This is the first of a series of articles exploring the centrality of adequate foreclosure laws to meet rising housing demand in the middle and lower income groups in Pakistan, with particular reference to the Prime Minister’s Naya Pakistan Housing Program. These articles will culminate in a comprehensive Zameen Research report that will scrutinise existing house financing laws and examine models of regional countries and similar-sized economies that were able to successfully stimulate investment in their respective housing markets.
The government’s flagship Naya Pakistan Housing Program (NPHP) is struggling to meet take-off deadlines because of reluctance of private sector financial institutions to commit to the present lending regime, which leaves them uncovered in case of defaults.
Because of the ambitious target of the program, 5,000,000 houses in five years for middle and lower income groups, the government is relying on Public-Private Partnerships (PPP) – in simplest terms, the public sector will secure lands necessary for the project, while private sector lending will bring the liquidity.
Yet the superior courts, in their recent banking jurisprudence, have repeatedly struck down powers of private banks to secure their own interests without the intervention of ‘independent adjudicatory bodies’; hence the low appetite among banks as well as non-banking financial institutions (NBFIs) for mortgage financing.
For example, in the case of National of Pakistan v Saif Textile Mills (2014), the Supreme Court upheld the judgment of the Lahore High Court, upon appeal, by maintaining that any action of a bank that amounted to being a judge in its own case constituted “exploitative behaviour,” which violates the borrower’s right to due process of law.
Similarly, in Summit Bank vs Wasim and Co (2015), the Supreme Court ruled that the only legal course for the bank, to recover outstanding liability, was to file a recovery suit in relevant banking courts.
In another case, Kalb e Haider and Co vs National Bank of Pakistan (2016), the Honourable Court observed that “It is a settled law that in such matters the banks cannot take any unilateral action and have to resort to the legal process provided under the law…”
This legal process referred to in the judgments is the Due Process clause, which was inserted in the Constitution of Pakistan as recently as 2010 through the 18th amendment. Simply put, should a customer default on a housing loan, banks cannot foreclose on the property by themselves but must instead follow “due process” already laid down in the law, that is turn to banking courts to recover amounts defaulted on.
But it was precisely the paralysis of the banking courts, where the large backlog of cases ensures that any new complaints are lost in the system for years on end, which forced banks’ commercial lending away from real estate. Due to this friction between the judiciary’s interpretation of existing laws and banks’ reluctance to invest in real estate without adequate foreclosure laws, the Pakistani real estate mortgage market is among the least developed in the region, especially in terms of housing for the middle and lower income groups – the principal beneficiaries of NPHP.
Enacting laws in favour of non-judicial foreclosures will require legislation in parliament. But because of the treasury-opposition standoff in the House, the government has tried to circumvent any parliamentary debate by forming the Naya Pakistan Housing Authority (NPHA) through a presidential ordinance, which was promulgated on May 24.
The Ordinance takes a step towards provision of non-judicial foreclosure by creating the position of an adjudicator to resolve disputes between borrowers and lending institutions. The adjudicator will have the authority to recover amounts from mortgagors in cases of default. In case a defaulting party is not satisfied with the adjudicator’s decision, the case can be forwarded to an appellate tribunal constituted by the Authority. In case of further problems the matter can be directed to the Supreme Court, which will then decide whether or not to allow appeal.
Yet the Ordinance is neither here nor there. Ordinances have a life of 120 days. They can be extended by another 120 days upon approval by relevant committees of the national assembly, but unless approved by parliament in this time frame they simply lapse. NPHA was kept alive, barely three days before lapsing on September 20, for another 120 days. So far there is little to suggest that the Ordinance will have anything resembling smooth parliamentary passage.
Since there is overwhelming demand for housing, particularly in income segments targeted by NPHP, and there is adequate liquidity in the financial system to meet such demand if a proper environment is created, it can be safely said that the entire project hinges in streamlining foreclosure laws in time. And unless the government is able to iron out political differences with the opposition, which is blocking legislation because of political, completely unrelated, reasons, there is a very real danger of the entire project collapsing.
Part 2 will examine previous policy initiatives to stimulate the housing sector, why they failed, and what provisions were incorporated by other, similar economies that catered to middle- and low-income housing demand.