Research Article ISSN: 2313-4747(p); 2313-4755(e)

Innovations of Housing Finance

Systems and the Implication in
Bangladesh – A Categorical Study on
Financial Markets
Sanjoy Pal1, Mohammad Sharif Hossain2
1
MBA, Department of Banking and Insurance, University of Dhaka, Dhaka, Bangladesh
2
Senior Lecturer, Dept. of Business Administration, Uttara University, Dhaka, Bangladesh

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ABSTRACT
www.ajtp.us An evolution in the system of investment and finance, is being seen everywhere not only in the
Volume 1 emerging economy but also in the economy of developing countries including Bangladesh, is
Number 1/2014 housing investment. A feature by its nature is a long term investment arena that requires cash or
Issue 1
cash equivalent to grab the real asset legally. Now a country with a lot of human resources like
DOI:
Bangladesh is under the frustration raised by the security investment which just is going to crash
Licenced: down the probable site of investment by its negative feedback. Now housing investment is the last
resort of investment that gives reasonable outcome and that’s why it is exigent to analyzing the
framework of housing finance system in Bangladesh. This paper addresses the parley relating to
the financial system and the sources of housing finance in the commercial sector of Bangladesh.
A group of model here represents the developing scenario of real estate financing and how to
assure of the sources of finance, how to get the services provided by the financial institutions
E-mail for correspondence:
sharif1400@gmail.com and overall, to measure the results according to market transparency.

Received: April 27, 2014 Keywords: Evolution of house financing, Mortgage lending, Mortgage intermediaries, Mortgage
Accepted: June 15, 2014
finance industry in Bangladesh
Published: June 30, 2014

Introduction shared) which pushes the finance not to get and volatiles the
risk management area of concentration.
Real Estate is the investment sector of the maximum return,
backed up by a fewer risk. Bangladeshi people are now losing The another type of direct finance exists in most of the emerging
their financing capital for the continuing economic downturn economy such as Brazil, Turkey and Egypt, which is installment
that is making a dam between the investors and the investment basis sales contract where there is no chance of observing the
projects. So, most of the average incoming persons are now construction on time, and they have to bear the total risk of
on the way of searching housing finance that has a long term housing. That is a problem of financing that is further rejected
feedback of gradual development. Without a formal financial by Russia, Ukraine, Turkey and China (Lea 2009).
system in the least developing and developing countries, housing
finance is either self-financed or mutually direct-financed In a growing economy like Bangladesh, it is now a matter of
which include the friends, relatives and so. In Brazil there are concern to provide the finance to individuals to make them
savings institutions or lending clubs and landlords in Korea. able to construct a house for living. And indirect finance
The present phenomena support, the informal arrangement of joined a new era of housing finance by the money market
household seeking, is always inefficient that will make hesitation participants (financial institutions); like that Bangladesh has
between the borrower and lender to achieve their expected scale. commercial banks, savings and loan associations (microfinance
In Bangladeshi market information is scattered (not equally organizations), mutual savings banks (cooperative societies),

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32 American Journal of Trade and Policy ● Jun 2014 ● Vol 1 ● Issue 1

 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

Islamic banks and insurance companies. Historically, a group increased pricing of the house, apartments, and lands for the
of models were prepared on the real estate financing where the middle and lower incoming people of Bangladesh. According
original existence was under the uncertainty. But, in Bangladesh to observation of The Financial Crisis Inquiry Commission
it is one kind of eclectic hotchpotch to provide the housing (2011, pp. 84–85), the homeownership is cut by the low rates
finance properly. Therefore, and a group of financial institutions of interest. The downturn economy affected by the investment
had broadened the particular market and liberalized the housing in the stock market made the episode for thinking about house
finance systems. lending by financial institution.

Literature Reviews Objectives of the Study

Finance is to collect fund and invest the money in an efficient The private financial institutions are actuating well and bringing
way for the purpose of maximizing profits. Both direct and out the new structure of housing finance. The objectives of the
indirect finance are noticeable in financing for housing. And study are:
the need for housing is explained by a lot of experts in their
own view: • To identify the sources of house financing
• To identify the financial institutions involved in the house
A report of Center for Policy Dialogue (CPD) bespeaks the right financing sectors
of every person is the demand for the basic needs that include • To measure the effect of financing from primary market and
a standard of living that can be most appropriately figured secondary market
out by housing he/she availed. But now-a-days the shelter is • To find out the probable lending models which are given by
going to be a challenge to the people of Bangladesh for limited the financial market leaders
land according to the nation’s population growth rate that has • To observe the moving module of single-handed and multi-
plateaued at 1.37 percent found in the Fifth Population Census handed system of house financing
up to March 15, 2011 report that published on July 16, 2012. • To explore the present situation of housing finance in
That indicates the further crying need for Bangladeshi people Bangladesh
will going for accommodation. • To show the tradeoff between borrowers and lenders for real
estate finance by evaluating the information.
Though categorization of house lending is not necessarily
a proposition for funding money by the middle and lower Rationale of the Study
classes of people for their living, lack of effectiveness of the
proper authority ensures making hesitation to the public Despite the verbal disputes over the borrowing for house
to get a moderate home loan from financial institutions. construction from the indirect methods of financing, the
Dr. Bhattacharya, an economist and reformist, emphasizes the formats of policies regarding the housing finance are available
importance of the housing sector in the economy of Bangladesh, in the financial market. But all individuals are not aware of these
which plays a role for the awareness generation regarding that drive to direct finance and most of them are not performing
relevant issues of housing sector mentioning to serve the shelter well in repayment of their collected money. So, the analysis is
as a fundamental right of a citizen which includes the economy, needed to ensure what the consequences of housing finance
market structure, market trends, legal and regulatory framework from financial institutions are.
and related challenges.
Data
Marja C. Hoek-Smit identifies, in a research conducted on The report has been conducted based on the secondary data
Bangladesh’s Housing Finance, the lacking of government available in the institutes including, Centre for Policy Dialogue
initiatives and hurdles in improving the housing conditions for (CPD), Real Estate and Housing Association of Bangladesh
middle and lower income households. In 1998, he assessed the (REHAB), Bangladesh Bureau of Statistics (BBS), Bangladesh
mortgage lending system and concluded four major impacts Banks (BB), and published articles of renowned journals and the
playing simultaneously for lending to household: data of yearly budgets and financial institutions of Bangladesh.

1. The non-transparency of government’s mortgage lending

Research Methodology
process
2. The encouraging of debt acquisition than deposits or savings The data has been processed with the interview of key personnel
due to subsidized interest-rate programs that took place in of banking and non-banking financial institutions. For the
Africa, Latin America as well as in Asia. selection of organizations, a random sampling procedure has
3. Providing a little mortgage lending according to the formal been applied that includes different sectors such as banking,
house finance system. leasing, insurance companies and so on from financial markets
4. The inability of affording the start-up costs for having of Bangladesh. And a group of data (secondary data) regarding
collateral mortgages. housing finance has been taken from available sources of inside
and outside Bangladesh to find out the western way of house
John F. McDonald & Houston H. Stokes mentioned the falling financing and the deviation of system in Bangladesh to analyze
downturn of people’s inability of housing due to the bubble the research in a broader perspective.

American Journal of Trade and Policy ● Jun 2014 ● Vol 1 ● Issue 1 33

 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

Research Analysis There are two sources from where one can collect the fund for
housing. The paper is contained of indirect finance for housing
The last few decades indicate the derivation of housing
that includes the financing from financial institutions. The
finance in Bangladesh. A lot of comprehensive studies gave
involvement of several firms in the housing finance markets
us the knowledge about the housing markets and the housing
had been observed from the mid 19 th century. Statistics
finance system. Since 1980, Bangladesh has been facing the
shows that Bangladesh will need to construct approximately
economic growth that makes the country to develop the area of
4 million new houses annually to meet the future demand
concentration in several concerns. It is quite clear the financial
of the next twenty years. Estimates for annual requirements
sector is the most productive sector in the economy. But the
for housing in urban areas vary from 3 lac to 5.5 lac units.
sector has to depend on the others to be developed. And Real
Rather than being a phenomenon specific to Bangladesh
Estate Sector is the only stage of distribution of land and house
(CPD, Report No: 64), urbanization has now become an issue
to the nationals. The falling demand has been seen in 1980 to
of global concern.
1990. But the growth of Bangladeshi nationals knocks at the
door of developing housing finance from 1991 to 2000. And a
huge inclination has been seen from 2001 to 2011 as the entry Mortgage Lending Models
of the reliable developers. The funding criteria innovated for house financing by formal
financial intermediaries is a sign of financial sector development,
The mere trade organization of real estate developers in where the institutions may be private sector entities, or
Bangladesh is REHAB, with a current membership of state- sponsored or state-owned firms. Here, we are to see the
260 Developers. A large portion of revenue to the Government interference of financial intermediaries for various models
exchequer in the angle of Registration Cost, Utility Service of housing finance system as a product named mortgage.
Charges as well as Income Tax is contributed by the members Organizations participated in mortgage markets are as follows;
of REHAB (rehab-bd.org. 2014)

Government of Bangladesh has distributed an allocation of Mortgage Lending Models

Tk. 1461.74 crores for FY 2012-2013 where Tk. 2189 crores
for FY 2011-2012, composed of both development and non
development budgets, for land management and housing sector Primary Mortgage Market
Secondary Mortgage
as the land scarcity and high price constitute a challenge for the Market
government in its efforts to ensure housing for low and middle
income people as pledged in ‘Vision 2021’ (Budget Speech 2011-
2012). The housing budget is 0.6 percent of non-development • Depository and Direct • Retail Mortgage Bank
Lending
budget. Emphasizing the theme of ‘Housing for All’ there is an • Specialized Mortgage • Correspondent Lender
inauguration of the construction work of a multistoried building Banks (NGOs)
• Mortgage Broker
of 22500 flats at Uttara and in parallel there are a group of project • Insurance Companies
started for the mediocre people and till February 2012 Tk. 132.50 • Portfolio Lender
crores out of an allocation of Tk. 160.50 crores is used for 51368
flat construction to provide shelters for the poor people. Figure 2: Mortgage lending models

Along with the huge population, grew up of safety housing Mortgage lending depends on the two types of markets; the
projects and standard of livings allow people to have a home, an first one is the primary mortgage market, and the last one is a
apartment, and as well as a land. But the demand for housing secondary mortgage market.
is not equivalent to the level of income and price hike with the
rate of inflation. To procure these, everyone has to collect money Primary Mortgage Market
from the available sources as financing.
The market comprises of depository and direct lending institutions
and the specialist mortgage banks that provide the mortgage loan
Sources of Housing Finance into different modes. Specialist-deposit-funded institutions have
traditionally dominated the provision of housing finance in Anglo-
Saxon countries (for example, Australia, South Africa, Canada,
and United States) in addition to Commonwealth countries (Lea
Direct Finance for Housing Indirect Finance for Housing 2009). The previous contribution of specialized mortgage banks
is not as little as the mortgage market maker.
• Own savings
• Financial Institutions Direct and Depository Lending
• Friends
• Relatives
The traditional and still market leading mechanism for the
formal financial sector of housing finance is the retail depository
• Other Sources institution. The followings are the only participants in house
Figure 1: Sources of housing finance financing that maintains the methods of direct lending.

34 American Journal of Trade and Policy ● Jun 2014 ● Vol 1 ● Issue 1

 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

Types of Depository Institution Primary Liabilities Primary Assets Commercial Banks

1. Savings and Loan Deposits Mortgage Loans The historical evolution of commercial banks in housing finance
Associations
(Microfinance Organizations) is well-said as weak. They only took deposits and provided only
2. Commercial Banks Deposits Mortgage Loans and the short-term loans to the organizational bases due to having
3. Mutual Savings Banks so on certainty of return money than the individual investors. They
(Cooperative Societies Deposits Mortgage Loans
led the commercial sectors just as the professional investors
& Credit Unions)
and paid a little attention in housing finance. But their product
4. Islamic Banks Deposits Mortgage Loans and
so on based area of concentration has been broadening day by day,
which now has reached into the consumer oriented banking, and
Figure 3: Financial institutions in housing finance system
an outcome of this is retail banking that includes the mortgage
loans separately. In many countries, the restricted commercial
All the fund transferring depends on the primary assets and
banking operation makes the real estate sectors volatile.
primary liabilities of institutions (Figure 3) as we know any
types of market is the combination of buyers and savers for
Now-a-days banks are turning to retail clients across the world
demand-supply. in part including Bangladesh because of a loss from their
huge investments of deposited money to the capital markets.
Banks are interested in long-term mortgage loans arisen from
Depositors fixed deposits that develop long-term consumer relationships
and secured feedback. This type of bank can be the portfolio
Secondary
cash
consultants as well as short-term construction and warehousing
Securities loan providers; and the lending firms in the secondary markets.
Direct Lending

Mutual Savings Banks (Cooperative Societies & Credit

Depository Institutions Unions)
The economy of the west insisted cooperative types of
Loans organizations to mutual participation in lending so that the risk
could be smoothly compensated. Now a significant market share
has been grabbed by the Cooperative Banks in Netherlands and
Homebuyers Germany. They are not considered as housing-finance specialists
while they continue operations as mutual organizations. The
institutional attendees of major mortgage fund lending in many
Model 1: Direct and depository lending procedure
European countries like Spain, Germany, and France are Savings
banks (Lea 2009). They are often owned by state or municipal
According to Loanable Fund Theory of Interest Rate defined
governments and can benefit under government backing.
the supply of Loanable fund creates from the households or
individuals or consumers savings, business enterprises, money In Bangladesh, there are some cooperative societies and credit
creation by central banks and lending in the domestic market unions operated by the private sector which are abused in their
by foreigners. Normally, the financial organs gather savings nature. Instead of helping the lower and middle incoming
from households and business enterprises as deposits and make people, they are only running after the businessman with a
mortgage loans to homebuyers. In model 1, the depository high interest rate spread of providing the short-term loan.
institutions only get the Loanable funds from depositors against Because, there is no control in interest rate spread where in
which the secondary securities (fixed deposit, savings deposit house financing it is merely rare.
and current deposit) are issued. Then the depository institutions
provide loans to the general public and corporations. A huge Islamic Banks
portion of the loan is distributed to homebuyers as housing loan.
Islamic banks are another market player in mortgage financing.
Savings and Loan Associations (Microfinance Organizations) These types of companies just grew up mostly Islamic countries
such as Bangladesh, Pakistan. A simplified version of house
The preliminary market dominant model for housing finance was finance is a sort of lease-buyback arrangement known as
the building societies before continuing operations of deposit- Murabaha. One of the popular house financing products
funded organizations. Building societies were first founded in in Islamic finance is Diminishing Musharaka, a declining
England in 1775. In Bangladesh, there is no savings and loan balance/equity shared with which both parties share risks and
association separately. Instead of savings and loan associations obligations related to the property. Under the Murabaha loans,
there are same types of services offered by the microfinance the banks buy properties and resell it to the client remaining
institutions in Bangladesh such as Grameen Bank (the Noble buoyant, to own the property outright until the final payment
Prize winning only firm in Bangladesh), BRAC, Association for paid out. The property outright is a plan offered by the bank
Social Advancement (ASA) and as well as Proshika. as a level of security not available with a traditional mortgage.

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 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

Specialized Mortgage Banks or NGOs Most recent mortgage banks have lost their monopoly on
covered bond issuance in Germany, and Denmark as a known
As a new mortgage markets specialist, one type of banks was
phenomenon about the diversification of product choice with
born in the mid 17th. An alternative to depository institution
the changes over time makes the industry be distinct. Because
(sometimes it may be Non-Government Organization) lenders
competitions of markets wait for nothing, here the players
is mortgage bank. Mortgage banks innovate and serve portfolios
gallop the profits initiating the diversified products or services
of mortgage loans which are funded by their issuing securities,
according to market demands and also think about the future
(Model 2) in this system. The mortgage banking system
needs. There is no existence of these types of organizations
from the late 1700s has been broadly used in Europe. Both
in Bangladesh, but Bangladesh House Building Finance
the residential and commercial mortgages loans are provided
Corporation (BHBFC), and some NGOs provide the services
by mortgage banks. They dominate the mortgage markets
here as offered by specialized mortgage banks.
providing fixed-rate mortgages not floating-rate mortgages that
are match-funded with corporate debts that will not make the
Insurance Companies
burden to the borrowers for variable interest rate. Mortgage
banks are efficient in producing collateral back-up loans, but Insurance company exists due to risk management for life as
like other specialized systems exercised in developed countries, well as general purposes to diversify the future uncertain loss
mortgage banks are also in declining mode. Their specialization caused by a group of reasons. All people are here only for getting
bounded their area of services, as their funding source does not long term safety, and that makes the insurance companies to
match with their product selection and ability to provide other invest in the long term projects, unlike the banks. So, they also
financial services. provide the housing loans as it is of long term nature.

Savings Financial Insured

Homebuyers Institutions
Premium Insurance

Insurer

Loans Mortgage

Specialized Housing
Mortgage Fund of Homebuilder
Banks or Loans Govt.
NGOs Loans Mortgage

Model 2: Specialized mortgage lending system Homebuyer

Model 3: Insurer mortgage lending system

Box 1. BHBFC – Creating a Mortgage Market
The House Building Finance Corporation (HBFC) was The above model indicates other types of institution playing in
incorporated in 1952 to strengthen the housing sector when financial markets, and since they get money from the insured
Bangladesh was known as East Pakistan, then in 1973 after for long term period, they are prone to safety investments. So,
the Liberation War it was renamed as Bangladesh House they accumulate funds only from insured against the insurance
Building Finance Corporation (BHBFC) established with contract and offer loans to homebuyer against collateral.
the first objective of enhancing home ownership by providing
long-term finance to households for their housing needs in Secondary Mortgage Market
Bangladesh. After the war, all the area of Bangladesh was The secondary market is a market where there are another party
devastated, and the then government wanted to make the involved known as third party or broker or dealer. They just
country as a nice living place, so, government made it with the transfer the mortgage assets and securities between the buyer
total initial capital of Tk. 110 core with a paid up capital of Tk. parties, and the party wants to change the right of owning the
97.29. BHBFC financed all the money by issuing debentures assets. As such, it involves the sale of the risks with selling
and selling it to Bangladesh Bank and other commercial banks. ownership of mortgage loans to the third party. Banks and
And till June 30, 2006 the net asset value was Tk. 1283.83 core. other financial institutions are the security providers of the
BHBFC provided housing loans in 2 categories previously that secondary market where they trade the mortgage securities of
has now classified into 7 categories. They provide housing several developer firms and they occasionally securitize pools
loans maximum Tk. 50 lac and according to place it depends of seasoned loans and expand the categories in the mortgage
on. As of June 30, 2011, BHBFC had about Tk. 2509.86 core market. The market gained popularity for quick ability of
in loan and advances outstanding. liquidating the mortgage backed assets or securities that are
Source: BHBFC still driving people for making money to housing industries.

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 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

Institutional Homebuyers Portfolio

Investors Lenders

Origination of profitable housing

projects
Collateral
Mortgage
Homebuyers Estimation of Services
Banks
Loans

Risk Management Analysis

Depository
Fund Collection from either issuing
Institutions
secondary securities or bonds

Model 4: Housing finance with a secondary mortgage market Model 5: Single-handed Mortgage system

Model 4 shows how the participants of secondary mortgage

market exchange mortgage securities and bond as house mortgage banks, or general depository institutions. Mortgage
financing. These entities raise funds through the issuance intermediaries are the market participant work for both the
of collateralized securities by the loans and trade them. borrowers and lenders who are increasingly important in the
The majority of residential mortgage loans in the United developed, as well as the developing countries. Introducer,
States are funded through the secondary market (Lea 2009). brokers, are the entities that soothe the demands for housing
The efficient market makers in secondary mortgage markets to the individuals by originating the mortgage services such as
are: Retail Mortgage Banks, Correspondent Lenders, Mortgage real estate brokerage, financial advisory services, consultancy
Brokers, and Portfolio Lenders. Mortgage or housing finance and building houses with legal assurance.
companies are specialized non-depository institutions that
obtain funds through sale of loans or circuit funding. Such types They are the more active market maker, because all the
of institutions in Bangladesh are IDLC, Union Capital Ltd, BD information is disseminated by the either man or through
finance, Bay Leasing, United Leasing, People Leasing, Uttara internet. They work on marketing of housing, underwriting of
Finance, Prime Finance and so. bonds to fund collection from capital market, managing risk,
etc. As a developing nation, Bangladeshi people are going to
Single-handed and Multi-handed Mortgage be expert to operate internet while internet origination is not
Models a stand-alone channel. It has to depend on other channels
because the housing needs come from using the several hands
The functional separation or multi-handing is the emerging for completing the demand for housing.
characteristic of mortgage markets in which specialists perform
the various functions such as assess the assets, measure the
ability of a borrower to pay amounts back, the time frame of a Homebuyers Functions:
loan and so on underlying mortgage loan.
Collateral Loans
The single-handed and multi-handed system of financing is
not for the mediocre people. The persons who are sufficient Retail Marketing,
Correspondent
in money and would like to invest more in the housing sector, Portfolio Mortgage
Lenders
Mortgage Underwriting,
Lenders Brokers Packaging,
those are the exact choice for them. Because if a person wants Banks
to capitalize more and more, he then will want to stay out of
negative feedback, and that’s why he will take advice from the Mortgage Risk Management,
Wholesale
Insurance Warehousing,
portfolio lenders. The lenders normally do the stepwise works Firms
Mortgage
Pooling,
Banks
for his client, known as single-handed model. Model 5 shows Savings Savings
the single-handed model of mortgage lending firms according
Institutional Savings
to its origination that separates the multi-handed model of Savers
Investors
mortgage lending as shown in model 6, where the market
intermediaries are the functional area or separation as Retail Model 6: Multi-handed Mortgage system
Mortgage Banks, Correspondent Lenders, Mortgage Brokers,
and Portfolio Lenders. In the multi-handed system, there is a wide variety of
investors to invest their savings but a risk is always occurred
Here portfolio lenders may be specialized institutions such as to get back all the lending money, known from the debacle
savings and loan associations, building societies, specialized of non-rearrangement of mortgage lending collection in

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 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

USA in 2007. As part of providing housing loan, the credit the market shares of different financing, a table regarding the
risk management is more standard comparative to others, pie chart is shown in annexure (Table 2).
provided by third parties to absorb the borrowing cost of the
borrowers, as well as the lending costs of financial institutions Here, Bank mortgage financing is possessed of the 64% of the
such as mortgage insurance or bond insurance companies for total balance, the maximum portion of mortgage lending,
the benefit of investors. Competition, technology and the whereas the state specialized mortgage financing was 17%;
development are the leading drivers of mortgage securities private specialized financing was 12%, and Islamic mortgage
to unbundling. financing was 7%.

The work limits of intermediaries have been clipped in the Country: Bangladesh (Tk. 142.4 Billion),
multi-handed system right now due to having a few functions
2009
such as housing appraisal, and mortgage origination rarely and
sometimes issuance of mortgage default, which now becomes Bank Mortgage
an important catalyst for mortgage lenders and borrowers. 7% Financing
12%
The Present Scenario of Housing Finance State Specialized
Industry in Bangladesh Mortgage Financing
Banking sector now dominates the house lending sectors in 17% Private Specialized
several ways. Banks take long time to approve a loan having a 64% Mortgage Financing
lot of operating costs per loan with a limited range of products.
However, the state-owned Bangladesh House Building Finance Islamic Mortgage
Corporation (BHBFC) is the only institution that caters to the Financing
money needs of middle- and low-income groups for housing,
which has sought the budgetary allocation of Tk 5 billion for Chart 2: Total Mortgage Balances Outstanding and Market Shares
Source: World Bank
the fiscal year 2013-2014 (Budget Speech 2014-2015).

The growth rate of South Asia Housing Finance Industry (chart Contribution of Housing Fund of Bangladesh
below) just shows the position of Bangladesh comparative to Government
other SAARC countries, where Bangladesh grabbed 14% loan
Shelter as the one of five basic needs of Bangladeshi people, the
in the mortgage of total, India 13%, Pakistan 20%, Sri Lanka
government of allocated Tk. 500 million for a housing fund to
30%, and Afghanistan 40% of total. In South Asia, the banking
ensure the house for poor people as a task of poverty alleviation.
sector dominates the mortgage sector; there is a small role of
Till March 2011, the amount stood at Tk. 1605 million. And the
non-bank financial institutions in participation to mortgage
government allocated this fund to lend for housing by NGOs
lending. The corresponding information regarding the chart 1
who take loan at 1 percent rate from the fund and offer loan
is shown in annexure (Table 1).
for housing at the rate of 5 percent for the tenure of 10 years
with the easy condition.
50
200
40 180
160
140
30 120
100
20 80
60 Lending (Tk. in
40 millions)
10 Percent 20
0 Allocated
0 (Tk. in millions)

Chart 3: Loans Allocated and Provided from Housing Fund

Source: Housing Fund, Bangladesh Bank
Chart 1: Housing Finance Rate with mortgage of the South Asia
Housing Finance Iindustry
Source: World Bank The above chart shows NGOs provided housing loans amounting
Tk. 68.0 million against the allocation of Tk. 19.5 million in FY
Bangladesh has a total of Tk. 142.4 billion in the mortgage 2007-2008 and Tk.30.5 millions against the higher allocation of
balance outstanding and the chart shows below also includes Tk. 172.8 million and in the following years the lending is greater

38 American Journal of Trade and Policy ● Jun 2014 ● Vol 1 ● Issue 1

 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

than the allocation. To reduce the lending deficit, government The drawbacks only are going to be the obstacles for house
had to allocate more in FY 2008-2009. lending by the financial institution. But a positive sign can be
obtained from the home loan ratio by the non-banking financial
There was a higher person got facilities and more houses built in institutions in Bangladesh.
FY 2007-2008 due to greater loans providing in that year. And the
amount of both reduced as the lending was less than half that of Government Initiatives for Housing
the previous fiscal year. FY 2010-2011 includes the data of only first
In order to rapidly increasing the housing sector in FY 1997-1998
6 months, which typically shows fewer houses built and facilitated
government a total of Tk. 164 crore had released under the
persons comparative to the previous. The corresponding trend is
housing loan scheme. In the fiscal year 2010-2011, 46,808 houses
shown in annexure (Table 3).
had been constructed at 400 Upazilas in 64 districts. The total
number of beneficiaries of the scheme was 2,34,040 among which
20000 60 percent represent women. Most countries in South Asia do not
18000
16000 have specific prudential regulations for housing finance (Source:
14000 Budget Speech 2011-2012). Although the sophistication level
12000 ranges below standard in Bangladesh, but Bangladesh successfully
10000
8000 finalized ‘Real Estate Development and Management Act 2010’
6000 to promote the smooth expansion of house financing sector
4000 Houses Built
(Source: World Bank). Besides, the government is still working
2000 Facilitated Persons
0 for the initiatives to work out a Detailed Area Plan (DAP) for the
use of land in the divisional cities of Bangladesh. Budget of FY
2012-2013 (Section IV, subsection – 150) indicates the initiatives
of developing 75688 plots and 212998 flats to build the satellite
cities at Dhamrai and Kamrangir Char of Dhaka under PPP.

Recommendations
Chart 4: Total built houses and facilitated persons from housing fund
Source: Housing Fund, Bangladesh Bank Housing Finance is the strategy for infrastructural development
taken by the government of any country that is considered as
And according to house financing need basis the corresponding the source of investments with maximum constancy though it
housing structure in the urban as well as in the rural area is contains the return at a fixed rate with long time. Bangladesh
shown in annexure (Table 4 and Table 5) indicating the demand is the populace country including approximately 15 crore
of people to go for constructing brick-cement made home as people with 1.37% of growth rate and an area of 147570 square
the land is limited mostly in the urban area. kilometers whereas Pakistan with a population of 17 core and the
area more than 6 times of Bangladesh. It ensures the land per
Problems Noticed in House Financing head is decreasing day by day that shrinks the ambit of people
which will create more demand of housing. Evaluating the study
There are a group of pit-falls identified at the time of assessment the the following recommendations are mostly needed to boost the
lending models of several countries and its effectiveness in the house ambition of house financing of individuals.
financing sectors in Bangladesh, such the problems mainly are:
• Interest rate spread, the gap between the rate of deposits
1. The country like Bangladesh has a lot of income regarding and the rate of lending of financial institutions, should be
as undocumented cannot be invested in the housing sector lower. According to data published by Bangladesh Bank, the
because of feeling insecure. highest spread is being grabbed by the Woori Bank (a foreign
2. Now-a-days no one can rely on the capital market that is bank operated in Bangladesh) that is 12.51 percent and
well-known as the main source of long-term funds, which is among the local banks Dutch Bangla Bank Limited draws in
used in the developed country for housing to the real estate 8.24 percent. But the experts recommend not incurring the
company. spread more than 5 percent whereas the state owned banks
3. Formal house financing organizations are only willing for are between 3.94 to 4.98 percent. The individual should
the distribution of fund to the public, nothing else. have well-knowledge about this so that they can finance at
4. The start-up cost of having a long term loan from the formal a lower cost.
house financing associations is high. • The housing finance institutions have to arrange various
5. The prohibition on real estate companies to procure their training to fund collection and to use the amount for
fund from the long term sources that make an apartment housing efficiently that will make the loan expansion of
investor lose trust investing his/her money in the future banking more fruitful.
housing projects. • There should be a lot of seminar organized on the housing
6. There is not any reliable organization of housing property of individuals. It is well said that about 15 percent of people
and securitized paper valuation for collateral lending in possessed with the 80 percent of development of Bangladesh,
Bangladesh. and the rest of the people only use the 20 percent. So, the

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 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

regulator of financial institutions should make it sure the not in practice from which financial institutions can assure
equal distribution of wealth and lending to people. of their lending recollection from client. In other countries,
• More than 275 real estate companies operated in Bangladesh financial institutions perform as a dynamic actor, and incur the
offering illusions that give people nothing but despair. The high productivity from the house lending sector. Excess demand
city dwellers are under the deception of them as there is no for housing in Bangladesh makes the sector of Tk. 142.5 billion
opportunity of purchasing land for housing, and they go for or a little over 6% of total credit to the private sector (World
buying apartments. So, the infrastructural development with Bank 2009). But, inflation more than 2 digits drive markets to
reliable papers should be cleared to individuals. increase the prices of all the products available and a service with
• Now-a-days the financial institutions involved in house an assurance should be referred to spike the house financing
financing only suggest the households the benefit of taking demand instead of slumped down of the housing sector.
loan from them compared to others. But this is not sufficient
as general people are fond of housing with insufficient References
knowledge of how to finance. So, financial institutions Lea, M. (2009). Structure and Evolution of Housing Finance Systems.
should tag the service of cost benefit analysis to individuals In: Chiquier, L. & Lea, M. (ed.) Housing Finance Policy in Emerging
for house financing. Market. The World Bank, Washington.
Uddin, A. K. M. R. (2003). Strengthening the Role of Private Sector Housing
• Government can encourage the low and middle incoming
in Bangladesh Economy: The Policy Challenges. Report No. 64. Center
people to make home in the least developed zones in for Policy Dialogue (CPD), Dhaka.
Bangladesh by giving subsidies that is the best designed Hoek-Smit, M. C. (1998). Housing Finance in Bangladesh: Improving Access
method of developing the housing sectors. Because property to Housing Finance by Middle and Lower Income Groups. University
of Pennsylvania, Philadelphia.
taxes is the highest source of government income in the city McDonald, J. F. & Stokes, H. H. (2013). Monetary Policy and the Housing
corporation of Bangladesh. Bubble. Journal of Real Estate Finance and Economics. Vol. 46,
• Private finance sectors have to be given more right to provide No. 3, February.
REHAB Profile [Internet]. Real Estate and Housing Association of
their fund for housing which was proved efficient in most of
Bangladesh, Dhaka. Available from: http://www.rehab-bd.org/profile
the developing countries that diversifies the more subsidy- [Accessed 16 January 2014].
based market to private sectors and makes the market not Mujeri, K. M. (ed.) (2009), The Banking Sector, Capital Market and
to distort prices. Non-Bank Financial Sector. Financial Sector Review. Bangladesh
Bank, Dhaka.
Statistical Yearbook of Bangladesh [Internet]. Bangladesh Bureau
After the consideration of above reactions by the government of Statistics, Dhaka. Available from: http://www.bbs.gov.bd/
of Bangladesh, there will be no chance of falling down in the WebTestApplication/userfiles/Image/SY2010/Chapter-14.pdf
ascending order of housing and is still an opportunity of assuring [Accessed 22 March 2012].
BHBFC Profile [Internet]. Bangladesh House Building Finance Corporation,
the home for everyone that was discussed as a stunning point Dhaka. Available from: http://www.bhbfc.gov.bd/about.html
to developing the economy of Bangladesh. [Accessed 19 August 2013].
Bangladesh Economic Review-2010 [Internet]. Finance Division, Ministry
of Finance, Government of Peoples Republic of Bangladesh,
Conclusive Thoughts Dhaka. Available from: http://mof.gov.bd/en/index.php [Accessed
15 December 2011].
South Asian countries were under the regulation of British World Development Indicators 2009 [Internet]. The World Bank,
mostly that had no longer to be liberated. There is no noticeable Washington. Available from: http://data.worldbank.org/indicator/
improvement seen in the housing sector yet. Europe and USA world-development-indicators-2009 [Accessed 09 April 2011].
Business in Brief (2011). Government urged to revive real estate market
mortgage markets are fully controlled by the financial institutions
to rescue banks. Vietnam Net Bridge.14 December.
specially banks whereas Bangladesh is not. Now-a-days most Huda, R. & Kamal, M. (1998). Increasing Need for Institutional Credit in
banks are unwilling to house lending, while there is long Housing Sector of Bangladesh. Journal of Finance & Banking. Vol. 4,
investment horizon, because it includes the sanctioning of Number 1 & 2, June.
Budget Speech 2011-2012 [Internet]. Ministry of Finance, GOB, Dhaka.
long term loan which is typically not permitted in the banking Available from: http://www.docstoc.com/docs/82669986/BUDGET-
services, there is no authority for proper valuation of assets. It SPEECH-2011-12 [Accessed 12 July 2011].
is noticeable in Bangladesh; the density of population is higher Downs, D. H. & Güner, Z. N. (2013). Commercial Real Estate, Information
Production and Market Activity. Journal of Real Estate Finance and
here. So, everyone deserves a piece of land for shelter or at least
Economics. Vol. 46, Issue 2, February, pp 282-298.
a flat for all. But, banks are feared to offer loan to them because Activities of Bank and Financial Institution 2010-2011. (2011). Department
of corruption everywhere such as accepting non-eligible property of Bank and Financial Institution, Ministry of Finance, GOB, Dhaka,
as a collateral, information of the property, and the financial May, pp 15-16.Appendi
institutions’ information service regarding housing finance are
not equally spread out, meager evaluation of client and their
How to Cite: Pal S and Hossain MS. 2014. Innovations of Housing Finance
deficient tradeoff between income sources and expenditures. Systems and the Implication in Bangladesh-A categorical study on
That’s why a slow advancement in house financing in Bangladesh Financial Markets American Journal of Trade and Policy, 1, 32-41.
and other South Asian countries is considered as a disquieting
Source of Support: Nil, Conflict of Interest: None declared.
picture. And insurance for property is so called active in book,

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 Pal and Hossain: Innovations of Housing Finance Systems and the Implication in Bangladesh (32-41)

Appendices

Table 1: House Financing Rate with Mortgage comparative

to Total Loan Outstanding of the South Asia Housing Finance
Industry
Country House Financing Rate with Mortgage
comparative to Total Loan Outstanding
Bangladesh 14%
India 13%
Pakistan 20%
Sri Lanka 29%
Afghanistan 40%
Source: World Bank

Table 2: Total Mortgage Balances Outstanding and Market Shares

Country (Balance) Bank Mortgage State Specialized Private Specialized Islamic Mortgage
Financing (%) Mortgage Financing (%) Mortgage Financing (%) Financing (%)
Bangladesh (Tk. 142.4 Billion) 64 17 12 7
Source: World Bank

Table 3: Loans Allocated and Provided & Total Built Houses and Facilitated Persons from Housing Fund
Particulars 2007-2008 2008-2009 2009-2010 2010-2011 (December) Grand total (up to December, 2010-2011)
Allocated (Tk. in millions) 19.5 172.8 40.9 14.6 2,221.1
Lending (Tk. in millions) 68.0 30.5 61.8 24.6 1,351.4
Built Houses 3,481 1,111 1,839 704 49,110
Facilitated Persons 17,405 5,555 9,195 3,520 2,45,550
Source: Activities of Bank and Financial Institution 2010-2011, Ministry of Finance, GOB

Table 4: Housing Structure (Main Houses) with Roof Material from Servey Reports
Housing Structure (Main HIES 2010 (Percent) HIES 2005(Percent)
House) Roof material Urban Rural Total (till Urban Rural Total (till
2010) 2005)
Brick/Cement 28.71 3.65 10.37 24.24 2.07 7.69
CIS/Wood 68.28 86.38 81.52 71.68 85.84 82.25
Straw/Bamboo/Others 3.01 9.97 8.11 4.08 12.09 10.06
Total 100 100 100 100 100 100
Source: Consumption, Household Income and Expenditure, Statistical Yearbook of Bangladesh (Chapter-14), 2010, Bangladesh Bureau of
Statistics (Note; HIES: Household Income and Expenditure Survey)

Table 5: Housing Structure (Main Houses) with Wall Material from Servey Reports
Housing Structure (Main HIES 2010 (Percent) HIES 2005 (Percent)
House ) Wall material Urban Rural Total (till Urban Rural Total (till
2010) 2005)

Brick/Cement 56.59 13.59 25.12 48.23 9.92 19.63

CIS/Brick/Wood 25.41 43.24 38.46 27.87 38.14 35.53
Mud/Unburnt brick 6.22 22.12 16.72 5.97 22.15 18.05
Hay/Bamboo/Leaf/Others 11.78 20.05 19.70 17.93 29.79 26.79
Total 100 100 100 100 100 100
Source: Consumption, Household Income and Expenditure, Statistical Yearbook of Bangladesh (Chapter-14), 2010, Bangladesh Bureau of Statistics
(Note; HIES: Household Income and Expenditure Survey)

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