information on market prices and valuation. The absence of a formal mechanism through which buyers and sellers can exchange information about the real estate market pre- vents the market from operating properly. The transfer tax rate is extremely high; at 12.5 percent of gross price, it strongly discourages the transfer of assets (or at least the official transfers of assets). Reducing this rate would likely increase revenue from the tax and, even more important, stimulate sufficient sales to start making accurate determinations of market value determinations that are crucial to the development of a market for mortgages.

22

Chapter 4

Financing in housing

23

The combination of high land prices and high interest rates makes housing unaf- fordable to middle- and lower-income groups, and simultaneously causes over- supply of housing for the very top income groups (box B.1). A large part of these inflated prices is the result of institutional factors that can be addressed by policy measures. To a large extent, the high land prices result from a faulty land development process, as noted above. As will be argued in this section, the high interest rates 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. But housing finance is growing at very high rates, spurred by high excess demand and market innovations to increase supply. During 2008, Delta Brac Housing Finance Corporation Limiteds housing portfolio increased by 34 percent, while those of commercial banks increased by 16 percent. The sector as a whole grew by 14 percent in 2008, and stood at Tk 142.5 billion, or a little more than 6 percent of total credit to the private sector.

The present housing finance system in Bangladesh is extremely small and highly segmented. Formal mortgage finance is available only to households with monthly incomes above Tk 25,000 (well above the 10th percentile of the urban income distribution), and is restricted to selected housing submarkets in Dhaka. Within this section of the market, government-subsidized housing finance through the BHBFC is most prevalent; at the same time, the nationalized commercial banks (NCBs) are decreasing their housing loan portfolios. Expansion of the sector has to come through private sector mortgage lenders who recently have 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 face a challenge in mobilizing funds; and it is unlikely that the cost of longer-term funds will come down in the short term. In addition, the housing finance sector has to convince these new housing finance institutions that it can be a profitable investment sector with long-term 24

potential. No 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.

25

The Housing Finance Market

The financial sector in Bangladesh is fairly well-developed, though it is dominated by the banking sector. It comprises 4 NCBs, 5 government-owned specialized banks,30 domestic and 9 foreign private commercial banks, and 29 private nonbank financial institutions (NBFIs), in addition to cooperative banks and insurance companies. Over- all banking sector assets amount to almost 60 percent 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 (IBBL). In the housing finance market, an additional player is the BHBFC, a government entity that pioneered house building finance in the country and, until recently, was the principal source of housing finance there. In rural areas, NGOs make considerable contributions to financing housing construction and improvements. The government also funds lower-income housing via a special Tk 500 million fund called Grihayan Tahabil. That fund was created in fiscal 1998/99, and monies are disbursed through NGOs. The multiplicity and diversity of players has not translated into a vibrant and competitive housing finance market because the primary mortgage market is characterized by (1) funding distortions that handicap the most dynamic and efficient actors, (2) the legacy of a high level of nonperforming loans among NCBs, and (3) an uneven playing field between the state-owned BHBFC and other lenders. All of those factors result in allocating the cheapest financial resources to the least efficient players and pushing up intermediation costsin turn, driving interest rates beyond the reach of most Bangladeshis. Therefore, interest rates continue to show the frag- mentation of the market between the BHBFC (which lends at as little as 9 percent) and the other institutions (which lend at rates between 13 and 16 percent), without taking into account various add-ons. Housing loans in Bangladesh have a maturity of 1015 years. Lending criteria reflect a great cautiousness, particularly through restrictive loan-to-cost maximums 26

(generally capped at 70 percent, but averaging 50 percent in practice) and relatively limited maximum taka amounts (Tk 2.53.0 million for many lenders). Interest rates are fixed, but loan agreements typically stipulate that the lenders can change the rates at their discretion during the life of the loan

The Bangladesh House Building Finance Corporation (BHBFC)

BHBFC provides credit facilities for construction, repair and remodeling of

dwelling houses and apartments in cities, towns and other urban areas. In general, priority is given to civil servants and within that group to those with the most years of service. Currently, BHBFC provides five types of loans: (1) general loans for construction of single or multi-storied residential houses on land/plots owned by a single person or by a husband and wife jointly; (2) group loans for the construction of flats by a group of borrowers on a plot owned jointly; (3) apartment loans for purchasing under-construction apartments in Dhaka and Chittagong Metropolitan areas; (4) adjustment loans for completion of an under-construction house; and (5) loans for constructing headquarters. BHBFC operates presently only in carefully targeted, higher quality housing submarkets in Dhaka, and on a very limited scale in Chittagong and Rajshahi (which received 9.4 per cent and 3.1 per cent of disbursed funds in 1995-1996 respectively). Poor repayment experience in other urban areas was the reason to concentrate on Dhaka. It has financed 125,000 units since its inception, of which more than 30,000 since 1992, mostly for higher income households (Hoek-Smit, 1998). semi-pucca houses in district and selected upazila

The

BHBFC

offers interest

15-20 rates

year

mortgages

to

individual

households

at (UN-

commercial

that increase as the loan amount increases

Habitat, 2005). The financing terms are as follows: 15 year fixed rate mortgages at interest rates increasing with the loan amount. For loans above BDT 1.5 million a

27

simple rate of 15 per cent is charged, whereas a rate of 13 per cent is charged for loans below BDT 1.5 million in Dhaka. Outside Dhaka, the interest rate is 10 per cent. Eligibility criteria for the programs specify that for rental properties, threequarters of the rental income of the property must cover the loan repayments, and for owner-occupied properties a maximum of 50 per cent of the applicants income is required for loan repayment. The spouses income can be used as a guarantee if the applicants personal income is insufficient. BHBFC was funded by the Bangladesh Treasury, with a cost of funds of 5 per cent per year, an amount well below the market rate of interest. Moreover, the corporation enjoys a number of advantages it gets tax exemption, has much laxer capital requirements than other financial institution in Bangladesh, and has its bond guaranteed by the national government. But since it has lost its direct government funding, its volume has stagnated, and its market share of mortgage debt outstanding dropped from 48 per cent to 40 per cent in just period from 2001 to 2003 (Green and Wachter, 2007). Although BHBFC is the market leader with a share of 52 per cent, it is not very market savvy compared to existing private sector players and moreover is plagued with high defaults government in of over 30 per cent and no additional recent years. funding from the the The amount of loans sanctioned by the

corporation in 1999-2000 was BDT 1,242 million, against which it disbursed BDT 993.59 million. During the year, the corporation recovered BDT 2,329 million. The outstanding balance of total loans and advances of the corporation on 30 June 2000 was BDT 27,236.97 million, of which classified loans accounted for BDT 8,343.07 million (substandard BDT 2,421.15 million, doubtful BDT 2,850.67 million and bad debts BDT 3,071.24 million). However, its loan recovery performance is poor and well below that of the commercial banks. Its recovery on current loans is 86 per cent (of number of loans), but the cumulative recovery is only 44 per cent (UN-Habitat, 2005). Green and Wachter (2007) have identified some inefficiency in the operation of the state-owned BHBFC. First, BHBFC approval times were exceptionally long sometimes as much as a year from application to approval. Second, because 28

mortgage carried below market rates of interest, and were essentially granted by the government, they were allocated via rationing, rather than underwriting. The allocation process was political, rather than financial. Third, because BHBFC was for many years not held to performance standards, the agency had little incentive to service loans, so loan performance was poor. Typically, 20 per cent of loans would be in arrears. When BHBFC did foreclose, it would typically collect less than 50 per cent of the outstanding loan balance (For more about this, please see the Table 5 in the Appendix). Besides BHBFC, two housing finance companies, namely Delta-BRAC Housing Finance Corporation Ltd. (DBH) and National Housing Finance and Investment Ltd. (NHFIL) are being discussed along with some other private housing finance companies including commercial banks and their contributions in this sector in the next section.

Delta-BRAC Housing Finance Corporation Ltd. (DBH)

DBH is the pioneer, the largest and the specialist housing finance institution in the private sector in Bangladesh. After commencing operation in the early 1997, the company has registered commendable growth in creating home ownership among more than 7,500 families in Dhaka and other major cities of the country. At the same time, the company has been playing an active role in promoting the real estate sector to the large cross sections of prospective clients who had but yet unfulfilled dream of owning a sweet home. Delta-BRAC makes loans for the construction of houses, the acquisition of flats and houses, the extension and improvement of existing housing and the purchase of housing plots for middle and, in the medium term, lower income households. It provides both construction finance and long-term mortgage finance. In the first year of its operation, 230 individual loans were sanctioned for a total of BDT 208 million, an average loan size of BDT 900,000. The business plan projects a steady increase in the number of loans and a simultaneous decrease in the average loan size. The maximum loan is BDT 2 million or 80 per cent of the construction cost or 70 per cent of the purchase price, whichever is less. Mortgage loans have a maximum term

29

of 15 years and are discretionary adjustable rate mortgages. Present rates are 16.5 per cent. For owner-occupied properties monthly payments cannot exceed 30 per cent of household income and in higher risk cases, third party guarantees are required (Hoek-Smit, 1998).

National Housing Finance and Investment Ltd. (NHFIL)

NHFIL, a private sector housing finance company provides loans for construction of houses, purchase of flats or houses, extension and improvement of existing houses or flats, and purchase of housing plots. Up to June 30, 2000, the NHFIL provided a total amount of term loans of BDT 204.67 million.

IDLC of Bangladesh
IDLC of Bangladesh provides real estate financing for individuals, for developers and for corporate users. For example, IDLCs Individual House Loan Scheme offer financing facilities for the purchase of apartment, construction of house, of house for the renovation and extension of house, purchase/construction

employees under corporate house finance scheme, and office chamber/space for professionals. Under the Developers Finance Scheme, IDLC provides financing for the construction of apartment building, whereas Corporate Finance Scheme deals with the purchase of office space/chamber/display centre, construction/purchase of commercial building, Constructions of commercially viable project like schools, hotels and hospitals etc., and constructions of industrial building like factory, warehouse etc.

MIDAS Financing Ltd. (MFL)

MFL has launched Housing Loan Scheme to fulfill the dream of the limited income people by extending financial constructing a house support and/or in the form of term loan for purchasing an apartment/readymade

house/commercial space. Any Bangladeshi citizen within the age bracket of 30-55 years with recognized sources of income can apply for loan under this scheme. 30

Eligibility

for loan

is judged on the basis of age, monthly personal and family

income, arrangement of own investment, assets and liability position, job/business status, nature of income and savings habit of the applicant. The amount of loan shall be from BDT 0.30 million to BDT 3 million but not exceeding 50 per cent of the construction cost or purchase price of the property. The loan along with the interest is repayable in equal monthly installments over a period from 3 to 15 Years. In case of commercial space, maximum terms will be 8 years. The rate of interest is 15 per cent to 16 per cent per annum. A rebate at 3 per cent on interest is allowed to good borrowers for timely repayment of all installments. The sanctioned loan will be disbursed at a time or in installments after full investment of the borrowers equity. The loan installments can be paid in advance any time before its maturity. In case of advance payment, the amount should be equal to three or more installments. A non-refundable amount, which is 0.50 per cent of the loan applied for (minimum BDT 2,000 but not exceeding BDT 5,000) is payable at the time of submission of application. Moreover, an appraisal expense of 1 per cent of the loan sanctioned is payable while accepting the sanction letter.

The Role of Banking Sector in Real Estate Financing

Until recently, mortgage lending has never been considered quite profitable for commercial banks, thats why, they have imposed serious kinds of restrictions upon their mortgage business, both as to terms of individual mortgages and size of mortgage portfolio. Only recently, some commercial banks, both public and private, 31

specialized banks along with other financial institutions invest a considerable proportion of their combined assets in housing. The total housing related advances of the country's banking sector in 1999 was approximately BDT 18 billion, about two-thirds of which were made by the NCBs. The housing loans by the banking sector amounted to only 4 per cent of their assets. The private banks have the largest proportion of housing related assets (9 per cent), and the foreign banks have the least involvement in the sector (2 per cent). The banking sector's housing loans were made largely to individuals (54,000) and the housing societies received only about 14,000 loans. A third category of borrowers of the housing loan is the banks' own staffs, who receive such loan under special terms and conditions (Banglapedia, 2005). Credit restrictions, specifying the proportion of deposit funds that could be lent for housing, were only withdrawn in 1988 and after that time investments in the housing sector soared. Over the years, major problems in loan recovery began to plague the housing portfolios and the banks gradually decreased the proportion of advances for housing. From the above data, it is clear that NCBs were reluctant to extend lending to the housing sector. A number of NCBs only consider housing loans for clients that have other businesses with them and have the income and assets to support these loans. It is also evident that, in 2001, 85 per cent of the total disbursed fund in this sector has been made for individual housing construction, 3 per cent of which has been made to housing companies (Shefali, 2006). There is not much competition in the housing lending market and most banks offer the same terms for the different client options. All loans are for new house construction only, and banks only lend for urban housing in secure sub-markets. While in the past a rural house lending program was sponsored by the government through a 3 per cent refinancing window at the Bangladesh Bank, this was stopped because of alleged poor recovery rates. The recovery rate of housing sector loans in the banking sector averages approximately 70 per cent. The poor recovery rate is due mostly to older loans and recovery exceeds 80 per cent on loans disbursed after 1990 (Hoek-Smit, 1998). 32

The present

terms on individual

housing loans for the NCBs are: 10 year

discretionary adjustable rate mortgages (just decreased from 15 years), at 16 per cent compounded interest rates per annum and a maximum Loan to Value (LTV) ratio of 50 per cent of total cost including land. The maximum loan amount is decided on the basis of the net rental value of the property. However, the average loan size is BDT 1.5 to 2.5 million, similar to BHBFCs.

Role of NGO in Housing for middle and low income people

Housing Construction Financing
There is no direct provision of housing by NGOs in Bangladeshs urban areas because of land availability constraints. New housing construction is also not funded in urban areas because most lower-income groups do not own land. Some NGOs are seeking funds to build houses for their project beneficiaries, and intend to 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 to improve sanitary and drainage systems, provide potable water, regularize garbage clearance, and pave 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 in which theyve mobilized the

households; negotiated for them with the authorities who do not cover bustees; and given guarantee that the facilities would be maintained, costs would be met, and bills would be paid regularly. Some NGOs have promoted door-to-door garbage collection, and have taken charge of the general neighborhood cleanliness and 33

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 clients income-generating activities were hampered by natural disaster that left the beneficiaries homeless. Some NGOs motivated the landowners, negotiated bank loans, and initiated slumupgrading projects involving physical construction. These housing improvement loans would not have been possible without the NGO intermediating with the financial institution, because the latter generally requires clean title of ownership something rarely available to lower-income households.

Special Housing
Several NGOs are catering to the housing needs of specific groups, like garment workers, destitute and delinquent women and youth, street of the children, orphans, Their or empowerment mentally retarded and physically disabled children, and dormitory-type rental accommodations are part working mothers.

rehabilitation programs that comprise literacy and skills training; legal, social, and entrepreneurial support; health facilities; and mother and child care facilities, among other things. Some NGOs, run by women, have successfully acquired funds to construct their own buildings, which will cross-subsidize loan repayment costs, maintenance, and operation costs via their partly commercial rental use.

Slum Development
The government-initiated Slum Improvement Program has been undertaken by a few NGOs. These organizations focus on income generation; health and family planning; education; infra- structure; and services such as roads, drainage, water supply, and sanitation aimed at environ- mental upgrading and enhancement of affordability to improve the housing situation indirectly. Along with the NGOs,

34

several clubs, youth organizations, and social welfare societies are engaged in various components of the overall programs.

Management Support
Several NGOs and community-based organizations have undertaken the housing maintenance and utilities management functions for the implementing housing agencies. The outsourced functions can include water supply, operation and maintenance of sanitation, drainage and garbage collection services, collection of

fees, bills and maintenance expenditure, collection of technicians and management staffs salaries, collection and deposition of loan repayments, liai- son with banks and completion of documents, monitoring of housing and utility services, and credit management for a large number of beneficiaries.

Advocacy
Some NGOs and community-based organizations offer legal aid to low-income households facing meetings, and they eviction. Additional advocacy programs include seminars, group workshops, gatherings, street processions, celebration of important days, trainings and cover

symposiums, and exhibitions of building materials and role of savings and

demonstration houses. These efforts target both the urban poor and policy makers; housing and environmental rights, the microcredit, human rights, and gender issues.

35

Financing for Supply Side: A case study on Navana Real Estate Ltd.
Navana Real Estate Ltd. (NREL) as a company belongs to the prestigious NAVANA GROUP has already a name in the potential Real Estate and Housing Sector of Bangladesh. As a matter of fact the Chairman of NREL is the pioneer in country's real estate and housing sector business. Founded: 1996 Founded by: Mr. Shafiul Islam Kamal Industry: Real Estate Market Share: 10% Source of fund Equity It includes the fund of the owners of the company. Most of the projects are financed through equity. Bank loans Amount of bank loan is very little. Navana Real estate ltd taken loans from banks like-standard chartered bank, Dhaka Bank limited, IFIC bank limited, eastern bank limited (EBL).There are some requirements by the bank for getting loan by real estate companies including type of raw material real estate company going to use, land price, project location and many others. Navana dont take any permanent or interim loan, they take loan for once. Short term loans are repaid with earnings within 3-4 years after taking loan. 36

Financial Institution Long-term borrowings City Bank Ltd. Standard chartered Bank Dhaka Bank Ltd. Pubali Bank Ltd. Southeast Bank Ltd. United Commercial Bank Ltd. Short-term loan Al-Arafah Islami Bank Ltd. Bank Alfalah Ltd. Bank Asia, Pr. EXIM Bank Ltd. IFIC Bank Ltd. NCC Bank Ltd. National Bank Ltd. One Bank Ltd. Pubali Bank Ltd. Social Islami Bank Ltd. Southeast Bank Ltd. Standard Bank Ltd. Lease finance Dhaka Bank Ltd. Dutch Bangla Bank Ltd. EXIM Bank Ltd. Standard Bank Ltd. Total

Loan amount (In Taka)

83,912,923 30,638,971 50,000,000 5,838,515 175,900,049 136,571,845 53,807,500 49,600,000 215,000,000 71,971,667 140,626,648 154,490,723 77,439,941 150,000,000 133,827,899 100,610,216 20,000,000 175,202,524 13,557,126 1,604,565 91,070,843 9,165,483 1,940,837,437

Sales proceeds Sales proceed is another source of fund for Navana real estate limited. It includes installment by the clients, primary signing money. Their construction period of a project and installment period both are similar. They only handover the flat after all the installments are paid.

37

Mortgage in Bangladesh
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, in both the public and private sectors, either have established or are in the process of setting up in-house mortgage finance departments. There are a few NBFIs already very active in the housing finance market (described in the Specialized Mortgage Lending section below). Islamic banking, including mortgage lending, also is growing quickly in Bangladesh (see the Islamic Mortgage Finance section below). Although there are three or four Islamic banks now operating in Bangladesh, the IBBL is the leading Islamic commercial bank. The banking and financial sector regulator is Bangladesh Bank, the central bank, which is entrusted with supervision and regulatory oversight of the sector (discussed below in the Prudential Framework for Housing Finance, and Recent Policies section). NCBs are the second important source of housing finance in Bangladesh (after the BHBFC), reluctantly following government guidelines to provide housing finance. The NCBs have a low cost of funds because they receive the bulk of their deposits from government entities, which are statutorily required to deposit at least 75 percent of their funds with NCBs. Nonetheless, the NCBs suffer from a termmismatch problem because they are constrained by the maturities of their deposits. Those maturities may extend to a maximum of three years in principle, and to less than a year on average. The NCBs thus give priority to corporate short-term lending, and they set a low ceiling on the amount of mortgage loans they extend (3 6 percent of their outstanding portfolios). Housing finance is only part of their mortgage portfolios, a significant portion of which is allocated to commercial real estate. The NCBs follow a policy of wide intermediation spreads for housingabout7 percentparticularly 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. Partly as a result of insufficient capital bases, the NCBs tend to restrict their lending activity. Their growing liquidity means that large

38

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 are growing as providers of housing finance, with housing loans making up 510 percent of their loan portfolios. They use the same deposit-based funding as do the NCBs, but they are less handicapped by delinquencies: the ratio of classified real estate loans seems to be in the range of 5 percent. These banks do not enjoy the privileges of the NCBs; but they are more efficient and sport a better service quality, better product options, and expanded branch networks. Foreign banks are recent newcomers to this market; the credit performances of their mortgages have been good, but their impact on the market is likely to remain marginal because they target only upper-class borrowers. The weighted average rate on private commercial bank deposits in June 2008 was 6.85 percent, compared with a weighted average lend- ing rate of 12.09 percent. Foreign banks are in an even better position in this regard, with a weighted average deposit rate of 3.75 percent, against a weighted average lend- ing rate of 11.29 percent.

Specialized Mortgage Lending

Private institutions specializing in housing finance have made remarkable strides in a short time. The management teams at Delta Brac Housing Finance Corporation Limited, National Housing Finance and Investments Limited (NHFIL), and IDLC Finance Limitedaspiring to the same professional standards as their counterparts in other areas of the worldhave made substantial progress in underwriting, loan servicing, streamlining local decisions, eliminating delays, and increasing together transparency. Particularly impressive is Delta Bracs work in putting

credit histories of potential borrowers, and in beginning to correlate credit history with loan performance. However, these institutions operate at the level of upperand upper-middle-income clientele, as evident from their average loan size per client (nearly three times the already high average loan size of the BHBFC). Specialized financial institutions also have 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 percent of their business. One thing that keeps 39

nonperforming loans to a

minimum is that lenders require owners to put up

substantial equity (at least 25 percent and usually more) before getting a loan. Lenders also insist on obtaining and keeping title until the loan is paid off. Last, and perhaps most important, is lenders ability to persuade borrowers that they are better-off with a property whose ownership interest is not disputed. The very presence of a foreclosure proceeding creates just such a dispute. Given the equity stake that owners have and the attitudes toward property in Bangladesh, the threat of uncertainty about property rightseven without actual foreclosureremains a strong deterrent to loan delinquency and default. These private institutions receive no indirect subsidies, but their share of the housing market is exploding at the expense of other institutions

Main Issues in Expanding the Formal Housing Finance System

There are several constraints that hamper the expansion of formal housing finance system in Bangladesh. Hoek-Smit (1998) has identified the following issues which seeks special attention in expanding the formal housing finance system in the country.

Distortions in the Savings Rates and Resource Mobilization

High interest rates offered by various government savings plans compared to market rates offered by private deposit taking institutions distort the financial system. These distortions make it difficult for private sector institutions to raise household funds. For example, BHBFC has access to lower-cost funds, which allows them to set their lending rates below the market rates, making it difficult for the private sector to compete and, therefore, suppressing the development of the private mortgage industry. In June of 2003, public sector financial institutions had a cost of funds of less than 5 per cent, while private commercial banks had a cost of funds of nearly 8 per cent and housing finance corporations (HFC) had a cost of funds of 12 per cent (Green and Wachter, 2007).

40

Interest Rate Subsidies

For expanding access to housing finance by lower and middle income households, there is no means but to give those subsidies either in the form of tax subsidies or interest rate subsidies. However, interest rate subsidies have some major drawbacks apart from suppressing private mortgage market development. First, they subsidize debt rather than housing directly. A below market interest subsidy encourages people to borrow as much as possible and repay their loans as slowly as possible. Second, the subsidies increase with inflation when interest rates go up, a poor index for subsidization. Third, the subsidies are not transparent. Subsidy amounts are hidden and vary with the market rate of capital.

Subsidy Targeting
The government subsidizes housing for middle- and upper-income households and a scattering of low income households through the BHBFC. The targeting of the existing interest rate subsidy system is inefficient. Subsidized loans are presently provided to those that could participate in the private market without assistance. BHBFCs sole objective is to provide credit facilities for construction, repair and remodeling of dwelling houses and apartments in cities, towns and other urban areas. So, if any subsidy programs are devised, only the city dwellers or government officials will be benefited. Until recently, government has always ignored low and middle income group in targeting subsidies. In FY 2006-07, an amount of BDT 500 million is allocated to the Fund for Housing the Homeless to address the housing problems of the homeless, the poor and the low income group, particularly the rural families (National Budget, 2006-2007).

Risks, Affordability and Mortgage Instruments

41

There are only a few different mortgage instruments such as fixed rate mortgage (FRM), graduated payment mortgage (GPM) to address the perceived risks in mortgage lending or to make mortgage finance more affordable to middle income households. Among them, FRM is the most common instrument in Bangladesh, where interest rates are fixed for the life of the loan and so are the periodic payments, irrespective of interest rate movements in the market. GPM is also fixed rate mortgage, but the repayment schedule has been set up in such a way that early payments are lower and increase percentage. periodically by a specified

Interest Rate Calculations

Different types of interest payment calculations are in use within the primary mortgage market (and micro- finance market), which often creates confusion in the borrowers and increases the difference between government and nongovernment rate structures. While compounding is the most common way to calculate interest and is used by most of the financial sector, simple interest rates, which lower the effective rate, are used for special loans or customers. For example, BHBFC charges simple interest rates for smaller loans and as an incentive system for special customers, which translate into much lower effective rates. Also, NCBs charge simple rates for special customers, using the same nominal interest rate (Hoek-Smit, 1998). MFIs typically charge a flat rate for the entire loan period. No adjustments are made for principal repayments during the course of the loan. A flat rate therefore has a higher effective rate than the quoted rate. In fact, the term effective rate is used more loosely in housing finance, and is customarily interpreted as the total burden or overhead of carrying a loan.

Policy and Programs in Real Estate Financing

The Housing Finance Group of the IFC has identified numerous challenges that must be overcome if the housing finance sector is to fulfill its objective of increasing the availability and affordability of residential housing in developing countries. These are lending restrictions (mortgage lending is often narrowly restricted to a

42

single sector, such as government-owned

lenders or highly regulated private

institutions), infrastructure (emerging markets often lack the infrastructure that is fundamental to the support of home ownership, such as untargeted subsidies and disincentives for the financial sector), regulatory environment (legal and regulatory reforms that include lien registrations, property rights and foreclosure (while numerous except in a few practices), capacity (the pool of skilled managers and field staff experienced in housing finance is limited in most countries), and outreach have yet to rise to the challenge of massive outreach, institutions have learned how to profitably serve the housing finance sector, they countries) (Housing Finance Group, 2006). The Technical Assistance Performance Audit Report on the Housing Sector Institutional Strengthening (TA No. 1670BAN) in Bangladesh has provided an eight-point financing strategy involving (1) introducing a National Home Lending program (NHLP); (2) redirecting housing subsidies; (3) increasing lending recovery rates by BHBFC; (4) expanding the primary mortgage market; (5) rehabilitating BHBFC; (6) adopting a legal and regulatory reform program to safeguard lenders; (7) enhancing lending in rural areas through village micro-credit schemes; and (8) improving the climate for attracting finance to the housing sector (ADB, 1995).

43

Chapter 5

Recent development Of Housing Issue in Bangladesh

Recent Regulatory Policies on Housing Finance

In July 2007, Bangladesh Bank started a refinance scheme to help middle-income people buy homes in cities and to encourage banks and NBFIs to lower their interest rates on home loans. Initially, a fund of Tk 3 billion was created for this scheme; later, it was enhanced to Tk 5 billion. Middle-income people earning less than Tk 50,000 a month are eligible to get loans from any participating financial institutions (up to a maximum of Tk 20 lakh). The loan is for purchase of an apartment no larger than 1,250 square feet, located in one of six divisional cities or in Gazipur, Narayanganj, Savar, or Tongi. The loan period is up to 20 years (with a 1-year grace 44

period) at an interest rate of 9 percent. The central bank makes 100 percent refinancing of the loans disbursed, meeting the given criteria, to the participating financial institutions; repayment of the loan to the central bank is the sole responsibility of that financial institution. As of March 2009, 12 banks and 20 NBFIs had signed up for this scheme, and Tk 2.43 billion had been disbursed. The scheme terms are not as attractive to the NBFIs as they are to banks, however: NBFI cost of funds still ends up higher than that of banks. This scheme is untenable over the long term, but Bangladesh Bank cannot be expected to provide development finance at concessionary rates to further the creation and growth of a vibrant housing finance market. The central bank also is not equipped to monitor the efficiency and targeting of the concessionary credit line, and may not efficiently ensure that the liquidity goes to low-income groups. Instead, a specialized mortgage refinance company is a more sustainable vehicle for addressing the maturity mismatch on housing loans helping the growth of the countrys mortgage industry.

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 mortgage insurance (or title insurance, for that matter). In view of the prevailing high loan-to-value ratios adversely affecting the loan affordability of low-income borrowers, the need for a mortgage insurance institution cannot be overemphasized.

Risk Management
Bangladesh financial institutions ability 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. 45

Liquidity risk perceptions have heightened as a result of the global financial crisis. There is indication, however, that the countrys banking system is flush with liquidity, hoarded as insurance against the vagaries of international markets. That liquidity does not extend to specialized housing finance outfits, however. In the case of the BHBFC, whose ability to attract market funds is severely compromised, lower liquidity translates automatically into reduced lending. The BHBFC now relies entirely on recycling loan repayments. It also maintains large working capital funds (more than Tk 3.6 billion), which are invested in low-yield bank placements. Independent of current events, the NBFIs suffer from a fundamental term structure mismatch, which is a source of considerable risk. NBFIs such as Delta Brac fund housing lending with short- to medium-term deposits. The Bangladesh Banks limited refinance scheme, introduced in the aftermath of the global financial crisis, has provided a somewhat temporary alleviation. Bangladesh has enjoyed a stable macroeconomic environment in the last 10 years. In spite of that, market risk is not well managed by housing finance outfits in Bangladesh; instead, it is passed on to the clients, thereby reducing the affordability of mortgages and limiting the outreach of the mortgage market. The mitigation of interest rate risk is hampered by the absence of a long-term yield curve. Only recently has the Bangladesh Bank floated long-term bonds with maturity longer than 10 years. These instruments do not have any active secondary market. Credit risk is not particularly problematic for private specialized housing institutions, as revealed by their 5 percent nonperforming loan rate. Commercial banks have limited their credit risk by maintaining trivially small exposure to the housing sector. In contrast, the BHBFC has a large nonperforming loan portfolio (about 47 percent, if reclassified on the basis of international prudential loan classification standards). It has more than Tk 10 billion as interest receivable from the problematic portfolio, partly because of the imprudent policy of interest deferment. This unrealized interest has a sizable opportunity cost (Tk 5001,000 million). These portfolio weaknesses have not been adequately provisioned for, creating a sustainability risk for the BHBFC.

Policy Challenges and Critical Issues

46

In the closing part of his presentation Dr Bhattacharya identified some policy challenges and issues that are critical to the housing industry. He felt that the present rate of housing interest is very high and provision of housing finance at competitive rates will prove to be useful. He also observed that lack of mortgage financing is perceived to be holding back housing opportunities for middle-income groups. He also argued in favor of making land available for developers through RAJUK rather than the prevailing practice of allocating land to individuals. Procedural delays in getting permission from authorities such as RAJUK, police, fire service, environment directorate and utility authorities were suggested to be removed. He also underscored the need to make a detailed plan for urban areas, and articulating the demands in the area of utility and infrastructure services from a futuristic perspective. Public-private collaboration is essential in this regard. While making room for more housing projects the issue of environmental sustainability should be ensured. He also suggested a detailed plan which would evaluate the role of low-lying areas and the ways to utilize them by taking into cognizance both the pressure of housing and flood management needs. He also underscored the need to undertake a plan to address the slum problem. He argued in favored of curbing the growth of slums and facilitating the process of rehabilitating the existing ones. Towards this end, an energetic policy in support of low cost housing was considered to be critically important. The need for a future-looking housing strategy that would cater to the needs of people with various levels of purchasing power was also stressed. Finally Dr Bhattacharya proposed that a comprehensive study be undertaken which will allow the policy makers to make informed policy decisions for the development of the sector.

Open Floor Discussion

Following the valuable comments made by the honorable Finance Minister, the chairman invited the participants to share their thoughts on the issues on the table. Following is a summary of the major points raised in course of the dialogue.

47

Right to Housing for all

The fact that shelter is a fundamental right for all citizens was forcefully mentioned in the keynote presentation and the Finance Minister also highlighted this in his speech. The importance of this fact was also reflected in the issue of low-income housing, which was raised by a number of discussants. Professor Sarwar Jahan, Head, Department of URP, BUET noted that for the rich people housing is not a problem. If strengthening is the purpose, middle and low income groups should be targeted. This issue received little attention in the paper, he observed. He informed the audience that because of the high price of land, most of which is privately owned, it has become very difficult to include middle and low income people in any housing scheme. Thus providing shelter for low-income people without subsidies has become quite difficult. Though provision for middle and low income people is possible in government owned khas land, this process in many cases became unsuccessful because it was observed that even if quality shelter is provided for low-income people, ultimately those facilities are enjoyed by the high-income group. At this end, he suggested inclusion of relevant experts in decision-making and suggested that the private sector should also be involved in this process. Emphasizing the issues of the fundamental rights to housing Dr Shayer Ghafur, Associate Professor of Architecture, BUET mentioned that if policy is the issue, the policy should serve the interest of the broader public. He suggested that private sector housing should be considered as complementary to the public sector. He observed that the basic nature of public sector housing is such that low-income people are going through a double discrimination which has become structural in the housing and land supply system. Poor people are not earning enough through the informal and formal sector to maintain a gainful livelihood. Hence, they are not paying income tax and therefore not collecting a TIN certificate, which RAJUK is considering as a prerequisite to apply for plots. On real estate developers demand for large tracts of land from RAJUK, Dr Ghafur was doubtful whether they are going to include provisions for low-income people in their scheme. He suggested that in such cases inclusion of low-income people should be done through introducing 48

cross-subsidy. Interpreting his comment he noted that if 70 per cent of land is developed for upper and middle-income people at least the remaining 30 per cent should be allocated to low-income people who would not otherwise be able to have access to that land. If necessary, regulatory reforms should be made in this regard.

Chapter 6

Policy Implementation

49

The legal, regulatory, and taxation frameworks are not enabling development of primary and secondary housing finance markets. Doing Business 2010 (World Bank 2009a) rates property registration procedures in Bangladesh among the 10 slowest in the world. There is no systematic land survey and cadaster; land administration purview is shared by two poorly coordinated ministries, which increases inefficiencies; and land registers are not computerized, which causes delays and a considerable backlog of land disputes. Transparency and governance are weak. This is aggravated by a framework of very poor court enforcement, also assessed to be among the worst in the world. Titling regulations could be streamlined, especially those regarding new developments. The enforcement of property liens is largely annihilated by the length and cost of cumber- some foreclosure procedures. its coverage is needed. Housing finance reforms will be ineffective unless accompanied by radical improvements in regulatory enforcement and property registration. Necessary regulatory reforms include prudential norms customized to housing finance, more effective collateral and foreclosure regime, improved availability of housing and mortgage information, and an overhaul of land administration. Pressing policy actions are required on (1) the revamping of the BHBFC, (2) the promotion of longterm 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 for all market participants, and (4) greater affordability of mortgage financing through promotion of micro lending for housing and innovative housing finance instruments. A public credit registry functions reasonably well in Bangladesh, but an expansion of

50

Chapter 7

Bibliography

51

1. REAL ESTATE MARKET IN BANGLADESH: DEVELOPMENT AND CURRENT PRACTICE Md. Tarikul Islam 2. STRENGTHENING THE ROLE OF PRIVATE SECTOR HOUSING IN BANGLADESH ECONOMY: THE POLICY CHALLENGES A K M Riaz Uddin, Programme Associate, CPD 3. WORLD BANK REPORT ON HOUSING IN UNDEVELOPED COUNTRIES, 2007 4. REAL ESTATE FINANCING IN BANGLADESH: PROBLEMS, PROGRAMS, AND PROSPECTS Md. Maksudur Rahman Sarker Mohammad Moniruzzaman Siddiquee Sheikh Feroze Rehan

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