On July 29th, the ‘Naya Pakistan Housing and Development Authority Ordinance’ was presented before the National Assembly to expedite the process of Prime Minister’s flagship low-cost housing program. It addresses several bottlenecks that are impeding housing development for the low-income population segment.
Amongst other issues, such as land acquisition, registration of properties and record of titles, a critical component of the Ordinance specifies foreclosure laws that will be implemented in case a party defaults on its mortgage deed. This is the need of the hour since the current status of foreclosure laws in Pakistan does not give financial institutions the right to sell off the property in case of defaults. Before dwelling into the solution provided in this Ordinance, it is imperative that we understand the environment necessary to facilitate consumer housing finance.
One of the salient features of a thriving housing finance market is a strong regulatory and legal framework established to protect lenders from borrower default. Well-developed and efficient legal systems ensure that lending institutions are protected in case borrowers are unable to meet their financial obligations.
As is the case with numerous emerging markets, the court system in Pakistan is also riddled with inefficiencies that substantially increase the risk of doing business for financial institutions. According to some estimates, in Pakistan, around 70 percent of cases in banking courts are frivolous in nature, intended to delay litigation decision and judgement.
Moreover, an ever-increasing backlog of banking court cases, and a legal system lacking the capacity to tackle them are among the many reasons that have contributed to an underdeveloped mortgage market in Pakistan. Financial institutions are averse to lending due to the legal insecurity associated with debt recovery.
In order to bypass litigation delays in developing countries, many governments introduce non-judicial foreclosure policies that give lending organizations the power to sell a property by themselves without recourse to the legal system. Not only does this promote mortgage lending, it also improves the overall credit culture as borrowers are aware of the consequences of dishonoring debt obligations.
In this regard, The Financial Institution Recovery Ordinance, 2001, Section 15 introduced by the government of Pakistan at that time authorized financial institutions to carry out foreclosures for a mortgaged property without going to court. However, in 2014, this law was declared as ‘ultra vires’ (beyond the powers) of the Constitution by the Honorable Supreme Court of Pakistan.
From the eye of an activist, the decision seemed commendable as it protected borrowers from predatory practices of financial institutions to usurp property in cases of defaults. From a business development perspective, though, this served as a final nail in the coffin for an already struggling mortgage market in Pakistan.
It is not surprising then, that the latest figures from State Bank of Pakistan show that the outstanding housing finance in the country is currently equivalent to only 0.5 percent of the GDP. This figure, which is also commonly referred to as the Mortgage Depth Ratio, is low in comparison to not only developed but also regional developing countries like India, Srilanka and Bangladesh.
Given the latest push of the incumbent government to develop low cost housing under the Naya Pakistan Housing Program, it is imperative for the Imran Khan administration to address this issue, amongst several others, to promote the entry of financial institutions in the affordable housing industry.
Optics suggest that the government understands the pivotal role that financial institutions have to play in making this initiative a success, as government officials have been seemingly very vocal in their support of foreclosure laws for their flagship Housing Scheme.
With the introduction of Naya Pakistan Housing Authority Ordinance, we now finally have an understanding in how the government aims to address foreclosure concerns for its housing scheme. In Chapter VII of this Ordinance, it is stated that all disputes between financial institutions and the relevant borrowers will be directed to an ‘Adjudicator’ for resolution, whose role has been defined in section 41 as follows:
- Adjudicators will be personnel appointed by the Housing Authority to hear and decide cases referred to them by the Chairman or Registrar of the Authority.
- They may conduct inquiry and execute their decisions in any referred case ‘as if (they are) a civil court under the Code of Civil Procedure, 1908 (Act V of 1908)’.
- They have the authority to recover amounts due from the mortgagor in case he/she fails to repay house finance
- They can ask enforcement inspectors of the Authority to execute decisions as directed.
Moreover, if a party does not find the Adjudicator’s decision as satisfactory, they can file an appeal in the Appellate Tribunal constituted by the Housing Authority for this specific purpose. In case the party is still displeased, they can direct the matter to the Supreme Court, which may or may not grant the permission to appeal this decision.
The ordinance also specifically denies jurisdiction to courts to entertain any matter that the Authority officials are empowered to resolve. In essence, it endeavors to minimise court involvement in matters pertinent to the Housing Authority, which means foreclosure decisions taken by the Adjudicators will stay enforced since they possess civil court authority. The impression here is that banking courts, therefore, will not have a role in determining the merits of foreclosure in case it is directed under this scheme.
While this Ordinance is still in its early stages, and questions remains about its enforcement, the clauses for dispute resolution provided in it clearly indicate the government’s strict intention to enforce foreclosure in cases of default. This is welcome sign for the financial institutions that want to step into the housing finance industry through the Naya Pakistan Housing Scheme. More than anything, the implementation of this ordinance will help prevail the perception that willful defaults in mortgage financing will have consequences, and will likely give confidence to creditors that they are protected.
If approved, it should provide a significant impetus to the real estate sector through the development of mortgage finance in Pakistan. But much more needs to be done to further incentivize housing finance.
For further insights into the history of foreclosure laws and its potential impact, please read ‘Foreclosure laws necessary for stimulating house financing, especially for Naya Pakistan Housing Program (NPHP) – Part 1’