The House Building Finance Corporation (Hbfc) - Pakistan: An Institutional Turnaround Spanning 2005 to 2007

Author:Rizvi, Zaigham Mahmood

The House Building Finance Corp (HBFC) was set up under the Government Act (titled "HBFC Act-1952") as a public sector enterprise soon after Pakistan's independence in 1947. Thus HBFC, established in 1952, became the country's first specialized housing finance institution and is currently ranked amongst the oldest housing finance institutions in Asia-Pacific region. In January 2005, the... (see full summary)



The House Building Finance Corporation (HBFC) was set up under the Government Act (titled "HBFC Act-1952") as a public sector enterprise soon after Pakistan's independence in 1947. Thus HBFC (the Corporation), established in 1952, became the country's first specialized housing finance institution and is currently ranked amongst the oldest housing finance institutions in Asia-Pacific region.

During the partition between India and Pakistan, there was a large influx of refugees crossing the border into Pakistan to settle mainly in the larger cities of Karachi and Lahore. Rehabilitation of these refugees, encompassing the provisioning of housing and employment, became the foremost issue facing the leadership of the new born state. In order to economically empower the people for housing and gainful employment, two institutions were created by the founding fathers of the country:

(i) The Refugees Rehabilitation Corporation, and

(ii) The House Building Finance Corporation.

With this purview, HBFC was created as a State Enterprise and by default, being in public sector became victim of the:

* Pros and cons inherent to a Public sector Enterprise within a developing country.

* Over the years it became an administrative arm of government's Social Service program and got plagued with inefficiency, corruption, political influences, and poor market perceptions.

* Nearly its entire loan portfolio was declared as either Non-Performing Loans (NPLs) or potential NPLs raising the fundamental question of its commercial viability and sustainability.


A World Bank Report in June, 7 2002 "A Housing Finance System for Pakistan Issues & Options" carried out a detailed review of HBFC and commented:

"Given the low rate of provisioning, HBFC may be in a situation economically equivalent to bankruptcy". "(P-2)"

Furthermore, it also observed that:

"Given its legacy as a Development Finance Institution (DFI), attempts to restructure HBFC as a commercially operating housing finance institution are not provisioning. Rather HBFC might focus on becoming an efficient manager of Government programs of social housing products, which would still require a major upgrading of its internal corporate environment...

.... "flawed charter, poor governance with administrative and political interferences... "(P-14)"

.... "A vast majority (98%) of credits due for more than 3 years (a very substantial share over 12 years). Recovery prospects are slim or nil [for these credits]." (P-14)"

"HSFC has a long-standing reputation problem domestically and even abroad among donors. These reputational problems must be factored in and addressed by any restructuring plan for HBFC."(P-27)".

In addition to the aforementioned analysis by the World Bank, an inspection report of the State Bank of Pakistan (SBP) on HBFC, prepared for period ending 2004 reiterated similar remarks on the status of NPLs in HBFC's loan portfolio.


Around that period, the then Prime Minister of Pakistan, Mr. Shaukat Aziz (previously serving as the Finance Minister of Pakistan) began emphasizing the importance of the issues of housing and housing finance in the country, leading to the creation of the following three main initiatives:

(i) Announcement of a National Housing Policy - 2002 (the first ever such document prepared on housing within Pakistan).

(ii) The State Bank of Pakistan (the country's central bank) started encouraging commercial banks to enter the business of mortgage finance.

(iii) The Government of Pakistan (GOP) also decided to try and revive HBFC to play its due role as the pioneer specialized housing finance institution in the country.

Building on this momentum, in January 2005, the GOP appointed a professional banker from the private sector as the new Chairman and Managing Director at HBFC. To start, the new management was tasked to come up with candid answers to the following fundamental questions:

* Was HBFC still needed as a specialized housing finance institution given that approximately 20 commercial banks had now entered and are competing with one another within the housing finance business? If the answer is YES, then

* Can HBFC be transformed into a commercially viable and sustainable housing finance institution?

The new management at HBFC first conducted a comprehensive review of the situation and noted its response as follows:

* The business focus of HBFC is Small & Medium Housing (SMH) for Low and Middle Income Groups (LIG) of the population. There is no financial institution except HBFC currently catering to this substantially large, un-served and/or underserved market segment. The Management argued in view of the Government's polices on SME banking that even though it is promoting specialized SME banking, no commercial bank has focused on SMEs finance despite the fact there are more than 40 commercial banks are operating in the country. The fact remains that SME represents a very sizeable business segment and thus needs to be accurately served with a business focus. The same holds true for justifying HBFC having a business focus for SMH financing.

* The following plan was imperative in succeeding to remake HBFC into a commercially sustainable entity:

(a) A comprehensive "reforms and restructuring" program to develop an efficient mortgage delivery platform.

(b) Drawing upon international expertise (possibly with the technical and advisory support of the IFC/World Bank Group) to develop a "business plan" and a "capacity building plan".

(c) Complete support and dedicated commitment of the Ministry of Finance (MOF), the SBP and the Board of Directors to achieve (a) and (b) above.

A presentation on management's view point was given to the GOP and finally the Management was given the go ahead to proceed as per plan.


In order to present a better comprehension of the ground realities faced by the new management in its endeavors, it is necessary to provide a review of some critical functions and activities at HBFC:

(i) HBFC prior to January 2005 (where they were),

(ii) HBFC subsequent to the reforms program & turnaround of 2005-2007 (where they are),

(iii) Future of HBFC (the way forward).


A brief overview of state of affairs, as prevailing prior to January 2005, would facilitate a better understanding of "where it was" and "where it is today". To assess the state of affairs needed time and lot of active involvement from the new management. The new management was convinced that any "effective treatment" would depend upon the quality of "diagnostics", so a comprehensive review of the state of affairs was immediately initiated.

1. Non-Performing Loans (NPLs)

As mentioned earlier, a very sizeable portion of the corporation's loan portfolio was nonperforming. The actual size of NPLs and the provisioning needed accordingly was hiding behind the definition of "loan classification". The State Bank of Pakistan's (SBP) Inspection Report for period ending December 2004 had remarked that out of a total asset size of approximately Rs.20 Bn, nearly Rs. 12 Bn were classified as NPLs which did not include other potential NPLs of around Rs.6 Bn.

The World Bank report for the year 2002 accorded the entire portfolio of HBFC as literally delinquent in contrast to the 90% estimate awarded by the SBR In the absence of precise data, the management classified the portfolio, partly using Ageing Analysis, to be as follows:

On the liability side, HBFC had an outstanding credit line of approximately Rs.13.5 Bn payable to the SBP. As such, if the situation would have continued, the much needed provisioning/write-offs would have wiped out the entire assets along with any chance of repaying the SBP credit line. Therefore, in the eyes of the new management, the first and foremost challenge was "default management".

2. Financial health of the Corporation

(a) HBFC as an "on-going" entity:

The two main issues severely eroding the health of the organization were:

(i) Need for more provisioning and write offs: In the absence of any attention focused on loan recovery from NPL's and Potential NPL's, and defaults getting deeper in ageing, the eroding assets would have eroded any chance of HBFC honoring its financial commitments,

(ii) Negative Cash Flows: As concluded in the World Bank report, the organization was gradually approaching bankruptcy. The SBP was refusing to roll over its credit lines since 2002, and instead demanded repayment of existing credit lines under a very tight repayment plan. This, coupled with very hefty establishment expenses created doubts on HBFC as an "on-going" entity.

(iii) No efforts were made to obtain market based funding, nor was it possible to do so in...

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