High Interest and Tough Terms Make Home Loan Unaffordable

April 21, 2022, 11:20 a.m.

Last modification: April 21, 2022, 11:24 a.m.

Infographic: TBS

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Infographic: TBS

Interest on home loans offered by government and private banks is much higher in Bangladesh than in neighboring India and many other countries.

In addition, difficult mortgage conditions coupled with the lack of a universal lending system have made it even more difficult for Bangladeshis 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 model of India and developed countries.

However, banking industry insiders claim that interest rates for home loans in Bangladesh are determined by a combination of a few other factors including inflation, cost of funds, deposit rate, etc.

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 only government institution that provides housing loans in the country, charges 8-9% interest. The maximum amount it lends to an individual is Tk2 crore with a repayment term of 5 to 25 years.

An analysis of mortgage interest rates offered by 26 private banks shows that they charge interest rates from 8.99% to 15%, while non-bank private 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 ranging between 6% and 8%.

According to the IFC, the Indian government has set interest rates on home loans between 6% and 7.99% for a dedicated housing bank and five housing finance institutions under its central finance ministry.

In addition, each provincial government has a housing finance institution that offers loans at 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 interest of 6.7% to 8.05%.

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

According to the World Bank, the urban population of Bangladesh is expected 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 inhabitants.

The IFC says the housing crisis may worsen 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: “Villagers in Bangladesh don’t 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 provide housing for the landless. But there is no special arrangement or government directive for those who have land but cannot afford to build a house.

One of the conditions for achieving the Sustainable Development Goals is to ensure 100% housing in Bangladesh, which is very difficult to achieve, he added.

In Bangladesh, a minimum monthly income to become eligible for acquiring a home loan is Tk 40,000 for private workers, Tk 25,000 for government employees, Tk 50,000 for self-employed and Tk 40 000 Tk for landowners as set by most banks and NBFIs.

Dr Ahsan H Mansur said: “This is a very difficult eligibility condition. More than 80% of people in Bangladesh cannot fulfill this condition. We need a solution here.”

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

According to the Bangladesh Bureau of Statistics (BBS), there are about 3.78 crores of houses in the country and the number of homeowner families is about 3.25 crores, who own almost 86% of the total houses.

Also, about 46.2 lakh or 12.21% of families live in rented houses and about 6.5 lakh or 1.71% of families live in rent-free houses. Additionally, there are around 2.53 lakh of makeshift huts in the country, according to BBS data.

Ahsan H Mansur said: “These figures show that the housing of 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 houses for everyone. But it should bring banks and non-banking financial institutions into a framework to provide easy home loans, which can secure affordable housing for everyone in the country, he added.

Getting a government home loan is 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 city, applied for a loan from Bogura branch to build a new house. But the loan has not yet been approved.

“I followed all the procedures. I visited the office of the House Building Finance Corporation for about 40 days. Some officials asked for silent money for the granting of the loan. But I did not accept” , did he declare.

He had requested a loan of Tk 82 lakh, or 70% of the current value of his land, he noted.

According to a recent study by a non-governmental organization, the approval time for loans from the housing construction finance company is exceptionally long, and sometimes it takes more than a year. The allocation process is political rather than financial.

For this reason, the country’s private banks are ahead in granting home loans, according to a World Bank study. But almost no bank or government or private institution provides housing loans at the village level.

Dr. Atiur Rahman, former Governor of Bangladesh Bank, told TBS: “Government institutions play an important role in the housing sector in most countries of the world except Bangladesh. “a solution. These institutions need to be refined and revamped. The government needs to create more new institutions like this.”

According to the IFC, the mortgage conditions for a home loan in Bangladesh are very difficult because the lending institutions do not lend only on land; rather, they are also looking for a house design and at least the building foundation completed.

However, in many countries, including the United States, Australia, and Indonesia, a person is granted a loan if they qualify for a mortgage.

According to the IFC, the percentage of home loans to 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 more priority than before to the housing sector. Thus, the credit disbursement target for this sector can be increased. We also need to develop a universal system to make this loan readily available. “

Inflation, deposit rate calculation

Delta Brac Housing Finance Corporation Ltd is one of the non-banking financial institutions in Bangladesh, which is solely engaged in housing loans.

Nasimul Baten, Managing Director and CEO of DBH, said: “Bangladesh home loan interest rates have been determined based on inflation rates, cost of funds, deposit rates, so we should not compare it with countries such as the United States or Canada.

“People in these countries do not earn interest on the deposits they deposit in banks. We have to pay interest on deposits at a rate above inflation. Our deposit rate is close to 6 % So, since we receive deposits at this rate, we have to add a margin to the loans.”

Finance Minister AHM Mustafa Kamal said, “We will discuss to resolve the complexities of home loans. If possible, the disbursement target for loans from the House Building Finance Corporation will be increased. construction of houses with an easier loan facility.

The minister said the government would also work to set a target for private banks in consultation with the central bank for the disbursement of home loans. “We also strive to attract investment on easy terms and at low rates from foreign banks or institutions.”

Luisa D. Fuller