High interests, difficult terms make home loan unaffordable

Interests on home loans offered by both government and private banks are much higher in Bangladesh than in neighbouring India and many other countries.

Besides, difficult mortgage conditions coupled with the absence of a universal lending system have made it even more difficult for Bangladeshi people to own an affordable home, according to studies by a number of international organisations, including the World Bank and the International Finance Corporation (IFC).

Experts suggest that the government introduce a logical home loan system following the pattern of India and developed countries.

However, banking sector insiders say interest rates of home loans in Bangladesh are determined by combining a few other factors, including inflation, cost of funds, deposit rate etc.

The home loan rates can be reduced if investments from the World Bank and other global lenders are brought in at a lower rate, they add.

The Bangladesh House Building Finance Corporation, the lone government institution that provides home loans in the country, charges 8%-9% in interest. The maximum amount that it lends to an individual is Tk2 crore with a repayment tenure of 5-25 years.

An analysis of home loan interest rates offered by 26 private banks shows that they charge 8.99%-15% interest rates, while private non-bank financial institutions offer interest rates between 8% and 8.5%.

On the other hand, taking out a home loan is more affordable in India, with interest rates between 6% and 8%.

According to the IFC, the Indian government has fixed home loan interest rates at 6%-7.99% for a dedicated housing bank and five housing finance institutions under its central finance ministry.

Besides, each provincial government has a housing finance institution that offers loans with the same rate set by the central government. And, in India, the loan can be repaid in 30 years.

There, private banks and non-bank financial institutions charge 6.7%-8.05% in interest.

An IFC study reveals that most people in Bangladesh consider bank loans as a kind of a trap and build houses with a part of their savings or by selling or mortgaging land. Many borrow money from relatives or close friends and even from moneylenders at a high interest rate.

According to the World Bank, urban population in Bangladesh is projected to reach a staggering 112.44 million by 2050 and Dhaka will be the sixth largest megacity in the world by 2030. Currently, Dhaka is 11th with a population of 27.37 million.

The IFC says the housing crisis can escalate if home loans are not made available to these citizens on easy terms.

Dr Ahsan H Mansur, executive director of the Policy Research Institute, told The Business Standard, "Village people in Bangladesh do not even know that home loans are available. On the other hand, those who know about this loan are not encouraged to take it. The government is implementing projects to ensure housing for the landless. But there is no special arrangement or directive from the government for those who have land but cannot afford to build a house."

One of the conditions for meeting sustainable development goals is to ensure 100% housing in Bangladesh, which is very difficult to comply with, he added.

In Bangladesh, a minimum monthly income to become eligible for acquiring a home loan is Tk40,000 for private job holders, Tk25,000 for government employees, Tk50,000 for the self-employed and Tk40,000 for land owners, as set by most banks and NBFIs.

Dr Ahsan H Mansur said, "It is a very difficult eligibility condition. More than 80% of the people in Bangladesh cannot meet this condition. We need a solution here."

According to the United Nations Population Survey 2020, there are about 18.7 crore people in Bangladesh.

As per the Bangladesh Bureau of Statistics (BBS), there are about 3.78 crore homes in the country, and the number of homeowner families is about 3.25 crore, who own nearly 86% of the total houses.

Besides, around 46.2 lakh or 12.21% families live in rented houses and about 6.5 lakh or 1.71% families live in houses without rent. Moreover, there are about 2.53 lakh makeshift huts in the country, BBS data says.

Ahsan H Mansur said, "These figures show that housing for a large part of the population has not yet been secured. The government must take the initiative to ensure this."

The government will not be able to build homes for everyone. But it should bring banks and non-bank financial institutions under a framework for providing easy home loans, which can ensure affordable housing for all in the country, he added.

Getting govt home loan a big ask

The Bangladesh House Building Finance Corporation has 61 branches across the country. In February 2020, Sajjadur Rahman Sohag, a resident of Maltinagar area in Bogura town, applied for a loan at the Bogura branch to build a new house. But the loan has not been approved yet.

"I have followed all the procedures. I have visited the House Building Finance Corporation's office for about 40 days. Some officials have asked for hush money for granting the loan. But I have not agreed," he said.

He had applied for a loan of Tk82 lakh that is 70% of his land's current value, he noted.

According to a recent study by a non-government organisation, the loan approval time of the house building finance corporation is exceptionally long, and sometimes it takes more than one year. The allocation process is political, rather than financial.

For this reason, the country's private banks are ahead in giving home loans, according to a study by the World Bank. But almost no government or private banks or institutions give home loans at the village level.

Dr Atiur Rahman, former governor of the Bangladesh Bank, told TBS, "Government institutions play a big role in the housing sector in most countries of the world except Bangladesh. We need a solution. These institutions have to be refined and reorganised. The government has to create more new institutions like this."

According to the IFC, the terms of the mortgage for home loan in Bangladesh are very difficult as the lender institutions do not give loans only on land; rather they also look for a home design and at least foundation of the building completed.

However, in many countries, including the United States, Australia and Indonesia, a person is given a loan if he is eligible for a mortgage.

As per the IFC, the percentage of home loans against total loans is 3.12% in Bangladesh, 6.7% in India, 6% in Indonesia, 4% in Pakistan, 9.6% in China and 7.9% in Malaysia.

Former governor Dr Mohammad Farasuddin said, "The government is now giving priority to the housing sector more than before. So, the credit disbursement target for this sector can be increased. We also need to develop a universal system to make this loan easily available."

The inflation, deposit rate calculation

Delta Brac Housing Finance Corporation Ltd is one of the non-bank financial institutions in Bangladesh, which is dedicated to only home loans. 

Nasimul Baten, managing director and CEO of DBH, said, "The interest rates of home loans in Bangladesh have been determined in line with the rates of inflation, cost of funds, deposit rates. So, we should not compare it with countries, such as the USA or Canada.

"People in those countries do not get interest on deposits they park in banks. We have to pay deposit interest at a rate higher than that of inflation. Our deposit rate is close to 6%. So, as we receive deposits at this rate, we have to add a margin to loans."

Finance Minister AHM Mustafa Kamal said, "We will discuss to resolve the complexities of home loans. If possible, the loan disbursement target of the House Building Finance Corporation will be increased. We will also take measures to facilitate house construction with an easier loan facility."

The minister said the government would also work on fixing a target for private banks in consultation with the central bank for disbursing home loans. "We are also working to bring in investments on easy terms and at low rates from any foreign banks or institutions."