No quick fix to long term liquidity shortage: Nasim Beg, Advisor Arif Habib Group

Earlier this month, BR Research met Nasim Beg, the Chief Executive of Arif Habib Consultancy (Pvt.) Limited. Nasim, who is a Fellow Member of the Institute of Chartered Accountants of Pakistan, also serves as the Vice Chairman of MCB-Arif Habib Savings & Investments Limited, and sits on the board of several renowned companies. In this interview, Nasim talks about low cost housing, mortgage financing and why shortage of long term liquidity will continue to hamper Pakistan’s mortgage industry.

BR Research: What is your take on the current property market?

Nasim Beg: The current property market is a reservoir of un-taxed black money, including money belonging to criminals. It is so overwhelming that even those with white money and straight records are forced to turn their money black as there is no way out. Real estate in Pakistan has become an avenue just to store money and not build houses; it represents dead and unproductive capital.

As a result of this, prices have gone up so high that middle income families do not have the capacity to pay for the entire homes in four years, even for low cost houses that cost about Rs5 to Rs8 million. To bring down the cost, the government needs to take the bitter pill and implement a policy to counter this current menace of property valuation.

Currently, we have a shortage of eight to 10 million houses in the country and this shortfall is increasing every year. The financing being provided by the government for low cost homes is being mismanaged with only about 25 percent of the allocated budget getting in to the right hands.

In an ideal scenario, the private sector should be involved here but it requires able consumers who can buy the property and protection laws to go with it. If the consumers get access to 15 to 20 year mortgages, then there would be queues outside banks. This is the starting point; we need to have a full fledged mortgage system.

BRR: Where do you think funds for mortgage financing can come from?

NB: The government should start allocating a part of PSDP towards mortgage financing. Initially, starting with Rs250 billion and then over the years taking it to Rs1 trillion. These funds should be kept with the State Bank of Pakistan. Banks who are interested in providing mortgage financing can then come forward and start financing five million rupees per NIC or tax payer.

Hundred to two hundred thousand homes can be built per year depending upon the amount and it would create four to eight million jobs with it. Bulk of these jobs would go to lower class unskilled workers.

At the end of the day, it is all about priorities and the kind of results the government wants. With mortgage financing and low cost housing, it is quite apparent that there is demand. The funds invested here would come back to the system in terms of spending on goods and services. The multiplier effect of this action would be huge as those new workers would also start spending money in the market. It would get the demand going for clothing, motorcycles etc. It is not a one-way street. We will see major impact on other sectors with this policy.

BRR: How would the banks be protected?

NB: The State Bank should give loans to banks on a fixed rate for this purpose so that their long term interest rate risk is mitigated. Also the parliament needs to pass a law which safeguards the banks in terms of re-possession of properties. Fundamentally in urban areas, the prices shouldn’t go down as the demand is rising each year.

BRR: But a state-funded model is still a crutch. For a sustainable self-functioning mortgage market there needs to be long term liquidity in the system. Who will provide that?

NB: Just like in other countries, you need to have a long term bond market. But who will buy those long term bonds.

Long term liquidity is unavailable in the banking system. There is hardly any appetite for long term papers in the market since the size of pension funds and life insurance is negligible. And so, to whom will the issuer sell those long term papers? If banks want to finance mortgage for 25 years, then someone should give them a deposit for 25 years. That deposit mostly comes from pension or life insurance sectors – sectors that are still to grow in Pakistan.

Right now two people are representing long term savers: pension fund manager and life insurance manager. Life insurance manager is not talking in the interest of the saver because they have offered a fixed amount – say Rs10 million after 20 years to the saver. So they will give you Rs10 million in the 20th year regardless of what has been the inflation during that period.

Life Insurance in our country has not kicked off because of various reasons; one of them is our savings rate. Our savings rate is 12 percent which is quite low compared to India where the savings rate is around 30 percent.

BRR: Is there a solution to this?

NB: There is no immediate solution. In the pension sector across the world, the trend is shifting from ‘defined benefit’ to ‘defined contribution’. The west is not very cognizant of it at the moment, but to my understanding it is rapidly moving from ‘pension promises’ to ‘pension contribution’.

This means a saver would like to save in instruments whose coupon rates change every six months instead of locking your money for ten years. And therefore, the typical long term investor who used to create a demand for long term papers is gradually ceasing to exist worldwide. In Pakistan, pension fund had never taken off and when it did start, we gradually started moving towards VPS with ‘defined contribution’.

To my mind, the long term money – retirement money or life insurance money – is going to reduce worldwide, whereas it hasn’t even started in Pakistan. Most of the corporate sector has switched to ‘defined contribution’. In my interaction with the government, the government of Pakistan is also thinking to move towards ‘pension contribution’ instead of ‘pension promise’. As soon as you take away the ‘pension promise’ or the ‘life insurance promise’, there are no takers for the long term bond.

BRR: Who will fill that gap then?

NB: That is why I maintain that the government should park some funds with the SBP - say at the rate equivalent to last 8-year average inflation. Then banks should take the risk and give out mortgage loan at 1-2 percent over and above the rate at which financing is provided by the government. This is a solution to deal with the ground realities.

I have often argued with central bankers who say that we will make the long term yield curve. But I say where exactly would you make the yield curve? In thin air? When you do not have a taker for 20-25 years, then who will buy that paper? We should forget that there is a demand for 25 year papers.

All this long term money was always at the cost of pensioner or the person who had taken life insurance but that is gradually reducing.

BRR: Does Takaful offer long term liquidity?

NB: Takaful has received good response and it has been relatively successful so far. The general public’s inclination towards Islamic products is there, which can also be seen in the deposit growth of Islamic banks. So focus should be on Takaful and it should be promoted seriously. There are some issues with the current incentive structures of these insurance and Takaful schemes which should be looked into. Incentive structures which promote increasing the fund pool size rather than increasing the premium value should be implemented.

However, structurally, I don’t see long term liquidity available from even Islamic insurance.

The best solution, therefore, is the mortgage refinance model, where banks can borrow from the central bank, and the government keeps on adding money into that pool each year, from which bankers can withdraw every year, and gradually the pool size would grow giving banks the ability to lend money.

The other side of the equation is bank taking risks, and those risks are protected.

The mortgage laws, foreclosure and recovery laws are currently not favourable. Historically, the laws are made to protect the small guy, and the court system takes further populist position. This problem needs to be fixed.