June 20, 2022
ISLAMABAD – IT has now been well-recognised that relying on markets and competition, as opposed to directed government control or privilege, is the best way for countries to achieve sustainable prosperity for their citizens. However, the rise of wealth inequality in recent years, as starkly illustrated by the French economist Thomas Piketty in his bestseller Capital in the Twenty-First Century, has made it equally important to recognise that markets — more often than we may have thought — fail to provide resources in an equitable manner for a country’s citizens to feel they have a level playing field to aspire to raise their living standards. In such cases, the government or the regulator must lean in to address the market failure.
A key illustration of such market failure is equitable access to finance: the ability to bank with ease for everyone. Over the past several decades, Pakistan’s banking system has not risen to the challenge of providing a level playing field in access to finance to different sections of society. This is particularly so for housing finance for those who did not have the good fortune of being born into a household of means. In most economies, one of the principal components of household wealth is home ownership. Consequently, programmes that promote affordable finance for owning a home for the less well-off are key for reducing the glaring wealth gap between the haves and the have-nots in our country.
A simple example is useful. A typical employee in his or her 30s with a spouse and two children providing a service (secretary, driver, etc) in a mid-sized company in a large city likely does not own their own home. The rent for their modest home would easily be in the Rs20,000 per month range which would likely increase 10 per cent yearly. If her or his salary does not rise at a commensurate pace, their rent will eat up a growing share of their total household budget, crowding out the ability to save or provide for other needs of the family.
If the same employee were to get financing so that he/she could buy their modest home (that is a mortgage) for about the same monthly instalments as rent, at least two key benefits would accrue. First, mortgage payments are typically fixed in rupee terms over the life of a loan. Thus, the share of housing expense in the household budget should shrink over time, allowing the family to better cater for their other needs to raise their living standards. Second, by owning their home, this family would benefit from the general rise in home values over time and feel wealthier. Importantly, they would also feel less anguish at seeing others getting wealthier because they would be part of a rising tide.
The importance of policies to reduce wealth inequality cannot be overemphasised.
Pakistan’s market failure was that its banks never developed an ecosystem for such mortgages. It took the State Bank of Pakistan (SBP) and the government to create an affordable housing finance programme, Mera Pakistan Mera Ghar, to address this market failure. Under this programme, available in both Sharia and conventional form, the government subsidises the markup payment and the Pakistan Mortgage Refinance Company can provide partial risk coverage. The subsidy is targeted because it is only available for a first-time home buyer of a house that is 125 or at most 250 square yards — and rich people don’t like to live in small houses.
When this programme was started, the take-up by banks in sourcing and facilitating low-income customers was slow. The SBP eventually had to sharpen its system of rewards and penalties and address regulatory and other bottlenecks. Today, after about a year and a half, banks own this programme: to date they have approved about Rs210 billion (about $1bn) in such housing loans and disbursed about Rs85bn. The typical loan size is about Rs3 million which for a 125 square yard home generates a fixed monthly instalment of about Rs20,000. The decision of which loan application to approve is with the bank, not with the SBP or the government. It is a non-partisan programme in that whichever political party the applicant may support is irrelevant for the purposes of the bank to decide whether it is an acceptable credit risk. As a testament to the merits of the programme, the World Bank has recently signed an agreement to support it.
This programme, and its progress to date, is the tip of the iceberg. The approval and disbursement numbers illustrate how much more is possible now that banks have put in place the needed systems to run this as a sustainable business. The subsidies involved are one of the best returns for the taxpayer’s money. To illustrate the magnitude of the benefit-to-cost ratio, if another Rs100bn is disbursed in the coming fiscal year in such affordable mortgages, the programme would require a subsidy from the budget of around Rs20bn. This is much better use of taxpayer money than, for instance, the less well-targeted energy subsidies that accrue mostly to the well-off and are several times greater in magnitude. Further, international institutions may consider supporting such subsidies as a targeted intervention to reduce wealth inequality.
This programme is but an example. The importance of policies to reduce wealth inequality cannot be overemphasised. This is even more poignant now as rising international energy and commodity prices are raising inflation, squeezing further the household budgets of the less well-off and driving the wedge of wealth disparity deeper and sharper in the social fabric. It was only about a decade ago that the desperation of one Tunisian fruit-seller, Mohammed Bouazizi, in the face of rising inequities, drove him to douse himself in petrol and set himself on fire. That one act started the Arab uprising in the Middle East. It should be a lesson to us. Proactive programmes to reduce wealth inequality in a sustainable manner need to be front and centre of our priorities for our progressive and peaceful future.