Incentivises targets for banks
Pakistan is looking to boost its economy through the construction sector and also reducing its backlog of 11 million houses. In order to achieve these goals, the State Bank has been pushing banks to pull up their socks and take housing and construction finance seriously.
The State Bank has already set mandatory targets for banks to extend mortgage loans and financing for developers and builders. Banks now have to maintain 5% of their domestic private sector credit by December 31, 2021 to finance housing and construction activities.
The central bank has also introduced a ‘carrot and stick’ scheme for the reluctant banking industry to eventually achieve these set targets.
Banks that achieve the target of extending house and construction loans will have the luxury to reduce the Cash Reserve Requirement (CRR) by the same amount by which they achieved the target.
CRR is the mandatory amount of money all banks maintain with the State Bank. Banks don’t earn anything on the amount. By unlocking a part of the CRR, banks can get more profit than before as they would have more funds at their disposal.
However, if banks fail to achieve the target, they will be penalised. They will have to maintain a CRR level that includes a minimum CRR requirement plus the amount by which they failed to achieve the target.
“The SBP has been actively working with banks to support finance for the promotion of housing and construction of building activities in the country,” the State Bank said.
“The growth of the housing and construction sector is vital for the economy, due to its linkages with a number of allied industries and potential for job creation and Pakistan has lower private sector credit to GDP than many comparable countries,” it added.
Stimulating the construction industry has been the most important agenda of the current government to boost the economy. It has been incentivizing the construction sector and enticing stakeholders to play their part.