2

REPORT APRIL 2014

MORTGAGE MARKET ASSESSMENT

IN 5 MAJOR CITIES OF AFGHANISTAN

PREPARED FOR
HARAKAT AFGHANISTAN INVESTEMENT CLIMATE FACILITY ORGANIZATION
 AFGHANISTAN HOLDING GROUP
an employee owned company

VISION
Our vision is to create a transparent, dynamic, sustainable service economy in Afghanistan, while
being socially responsible.

MISSION
Our mission is clear: Pay no bribes and take no bribes. Fearlessly pursue quality. Thrive on
individual and team excellence.

Afghanistan Holding Group (formerly Afghanistan Financial Services) is an employee-owned company

registered in Kabul, Afghanistan. Currently comprising four divisions providing inter-related
professional business services including taxation, accounting, training and strategic management
consulting, research and M&E. AHG employs more than 80 full-time highly qualified Afghans, calling
on an additional pool of high caliber international consultants to provide project specific support.
AHG operates from offices in Kabul, Mazar, Herat and back offices in Washington and Dubai. We
strive to serve our clients with the highest levels of efficiency, integrity, and accountability.

Report Commissioned & Funded by HARAKAT Afghanistan Investment Climate Facility Organization

Copyright AHG 2014

Afghanistan Holding Group | Opposite MRRD, Darulaman, Kabul, Afghanistan
Telephone: +93 796 000 111 | Email: info@ahg.af | Website: http://www.ahg.af

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 TABLE OF CONTENTS
1. Executive Summary 7
2. Introduction 9
3. Literature Review 10
A. Afghanistan 11
B. India 14
C. Malaysia 18
D. Nepal 23
E. Pakistan 27
F. United Arab Emirates 30
G. Summary of Literature Review 35
H. Case Studies 37
1. Kabul-e-Jadid 37
2. Aino Mina 39
I. Implications from Literature Review 40
4. Methodology 43
A. Data Sources 43
1. Household Survey 43
2. Satellite Imagery 45
3. In-Depth Interviews and Focus Groups 46
5. Results 47
A. Respondent Demographics 47
1. Current Home Ownership 47
2. Sample Size, Gender, and Age Distribution 48
3. Education 49
4. Employment 50
B. Market Demand for Housing Finance 51
C. Assessment of Business Environment 52
1. Investment into Sector by Developers 52
2. Income Profile 56
a. Estimated Monthly Income and Savings 56
b. Monthly Rent 56
c. Mortgaged Property (Giraw) & Estimated Down Payment 57
3. Affordability 58
D. Implications from Survey Findings 59
1. Islamic Home Finance 59
2. House Price and Affordability 59
3. Consumer Protection 60
E. Needs, Views, and Requirements of the Private Sector 61
1. Provision of Mortgage Products 61
2. Needed Prerequisites for Developing Mortgage Products 62
3. Challenges and Barriers to Investing in Mortgage Products 62
4. Recommendations of the Private Sector 63
5. Prerequisites for Creating and Enabling Environment 64
6. Requirements of the Private Sector 66
6. Mortgage Market Implications 67
7. Review of Afghanistans Mortgage Law 68
8. Developing the Home Finance Sector 73
A. Importance of Establishing Home Finance Sector 73
B. Developing an Islamic Home Finance Sector 73
9. Recommendations 78
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 LIST OF TABLES, GRAPHS, & FIGURES

List of Tables Page

Table 1. Home Ownership 47
Table 2. Mechanism for Acquisition of Home 47
Table 3. Non-Ownership Arrangement of Home 47
Table 4. Household Sample 48
Table 5. Respondents Age Range 48
Table 6. Respondents Educational Attainment 49
Table 7. Respondents Employment 50
Table 8. Estimated Market Value of Residential Construction 52
Table 9. List of Residential Developments 53
Table 10. Estimated Household Monthly Income 56
Table 11. Monthly Income Distribution 56
Table 12. Monthly Rent Distribution 56
Table 13. Estimated Annual Giraw 57
Table 14. Estimated Annual Giraw Distribution by City 57
Table 15. Estimated Down-payment Ability 57
Table 16. Detailed List of Expert Interviews 65

List of Graphs Page

Graph 1. Home Ownership 47
Graph 2. Non-Ownership Arrangement of Home 47
Graph 3. Respondents Educational Attainment 49
Graph 4. Respondents Employment 50
Graph 5. Loan Preference 51
Graph 6. Interest in Loan 51
Graph 7. Loan Type Preference 51
Graph 8. Interest in Loan by City 51
Graph 9. Loan Length Preference by City 51
Graph 10. Loan Type Preference by City 51
Graph 11. Land Area Under Development 52
Graph 12. Average Rental Rates 56

List of Figures Page

Figure 1. Select Findings of Household Survey 59
Figure 2. Process for Obtaining Land Titles 71
Figure 3. Process for Obtaining Land Titles Through Townships 72
Figure 4. Key Benefits of Housing Finance Industry 73
Figure 5. Key Benefits of Islamic Finance 74
Figure 6. Principles of Islamic Home Finance 74

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 LIST OF NON-ENGLISH WORDS/TERMS

Definition of select non-English words/terms used in this report:

Darura Necessity
Giraw Mortgaged property
Jerib 2000 square meters
Jirga Tribal assembly of elder
Murabiha Sale on profit
Musharika Co-ownership
Shahrak Township
Sharia compliant Non-interest based
Shura Advisory Council

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 LIST OF ABBREVIATIONS

AHG Afghanistan Holding Group

AMRB Afghanistan Mortgage and Reconstruction Bank
ARM Adjustable Rate Mortgage
ARS Afghanistan Research Services
BLR Base-Lending Rate
CERSAI Central Registry of Securitization Asset Reconstruction and Security Interest of India
DAB Da Afghanistan Bank
DCDA Dehsabz - Barikab City Development Authority
EFP Employees Provident Fund
ENSFC Emirates National Securitization and Finance Corporation
EPF Employee Provident Fund
EPF Employee Provident Fund
FRM Fixed-Rate Mortgage
GJRHFS Golden Jubilee Rural Housing Finance Scheme
GPS Global Positioning System
HAG Housing Advisory Group
Harakat-AICFO Harakat- Afghanistan Investment Climate Facility Organization
HDFC Housing Development Finance Corporation
HPI Housing Price Index
HUDCO Housing and Urban Development Corporation
IMF International Monetary Fund
IST Information Science Technology
JICA Japan International Cooperation Agency
LTV Loan-to-Value
MHLG Ministry of Urban Wellbeing, Housing, and Local Government
MM2H Malaysia My Second Home
MoHW Ministry of Housing and Works
MPPW Ministry of Physical Planning and Works
MRC Mortgage Refinance Company
MUDA Ministry of Urban Development Affairs
NGO Non-Governmental Organization
NHDFC Nepal Housing Development Finance Company
NHP National Housing Policy
NOAA National Oceanographic and Atmospheric Administration
NUHHP National Urban Housing and Habitat Policy
PITI Principal, Interest, Taxes, Insurance
RMBS Residential Mortgage-Backed Securities
SD Secure Digital
USAID U.S. Agency for International Development
USD US Dollar

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 1. EXECUTIVE SUMMARY

This study was launched on behalf of Harakat- Afghanistan Investment Climate

Facility Organization (Harakat-AICFO) to identify needs, requirements,
prerequisites, recent investments in the housing sector, and public demand for
mortgage loans in the major cities of Herat, Jalalabad, Kabul, Kandahar, and
Mazar-i-Sharif.

Afghanistan Holding Groups research into the mortgage market of Afghanistan

has revealed a strong public demand for more mortgage products. Financial
firms, however, report that the legal infrastructure of Afghanistan needs to be
improved before they can invest in developing mortgage products. AHGs
analysis is that mortgage products, especially Sharia compliant products, are
highly desirable if they are priced properly and if proper adjudication and law
enforcement mechanisms are put in place and strengthened. AHG believes that
the current laws, in general, are supportive of the industry, but the enforcement
and interpretation of those laws need additional work.

The results of this report are based on a mixture of quantitative and qualitative
data that were obtained through a representative sample household survey,
expert interviews, focus groups, and a comprehensive national and international
review of relevant reports and previous research.

The household survey was administered to 1959 households, selected through a

random geo-spatial sampling strategy, in the five urban centers. A total of 56
expert interviews and 3 focus groups were conducted with representatives of
relevant Afghan Government agencies, representatives of state owned and private
banks, developers, property dealers, and common citizens, finally a
comprehensive literature review was conducted to identify pre-requisites and
existing policies and procedures for home financing in Afghanistan, Malaysia,
India, Pakistan, Nepal and United Arab Emirates.

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 Key findings of this study include:

Eighty three percent (83%) of the respondents from the household survey
reported that they were interested in obtaining mortgage loans.
Ninety two percent (92 %) of the respondents from the household survey
reported they prefer long-term loans, and only eight percent (8%) reported
that they prefer short-term loans.
Ninety three percent (93%) of the respondents from the household survey
reported that they prefer non-interest based (sharia compliant) mortgage
loans, two percent (2%) reported that they are interested in conventional
loans, and five percent (5%) of the respondents reported that it does not
matter whether the mortgage loan is interest based or not.
Seventy two percent (72%) of the respondents from the household survey
reported that they are not able to pay more than 275,000 AFN (USD
5,000.00) down payment for a house.
Seventy percent (70%) of the respondents from the household survey
reported that they prefer to have mortgage loans from state banks, seven
percent (7%) reported that they prefer mortgage loans from private banks,
eight percent (8%) reported that they prefer loans from developers, and
fifteen percent (15%) reported that they prefer to get loans from other
mechanisms including family and friends.
Our analysis of new developments reveals that the market value of new
developments in the five cities is estimated at 15.2 billion USD.
Pervious estimates by World Bank and Da Afghanistan Bank put the
housing demand at 1.5 million dwellings by the end of 2014. If we assume
a conservative average of $40,000 per dwelling the housing demand in
Afghanistan by the end of 2014 will be 60 billion USD.
Based on expert and focus group interviews, the primary factors that are
preventing banks from providing mortgage loans include: a) non-
supportive laws, b) land titling problems, c) corruption in the court system,
d) lack of capital for long-term financing, e) difficulty in repossession of
property in case of default, and f) difficulties in tracking individuals
(including the lack of unique individual identification, and lack of postal
addresses).
Banks view mortgage loans as a crucial product for their business and are
very interested in offering mortgage products. All the bankers interviewed
as part of this study, stated that their institutions are eager to offer
mortgage products both interest based and non-interest based if the above
challenges are addressed.
Government agencies, banks and developers see mortgage loan as an
opportunity that addresses the increasing housing demand, as well as a
means to bolster the nations entire economy.

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 2. INTRODUCTION

Harakat Management is interested in understanding Afghanistans housing market and the mortgage
products offered. Afghanistan Holding Group has been selected to conduct an assessment of
Afghanistans mortgage market. The primary objectives of this assessment are to:

1. Quantify the demand for housing finance and mortgage in five main cities of the country:
Kabul, Herat, Mazar, Jalalabad and Kandahar;

2. Assess the business environment for the development of the mortgage industry and identify
existing challenges, barriers, and opportunities for investment by financial institutions and
housing developers combined with specific recommendations on ways to remove the barriers
and make the industry functional;

3. Identify the needs, requirements, and views of the private sector with regards to providing
mortgage products and investing in the market for housing finance;
This report begins by providing the findings of a review of relevant literature and policy documents.
Two case studies in Afghanistan are then described, followed by the methodology of the primary study,
in particular the data sources used to conduct the research. Results follow, organized according to the
three aforementioned priority areas. Finally, AHG provides recommendations informed by the results
of this study. Throughout the report, implications of the findings for establishing the mortgage industry
are interwoven. Additionally, a full legal review, and specific set of recommendations on developing
the home finance sector is presented towards the end of the report. Both of these analyses were
conducted by independent professional entities; lawyers from Afghanistan Legal Services with both
international and local Afghan experience provided the legal review, and mortgage experts from
Islamic Finance Council (IFC) with specific expertise in Islamic mortgages provided recommendations
for developing the home finance sector

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 3. LITERATURE REVIEW

A comprehensive literature review was undertaken to identify pre-requisites and existing policies and
procedures for home financing in Afghanistan, Malaysia, India, Pakistan, Nepal and the United Arab
Emirates. The literature review was meant to determine key components of the home financing
industry in these countries, identify common trends and challenges, and to suggest lessons learned for
mortgage products in Afghanistan. The sources looked at for the literature review included
professional journals, online publications, and organizational websites.

Findings from the literature review revealed that while countries such as Malaysia, Pakistan and UAE
offer both conventional and Islamic finance products; Nepal and India predominantly offer
conventional loans. Conventional loans issued in these countries are mostly offered at both fixed and
variable interest rates, and a combination of both. Additionally, normally issued for construction,
renovation or purchase of a new house, conventional loans have a repayment period of 5 to 35 years
on average and are provided against collateral security such as fixed deposits / government bonds,
industrial property, urban commercial complex, residential house or apartments. The products offered
under Shariah compliant financing generally have the same characteristics as conventional mortgages
but carry mainly fixed profit rates.

The literature review also revealed that while there are some differences in the housing finance
industry in these countries, there are a number of similarities between them. Some of these similarities
include the gap between demand and supply (the demand for housing exceeding the supply in some of
these countries), affordability (high land and rent prices making housing unaffordable for the poor),
and laws and regulations (lack of clear policies, property rights and an effective legal framework and
land information system serving as constraints to the expansion of the housing industry).

The findings of the literature review, serve as a resource for determining key components of the home
financing industry in these countries, identifying common trends and challenges, and for preparing
mortgage products for Afghanistan from the lessons learned in the other four countries.

A detailed analysis of each country is presented in the following pages.

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A. AFGHANISTAN
There is an immense desire
and need for housing in
Afghanistan particularly among
the low- income stratum of the
society. A survey by JICA (2011) found
that 94% of the low- income residents of Kabul
expressed strong desire and need for new
housing. Given unfavorable housing conditions,
more than 80% of residents from all strata
demand new dwellings. The demand for housing
is steadily growing and by far exceeds the supply
countrywide. World Bank (2008) estimated that
Afghanistan needed 1 million units of new
dwellings in 2006. The report projects that the
countrys housing needs reaches 1.25 million
units in 2010 and 1.5 million in the year 2014.
With such an enormous demand, supply of
affordable houses and provision of mortgage
loans that can meet the demand of the Afghans,
is an intractable challenge particularly when the
only state owned mortgage and reconstruction
bank is no longer in service. Afghanistan
Mortgage and Reconstruction Bank (AMRB),
whose objectives were house reconstruction and
provision of mortgage loans, was dissolved in
2003. AMRB was in operation for decades and
was allegedly closed down for its weak
performance, loan portfolio and failure to
obtain banking license, a requirement under the
new banking law. Provision of mortgage loans in
Afghanistan dates back to1947. Though small in
scale, the then government of Afghanistan
initiated the provision of mortgage loans and
reconstruction of residential houses in early 50s
through establishing Mosessesa Keesa Omrani
(Finance Development Organization). The
organization started with an initial investment of
30 million Afghanis. DAB was financially
large bulk of the Afghan economy. According to
3. LITERATURE REVIEW
supporting the Financial Development
Organization. In 1954, based on the
recommendation of the then Afghan
administration, the Finance Development
Organization was restructured. The restructuring
led to the creation of Afghanistan Mortgage and
Reconstruction Bank. Based on a report released
by the AMRB in 1957, some of the housing
projects the bank completed included Karte
Mamoreen, Jada-e Maiwand, and Maiwand
Watt apartments. According to the report, the
interest rate charges for mortgage loans were at 6
percent.
Currently Afghanistan is short of finance
institutions and banks that provide country-wide
long-term mortgage loans to the Afghan
population (May et al 2008). Afghans therefore
rely on assistance from family, relatives and
friends to meet their financial needs. Fitrat
(2009) in line with May et al asserts that the two
state- owned banks (i.e. Pashtany Bank and Bank
Millie) that still provide mortgage loans do not
offer long-term loans; therefore, the impact of
such loan is very minimum. Mortgage loans
provided by Pashtany and Millie banks range
from $400 to $1000 for a period of two years.
Bank Millie in particular has made some efforts
to establish a mortgage loan department, but due
to capacity issues, it has not been successful. Bank
Millie charges an interest rate of almost 12
percent for its short-term and limited amount of
loans. Based on May et al report, Bank Millie is
planning to allocate at least 10 percent of its
current loan programs to the housing mortgage
program. Due to lack of formal long-term loan
programs, people resort to informal sector for
securing loans. Informal financing constitutes a
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World Bank (2008) 8590 percent of all economic
activity occurs within the informal economy. May
et al while acknowledging the instrumentality of
the informal financing in the current context of
Afghanistan; argue that the informal financing
can only prove effective in manufacturing and
commercial activities. Informal financing
according to May et al are costly and therefore
inappropriate for the development of housing
mortgage industry and a sustainable private
sector (p.14).
May et al on the other hand stresses on legal
issues in relation to land possessions, tenure and
legal framework and tenure transfer as some of
the constraints to the development of mortgage
industry. Gebremehin (2006) refers to land titling
as another challenge. He for example points out
to a widespread practice of irregular and illegal
land occupation in Afghanistan including
squatting and grabbing. Land grabbing in
particular has encouraged informal market of the
real estate. Informal transactions of real estate
according to Gebremehin has posed two
challenges i.e. formalization of property titles
and service provision by the municipalities (p. 8).
May et al points to variety of laws such as
customary law, Sharia law, state law and civil law
as factors complicating land title in Afghanistan.
Multiple laws create problem of ownership. For
example a particular land can be claimed in
several ways such as through possessions of
customary papers with the confirmation of the
local body (such as Jirga or Shura). In most cases
the local body that has certified the possession of
land to a particular individual, has no official
status in the state courts. May et al reports that
frequent regime change has led to more than 60
different land laws and amendments to the state
law (p.6). Lack of insurance mechanism is
another challenge facing the mortgage industry.
The national insurance company is totally
infrastructure development. Additionally, DAB
3. LITERATURE REVIEW
under- resourced and is not fully functional. In
2007 only one private company began its
operation in Kabul. It is argued that unless there
are more insurance companies operational, the
risk for the provision of mortgage loans will
remain very high for the banks in Afghanistan
(May et al).
May et al therefore concludes that banks in
Afghanistan are hesitant to provide large amount
of loans without insurance on the collateral and
no company in the country provides
homeowners insurance protecting against fire or
against earthquake, a particular concern in
Kabul and the surrounding region (p.24).
While these intractable challenges remain to the
development of the mortgage industry, what is
promising is the will for establishing the industry
as well as the excess liquidity of the banks.
According to IMF (2009), in 2007 the
commercial banks assets exceeded $ 1.6 billion.
This indicates that financing itself is not an issue.
Current deposits at the commercial banks are
around 1.20 billion US dollars, and there is a
strong desire by the banks to provide mortgage
loans and the bank are seeking ways to securely
provide loans. What holds the banks back is
inefficient financial intermediaries function for
generating long-term funds and the lack of a legal
regime that supports long-term loans such as
those for housing (May et. al., p.22).
Reports indicate, that the commercial banks that
are currently operating in Afghanistan view
housing market as a lucrative business. While
acknowledging the lucrative nature of the
housing finance market, DAB believes that the
housing finance market is also instrumental to the
Afghan economy as a whole. According to DAB,
the housing finance market is conducive to the
development of other industries including
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 3. LITERATURE REVIEW

believes that the development of housing finance
market by the private sector can help the Afghan
government direct its resources to other
economic and social needs of the Afghan people.
As part of removing the legal obstacles facing the
mortgage loans and in order to address some of
these challenges, the Afghan parliament passed
the mortgage law in 2009. The objectives of the
law are stipulated as follow:
Secure debt and contracts through mortgage
of immovable property
Facilitate access to negotiable bank credits
through mortgage of immovable property
Ensure mutual trust among individuals
involved in banking transaction
Expand trade and credit, attract investment
and promote economic growth
In general, the mortgage law discusses the
creation of mortgage, condition for its creation,
conditions of loan agreement, obligations,
responsibilities and liabilities of mortgager and
mortgagee. From the provisions of the law, it
appears that the position of law in regards to
Islamic compliance and convention mortgage is
neutral.
It appears that mortgage loans will certainly help
Afghan meet their housing needs. JICA (2011)
found that 70 percent of Kabul residents budget
is lower than $ 50,000 while an apartment costs
from $80,000 to $100,000. JICA therefore
concludes that the current costs of houses in
Afghanistan is beyond the financial capacity of
majority people (70%) (p.17).

References

Afghanistan Reconstruction and Mortgage (1957). Annual Performance Report of 1955-56. Kabul,
Government Printing Office.
Doing Business (2008). The International Bank of Reconstruction/ the World Bank. Washington, DC:
U.S. Publication of the World Bank and the International Finance Corporation.
Fitrat, A.Q. (2008). Building a Vibrant Afghanistan Affordable Housing Market. Asia-Pacific Housing
Journal, 16-19.
Fitrat, A.Q. (2009). Challenges of Financing Affordable Housing in Afghanistan. Presentation at
World Bank Workshop Housing Finance in Asia.
Gebremedhin,Y. (2006). Legal Issues Pertaining to Land Titling and Registration in Afghanistan:
Land Titling and Economic Restructuring in (LTERA) Project Report.
JICA CD Team. (2011). Highlights of Real Estate Market Analysis. The JICA Survey Report.
May, E., Bell, S.C., Islam, R. (2008). Housing Finance in Afghanistan: Challenges and Opportunities.
The World Bank Report.

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B. INDIA
Historical Development
The housing finance
system in India had
three distinct phases. The
first phase was before the 1970s,
when the government was the
only provider of public housing and thus
allocated serviced land and houses to individuals
(through its various social schemes) based on
social equity principles. The 1970s saw two major
developments in housing finance. A public sector
housing company, the Housing and Urban
Development Corporation (HUDCO), was
established in 1970; and a private sector
company, Housing Development Finance
Corporation (HDFC), was created in 1977. While
HUDCO was responsible for assisting and
promoting housing and urban development
programs, HDFC was responsible for individual
lending based on market principles for
homeownership in India.
The second phase was during 1987, when the
National Housing Bank (NHB) was formed to
promote a sound, healthy and cost effective
housing finance system. During the late 1980s,
the government enhanced its involvement and
directed various agencies like insurance
companies, commercial banks, provident funds
and mutual funds (Unit Trust of India) to invest
part of their annual incremental resources in
housing. The third phase was post 1990s
liberalization era, when three distinct groups of
housing finance companies had emerged: 1)
specialized housing finance companies, 2)
housing finance companies created as subsidiaries
of some commercial banks, and 3) housing
finance companies set up by insurance
companies.
3. LITERATURE REVIEW
Current Status of the Mortgage Market
The current financing mechanism prevalent in
the country mostly targets middle and high
income sections of the society while low income
and economically weaker sections have no or
limited access to housing finance. This can be
attributed to the mismatch between the demand
and supply of housing units and the financial
solutions available to address it. On the demand
side factors like income levels of people, the
growing middle class, and on the supply side
factors like the lack of availability of land and
finance at reasonable rate, legal and regulatory
framework and the limitations of the public and
private stakeholders to provide low income
housing play a critical role. It is worth
mentioning that with the emergence of
specialized financial institutions and the
intervention of the banking sector, the housing
sector is attracting a wide range of customers
ranging from individuals to corporations to
groups. As of June 30, 2012, 56 Housing Finance
Institutions were registered with the NHB,
offering the following types of loans:
Home Purchase Loan: conventional home loan
meant for purchasing a new home.
Home Extension Loan: funding any alteration to
an existing home.
Home Construction Loan: This is for the
construction of a new home on an existing
property.
Land Purchase Loans: This, one of the most
availed type of loan scheme currently in
India, is for the purchase of land for
investment/construction purposes.
Stamp Duty Loan: This loan is used for paying
the stamp duty.
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1
2
Financing (Conventional)
In terms of financing, the followings are
predominantly offered by Banks in India:
Fixed-Rate Mortgage (FRM): Considered a
traditional type of mortgage, FRM offers
borrowers a fixed interest rate over the term
of the loan, whether it is 10, 15, 20 or 30
years, with monthly payments that remain
the same. In the beginning of the loan period,
the majority of monthly payments will serve
the purpose of paying off the loans interest.
During the later part, the borrower will be
paying more toward the loans principal.
Adjustable Rate Mortgage (ARM): Also known as
floating rate or variable rate mortgage, ARM
has set adjustment periods in which the
interest rate may increase or decrease,
depending on current market conditions.
Rate caps are put in place so that the interest
rate can never increase or decrease by more
than the determined percentage over an
agreed period of time.
Balloon Payment Mortgage: This, a fixed rate
home loan, is usually offered for a short term
to borrowers. The payment period is on a
monthly installment basis where the
borrower starts by paying smaller monthly
installments followed by larger payments.
Blanket Mortgage: This type of mortgage,
mostly preferred by builders and developers,
is used to purchase real properties / lands for
commercial sale.
Bridge Loans: Also known as caveat loan,
bridge loan is a short term interim financing
used by those who wish to sell their present
home and buy a new one. The repayment
period for this type of loan ranges from 14
days to 36 months. The rate of interest is
higher; and therefore, it is very expensive
than the conventional financings.
Interest Only Mortgage: In this type, the
borrower does not need to pay off entire
capital of his/her housing loan. Borrowers
need to pay for interest rate only on principal
loan amount. However, when the mortgage
3. LITERATURE REVIEW
term expires, the borrower needs to pay large
sum of money including dues payment and
interest rate.
Reverse Mortgage: In this type of housing loan,
the borrower can mortgage his/her property
with a bank. In return, the bank will pay the
borrower a regular payment and allow
him/her stay in the property until his/her
death. After the borrower dies, the property
is sold off by the bank to recover the loan
amounts owed by borrower.
Accessing Loans
Mortgage loans in India are provided against
collateral security such as industrial property,
urban commercial complex, residential house or
apartment, possessed in the name of the receiver
of the loan. Rented house can be accepted as
collateral too if the property is on a lease and the
person has the authority to collect the rent under
the power of attorney. While on average the
minimum loan amount that can be availed is Rs.
5 lakhs, the maximum can go up to Rs. 10 crore
or more, depending on the borrowers repayment
capacity and the city where the loan is disbursed.
The minimum tenure that a loan against
property has is 5 years and the maximum is up to
15-30 years depending on the Banks credit
acceptance parameters. Also, the borrower has to
be between 21 years to 45 years old, have a
continuous work experience of at least 3 years
and a minimum net monthly income of Rs.
30,000 in order to be eligible for a loan.
Major Challenges
Some of the major challenges that the housing
finance industry face in India are:
Absence of Innovations. There is an absence and
lack of other innovative financing
mechanisms, particularly those that target the
poor households and link up formal and
informal sources of financing. The reason
15

behind this is the repayment capacity of the
poor being below the amount necessary to
purchase a housing unit, increased frequency
of late payments and default, difficulty in
establishing clear titles and lack of credit
record. Subsidized credit is still viewed as the
principal instrument to reach out to the
poorer households.
Archaic Laws and Regulations: The environment
on both the demand and supply side of the
housing market in India is heavily impacted
by unclear and time-consuming legislation
and procedures. Local authorities impose
their regulations through municipal and
development rules. Policies such as the urban
policy that restricts the supply of available
land for housing construction, and rent
control legislation, which protects existing
tenants at the expense of all future potential
tenants, distort the supply response.
Affordability of Housing: Affordability of
housing is another key issue even if housing
finance was more widely available. To make
housing affordable, the financial institutions
would not only have to offer a reasonable
cost of finance, but also undergo a complete
overhaul of current regulatory land and
rental policies, stamp duties on transfer of
property and fiscal treatment of property
income.
3. LITERATURE REVIEW
Case Study
The central and state governments have put in
place various reforms / measures to improve and
enhance the level of housing in India. The Indira
Awas Yojana (IAY), Golden Jubilee Rural
Housing Finance Scheme (GJRHFS), Bharat
Nirman, National Urban Housing and Habitat
Policy (NUHHP) are of few examples of
initiatives taken by the Government of India.
Another example of such initiative is the
establishment of the Central Registry of
Securitization Asset Reconstruction and Security
Interest of India (CERSAI) on March 31, 2011.
The government established the Central Registry
in order to prevent frauds in loan cases involving
multiple lending from different banks/HFCs on
the same immovable property.
The CERSAI, being partially managed by NHB,
provides a database of security interest over
property rights to secure loans and advances
granted by banks and financial institutions. It also
helps in preventing frauds involving cases where
loans are taken from different lenders against the
same property as well as fraudulent sale of
property without disclosing the security interest
over such property.
16
 3. LITERATURE REVIEW

References

DSouza, C. (2009). The Housing Finance Market in India. Workshop on Housing Finance in South
Asia-World Bank & IFC. Jakarta, Indonesia.
Home Loan as an Overdraft. Retreived August 23,2013 from: https://www.sbi.co.in/
user.htm?action=viewsection&lang=0&id=0,1,20,115,741,786
Learn About the Different Types of Mortgages. Retrieved August 22, 2013 from:
http://www.nationwide.com/bank-types-of-mortgages.jsp
Loan against Property. Citibank India. Retrieved August 24, 2013 from: https://www.online.
citibank.co.in/products-services/loans/loan-against- property.htm?site= PORTAL &creative=
NGX&section=LFTNVLON&agencyCode=XER&campaignCode=&productCode=&eOfferC
ode=LFTNVLON
Mohanty, D. (2013). Perspectives on Housing Finance In India. Retrieved August 10, 2013 from:
http://www.bis.org/review/r130416d.pdf
Mortgage Leaders in India (2013). Retrieved August 22, 2013 from: http://business. Maps
ofindia.com/india-mortgage/loans/lenders.html
Mortgage Market in India (2010). Economic Watch. Retrieved August 22, 2013 from:
http://www.economywatch.com/mortgage/india.html
Report on Trend and Progress of Housing in India (2012). National Housing Bank.
Understanding the Types of Mortgage Home Loans in India. Retrieved August 22,2013 from:
http://besthomeloaninindia.wordpress.com/2013/01/07/understanding-the-types-of-
mortgage-home-loans-in-india/
Varma, R. (2013). Overview of Housing Finance Industry in India. Retrieved August 22, 2013 from:
http://rupeemanager.com/investing/loans/overview-of-housing-finance-industry-in-india.html

17

C. MALAYSIA
Historical Development
Housing has been one of the highest priorities of
the Malaysian government. Building Societies1
were the largest originators of housing finance in
Malaysia during the1960s -70s. Public housing
and credit programs, commercial banks and
financial companies emerged as major players in
the housing finance market that gradually shrank
the role of these societies in the 1980s.
Malaysia has been implementing housing
programs in accordance to 5-year national
economic development and poverty reduction
plans, also called Malaysian Plans (MPs). The
country has successfully implemented nine MPs
so far and is now undertaking the 10th. During
the first MP1966-1970, Malaysia launched the
first formal and structured housing program to
provide low-cost housing for low-income groups.
Even though the emphasis of MPs in regard to
housing has changed from time to time,
depending on the priority of the government,
provision of low-cost housing has been a primary
feature in all MPs.
National Housing Policy (NHP)
Ministry of Urban Wellbeing, Housing and Local
Government (MHLG) develops updated housing
policy to facilitate the implementation of housing
1A building society, a financial institution owned by its members as
a mutual organization, offers banking and related financial services
especially mortgage lending.
3. LITERATURE REVIEW
priorities described in MPs. The policy is then
detailed in an action plan and broken down into
projects and programs. The action plan clarifies
the roles of federal, state and local government
agencies as well as that of the private sector for
the purposes of effective implementation and
evaluation of the thrusts and policy
statements1. The policy is mostly controlled by
state authorities, is localized in character, and
translated into regulations that developers and
house financiers must comply with.
Government and the Housing Finance
With a vision of becoming a developed country
by 2020, Malaysia is committed to providing
adequate, quality, and sustainable housing for
everyone in the country. In addition to regulating
the housing sector for the purposes of
maintaining minimum quality and ensuring
affordable prices for all income groups, the
government concentrates on the delivery of
housing units to the lower-income groups
through government financed housing programs.
The Malaysian Government established the
Treasury Housing Loans Divisionthe
specialized arm of Ministry of Financein 1971
to finance public entities to provide affordable
housing for every Malaysian, especially the low-
income groups. These public incorporated
companies are: Malaysia Building Society Berhad
(Banking and Mortgage), Borneo Housing
Mortgage Finance (Banking and Mortgage),
Berhad Sabah Credit Corporation (Housing and
1 NHP is formulated based on six strategic thrusts and twenty policy
statements. A strategic thrust is almost equivalent to a strategic
objective. Policy statements are used to breakdown the thrusts into
manageable units
18

Business Finance) Bank Rakayat (Islamic Banking
and Islamic Mortgage) and National Savings
Bank (Ordinary Banking and Home Loans).
The Malaysian Government uses these
companies to provide public servants with
subsidized mortgages (at a maximum of 3%
interest rate) using Employee Provident Fund
(EPF)1. The government also offers subsidized
long-term loans and mortgages to low-income
non-government employees for
construction/improvement of their houses or for
purchasing new property.
In addition, every NHP requires the private
sector to build a certain number of low-price
housing (<RM100,000) for the poor to increase
availability and affordability of low income
housing during each MP. Forty four percent
(44%) of the total outstanding housing loan in the
market in 1993 belonged to government. The
share was however reduced to 22% in 2004.
In order to increase liquidity, lower lending risks,
and encourage a greater number of mortgage
loans by both private (commercial banks and
financial companies) and the public sector, in
1986 the Malaysian Government established the
secondary mortgage market, Cagamas Berhad
the National Mortgage Corporation. The mission
of the Cagamas Berhard is to provide financial
products and services that improve the
availability and affordability of home mortgages,
particularly for lower-income households.
Cagamas issues debt securities and uses the funds
to finance the purchase of housing loans from
banking institutions, selected corporations and
the government. In October 2004, through its
single-purpose and wholly owned subsidiary,
Cagamas MBS Berhad (CMBS), Cagamas
successfully issued Malaysias first residential
1EPF is the mandatory savings and retirement plan for Malaysian
government employees
purposes e.g. car loan, home loan, education loan etc.
3. LITERATURE REVIEW
mortgage-backed securities (RMBS), which were
backed by the governments staff housing loans.
The establishment of the RMBS was the start of
the securitization market in Malaysia. At end of
2007, CMBS securitization activities involved a
total of five issues of RMBS backed by the
governments staff housing loans, of which two
were based on the musyarakah principle.
Lastly, The Housing Ministry MHLG protects
the rights of homebuyers to a greater extent.
MHLG has also developed outreach and
awareness mechanisms to increase homebuyers
knowledge about standard procedures and
possible fraudulent transactions before
purchasing property.
Private Sector and the Housing Finance
Commercial banks (including Islamic) and
finance companies have become the primary
lenders in the Malaysian housing finance market
since 1995. Seventy seven point three percent
(77.3%) of the total outstanding housing loans
were granted by the private sector in 2004. Since
the end of financial crisis of 1998, household
lending has increased at a high rate compared to
business lending. Among other forms of
household financing prevalent in Malaysia, home
loan constitutes the largest portion (58%) of the
total household finance1. The ratio of household
debt to GDP grew from 39% in 1997 to 78% in
2011. Financial institutions have been willing to
finance residential mortgages because such loans
are typically viewed as low risk with extensive
government support.
Types of Loans
In general, almost all banking institutions and
1 Household finance includes all types of loans for household
19

finance companies in Malaysia offer two types of
mortgage loans, namely, conventional and
Islamic. Conventional loans account for 90% of
mortgages. Banks typically offer plain-vanilla
mortgages at fixed or variable interest rates or a
combination of the two. Approximately 83% of
residential mortgages are variable rate
mortgages, with adjustable rates pegged to the
base-lending rate (BLR) of individual institutions.
In an increasingly competitive environment,
banks also offer mortgage packages with
repayment flexibility, such as graduated
repayment schemes (lower initial installment
payments that increase gradually over time) and
loans with longer maturities. Typically, housing
loans have a repayment period ranging from 20
to 35 years or mature when the borrowers turn
60 or 65.
It is common for mortgages to carry fixed interest
rates during the first three to five years and BLR-
based rates subsequently, until maturity. This
reflects the sell-then-build concept of
residential property development.
The products offered under Shariah compliant
financing generally have the same characteristics
as conventional mortgages but are based on the
concept of Bai Bithaman Ajil (BBA)1. Islamic
mortgages carry mainly fixed profit rates.
However, banking institutions have begun to
offer variable rate Islamic mortgages following a
review of the BBAs variable rate financing
mechanism conducted in November 2004 to
promote efficiency in the pricing of this mode of
financing.
1 Al-Bai` Bithaman Ajil or deferred Payment Sales is a Sales and
Purchase Agreement of an asset e.g. houses, shops, factories and
other fixed assets. Among others the Al-Bai` Bithaman Ajil
Financing packages are used to purchase house/shoplots, refinance
housing loan, purchase land for the construction of a house,
construct house on customers' own land and refinance fixed asset.
3. LITERATURE REVIEW
Accordingly, Islamic banking institutions are now
allowed to determine a reasonable ceiling profit
rate, taking into account their risk management,
capabilities, business strategies and market
outlook. As of July 29, 2013, the BLR variable
mortgage interest rate was on average at 4.5%.
Major Challenges
Despite efforts by the Malaysian Government,
there are various issues relating to a housing
delivery system.
First, public and private house builders have
been giving low priority to the low-cost
housing program, which falls below the
targeted level. The construction of medium-
and high-cost housing, on the other hand,
has exceeded the targeted level during the
Five-Year Malaysia Plans.
Second, a massive over construction of
medium- and high-cost housing has
contributed to the problem of property
overhang. Independent analysts blame the
government for ineffective policies and
programs and corrupt practices by high
officials in the public sector. In addition,
since low-cost houses bear less profit
compared to medium and high-cost ones;
therefore, the private sector prefers investing
and building medium and high-cost houses to
reap more profit.
Third, many low-cost housing projects have
been abandoned. From 1990 to 2005,
MHLG records show that 261 projects
involving 88,410 houses in Peninsular
Malaysia were abandoned. The government
claims that it is 1-3% of all projects and cites
issues such as developer cash flow problems;
dispute between landowner and developer;
lack of detailed market study; technical
problems at the site; squatter resettlement
problems; and developer's internal problems
as reasons for abandonment. Meanwhile, the
government has created a department to deal
20

with this issue and has taken three measures
to limit the problem: strict vetting process
while licensing developers; increased
monitoring and evaluation of the projects;
and recovery of some of the viable projects.
Furthermore, IMF estimates Malaysian housing
prices to drastically increase by 2016. The issue
has raised global concern because home loan is
the largest portion of the current high household-
lending trend (>50%) in Malaysia. According to
Malaysias Department of Insolvency, 13% of
bankruptcy between 2005 and June 2012 were
caused by house loans. On the other hand, some
analysts thwart the apprehension arguing that
Malaysia has a strong enough economy that the
price rise will not impact the economy
significantly. They base their claim on figures
that show relatively low unemployment and
higher household income in Malaysia.
Andrew C. Ezeanya, while analyzing Malaysian
housing policy, writes that the major problem of
Malaysia residential housing policy is that it has
lost its traditional form of identity. He argues that
many western style plans and designs are
implemented in Malaysia that do not fit
Malaysian topography and environment.
2007 to 2012.
3. LITERATURE REVIEW
This trend has resulted into deforestation; land
degradation and increase in pollution in some
areas.
Case Study
Malaysia My Second Home (MM2H) Program is
promoted by the Government of Malaysia to
allow foreigners who fulfill certain criteria, to stay
in Malaysia for as long as possible on a multiple-
entry social visit pass. The Social Visit Pass is
initially for a period of ten years, and is
renewable. Non-residents are free to purchase
residential and commercial properties in
Malaysia. All purchasers are subject to
restrictions on Malay Reserve Land and
properties allocated to Bumiputras (native
Malaysians). There is a minimum investment
value of approximately RM 500,000 for property
purchases, but this varies from state to state.
There is no restriction on the number of
properties a foreigner can buy although they will
require State approval for any property purchase.
From 2002 to 2012, the program attracted
19,488 foreign buyers, mostly from China,
Bangladesh, Britain, and Iran and 1,659
properties (worth RM1.5 billion - US$495
million) were purchased under the program from
21
 3. LITERATURE REVIEW

References

Endut, N.Hua.T.G (2008). Household Debt in Malaysia. BIS Paper # 46. 107-116.
Ezeanya, A.C. (2004). Malaysian Housing Policy: Prospects and Obstacles of National Vision 2020.
Adequate & Affordable Housing for All: Research, Policy and Practice, 1-12.
Hong Tan, Teck. (2011). Sustainability and Housing Provision in Malaysia. Journal of Strategic
Innovation and Sustainability1, (7), 62-71.
Investing in Malysian Real Estate. Retrieved August 19, 2013 from: http://www.mm2h.com/ buying-
home.php
Malaysia: Financial Sector Stability Assessment (2013). International Monetary Fund. Washington
D.C. The United States.
Malaysian House Prices Continue to Rise, Ableit at a Slower Pace. Retrieved August 20, 2013 from:
http://www.globalpropertyguide.com/Asia/malaysia/Price-History

22

D. NEPAL
Historical Development
From 1956 until 1985, the
Government of Nepal
treated the housing sector
as a social service, and
therefore, it remained a low
priority in the countrys
national economic
development plans. The
classification of housing changed after 1985,
when the government started treating the sector
separately from other social services and drafted
the National Shelter Policy of 1996. Through this
policy, the government envisioned to provide
shelter for all, especially for poor and low-income
families. Though very promising, the 1996 policy
proved to be ineffective mainly because there was
no specific agency tasked to oversee and
implement it. Additionally, the policy did not
contain clear roles of responsibilities, which led to
duplication of efforts, gaps in implementation,
and conflicts; thus harming the housing sector
more than helping it.
Current Status of the Mortgage Market:
Although after 1991, plenty of private
commercial banks and finance companies
emerged, housing finance still remained a low
priority for them as they had lot of clients for
industrial and commercial purposes. However,
this situation changed especially from 1996 to
2000, when commercial lenders reduced to a
minimum due to various political crises and the
emergence of the Maoist insurgency. On the
other hand, banks deposits were increasing due
to the concentration of people in towns and the
increasing transfer of funds / salaries from
employees working abroad. Thus, as a survival
option, financial institutions started lending for
car purchase on installment basis.
3. LITERATURE REVIEW
They eventually switched over to loan home from
2001 because the country was experiencing a
rapid growth on housing and apartment business;
driven by the rural to urban migration. Besides
the financial institutions, couple of NGOs also
emerged to provide informal lending in a
successful way but they were insufficient in
number and coverage. Currently, there are 18
commercial banks and 37 financial companies
that provide various types of loans. Some of them
include the followings:
Home Purchase Loan: A conventional home
loan provided for the purchase of a new
home / apartment.
Home Extension Loan: This home loan is for
funding any alteration to an existing home.
Home Construction Loan: This is for the
construction of a new home on an existing
property.
Land Purchase Loans: This is for funding the
purchase of land for investment/construction
purposes.
The loan tenure on average ranges from 2 years
to 20 years. The lending is on regular monthly
installment basis and the interest rates range from
8 to over 13 percent, depending on the borrower
and the bank.
Financing
In terms of financing, the following formal and
informal financing opinions exist in Nepal:
Formal Sources:
Commercial Banks: There are 26 commercial
banks, many of them owned by wealthy
families with other business interests, that
23

serve as an important source of housing
finance both for purchasers and developers.
Typical lending period ranges from 5 to 15
years with an interest rate ranging from 10 to
15 percent per year. Land and or the
property serve as collateral.
Nepal Housing Development Finance Company
(NHDFC): The NHDFC, established by the
Ministry of Physical Planning and Works
(MPPW) in 1990 under the Finance
Company Act 1985, provides individual
housing loan for a maximum period of 15
years against collateral both for the
construction or purchase of a new house
and/or improvements of existing properties.
The average size of loan is NPR 150,000
(USD 2,042) the maximum loan amounting
to NPR 6.0 million (USD 81,688) with an
interest rate of 13 percent per annum.
Employees Provident Fund (EFP): EFP was
established under EPF Act (1962) to manage
NPR 3.7 million (USD 50,374) fund of
26,000 government employees and military
staff which now has evolved into a fund with
440,000 clients and a net worth of NPR
79.15 billion (USD 107 million). The
Provident Fund provides housing loan to
permanent employees of government (civil,
police, military), semi-government
(corporations), academics institutions and
organized private sector. Housing loan
conditions of Provident Fund are more
attractive than the commercial market or
NHDFC. However, this housing finance is
available only to subscribers of the fund.
Saving and Loans (Cooperative) Program: Nepal
has an estimated 15,000-registered
cooperative society. Although most of these
cooperative societies have been established
for agricultural development and agri-
marketing in rural areas, housing loans are
also part of their service package. Since these
loans typically do not require collateral;
therefore, they have proven to be useful
particularly for poor households to maintain,
improve and extend their houses both in
3. LITERATURE REVIEW
Informal Sources
Informal Lenders: In 1991, it was estimated that
around 70 percent of housing finance came
from the informal sector (friends, relatives or
traditional money lenders). However, in
recent years there has been a decline in this
practice.
Accessing Loans: The Mortgage Loans are
provided against collateral, fixed deposits /
government bonds, gold and silver and stable
future income possessed in the name of the
receiver of the loan.
Major Challenges
Two major challenges that the housing finance
industry face in Nepal are:
Affordability of Housing: The growing
commercial banks and financial institutions
will not serve the needs of the low-income
people. It is estimated that 95% of the urban
population cannot afford to purchase ready
built property.
Coverage: The housing finance has been
mostly prevalent in the Katmandu Valley
and not in other towns of Nepal.
Case Study
The Habitat for Humanity started its interest free
home loan to poor people in December 1999,
specifically to those who have their own piece of
land. A total of 225 houses have been built in
Nepal through this assistance. The loan amount
provided to each household ranged from Rs
60,000 to 100,000 rupees. They normally had
monthly repayment, which was about Rs 550 per
month. However, in some cases, stages of
repayment were made every three to six month
as per their earning and repaying capability.
24

serve as an important source of housing
finance both for purchasers and developers.
Typical lending period ranges from 5 to 15
years with an interest rate ranging from 10 to
15 percent per year. Land and or the
property serve as collateral.
Nepal Housing Development Finance Company
(NHDFC): The NHDFC, established by the
Ministry of Physical Planning and Works
(MPPW) in 1990 under the Finance
Company Act 1985, provides individual
housing loan for a maximum period of 15
years against collateral both for the
construction or purchase of a new house
and/or improvements of existing properties.
The average size of loan is NPR 150,000
(USD 2,042) the maximum loan amounting
to NPR 6.0 million (USD 81,688) with an
interest rate of 13 percent per annum.
Employees Provident Fund (EFP): EFP was
established under EPF Act (1962) to manage
NPR 3.7 million (USD 50,374) fund of
26,000 government employees and military
staff which now has evolved into a fund with
440,000 clients and a net worth of NPR
79.15 billion (USD 107 million). The
Provident Fund provides housing loan to
permanent employees of government (civil,
police, military), semi-government
(corporations), academics institutions and
organized private sector. Housing loan
conditions of Provident Fund are more
attractive than the commercial market or
NHDFC. However, this housing finance is
available only to subscribers of the fund.
Saving and Loans (Cooperative) Program: Nepal
has an estimated 15,000-registered
cooperative society. Although most of these
cooperative societies have been established
for agricultural development and agri-
marketing in rural areas, housing loans are
also part of their service package. Since these
loans typically do not require collateral;
therefore, they have proven to be useful
particularly for poor households to maintain,
improve and extend their houses both in
3. LITERATURE REVIEW
Informal Sources
Informal Lenders: In 1991, it was estimated that
around 70 percent of housing finance came
from the informal sector (friends, relatives or
traditional money lenders). However, in
recent years there has been a decline in this
practice.
Accessing Loans: The Mortgage Loans are
provided against collateral, fixed deposits /
government bonds, gold and silver and stable
future income possessed in the name of the
receiver of the loan.
Major Challenges
Two major challenges that the housing finance
industry face in Nepal are:
Affordability of Housing: The growing
commercial banks and financial institutions
will not serve the needs of the low-income
people. It is estimated that 95% of the urban
population cannot afford to purchase ready
built property.
Coverage: The housing finance has been
mostly prevalent in the Katmandu Valley
and not in other towns of Nepal.
Case Study
The Habitat for Humanity started its interest free
home loan to poor people in December 1999,
specifically to those who have their own piece of
land. A total of 225 houses have been built in
Nepal through this assistance. The loan amount
provided to each household ranged from Rs
60,000 to 100,000 rupees. They normally had
monthly repayment, which was about Rs 550 per
month. However, in some cases, stages of
repayment were made every three to six month
as per their earning and repaying capability.
25
 3. LITERATURE REVIEW

References

Karki, T.K. (2004). An Assessment of the Nepal Housing Development Finance Company Operating
in Kathmandu Valley. UN. Habitat. Germany.
Kulkarni,N.K. (2012). Nepals Urban Housing Challenge. South Asia Searchlight: Tracking Urban
Poverty Trends in India, Bangladesh and Pakistan. Retrieved August 21,2013 from:
http://urbanpoverty.intellecap.com/?p=552
Steekelnburge, E.V.(2010). Nepal Urban Housing Sector Profile. UN. Habitat. Nairobi Kenya.

26

E. PAKISTAN
Historical
Development
Formal housing began in
Pakistan in 1947 when a
number of basic shelters
were built for Muslims who
migrated from India. During
1950s and 1960s, the
government started developing houses for the
public servants and lower-income groups. Lacking
proper coordination and management, the first
effort failed and the housing schemes in the second
effort mushroomed in urban fabric without any
master plan. The government had similar small-
scale projects during 1970s and 1980s, but did not
have notable achievements in their
implementation. In 1990, the government
announced Federal Government Employees
Housing Foundationa self-financing housing
scheme on ownership basis for Federal
Government employees. The government also
created Pakistan Housing Authority Foundation
and National Housing Authoritycurrently under
the Ministry of Housing and Works (MoHW), to
enhance housing development. Lately, some public
housing development projects are underway
through the Prime Ministers Housing Finance
Scheme (PMHFS).
Housing finance started in 1952 when the
specialized public housing bankHousing Building
Finance Company (HBFC) was established. HBFC
became a market oriented financial institution in
1994 and was incorporated in 2007. Government
of Pakistan and the State Bank of Pakistan (SBP)
with 62.50% and 37.50%, shares, jointly own the
company respectively. Commercial banks entered
the mortgage business during 2003. Banks and
Development Financial Institutions (DFIs) now
3. LITERATURE REVIEW
hold almost 80% of total outstanding housing
finance loans.
Government, the general public and the
private sector are not happy with the sectors
growth and performance. SBP 2012
performance review report states that housing
finance market in Pakistan is passing through
hard times. The sector has shown declining
trend since 2008. The gross outstanding home
loans reported by banks and DFIs declined by
7.8% to Rs57.1 billion as on June 30, 2012.
The total number of outstanding borrowers
also decreased by 8.7% to 87,195 in FY12.
National Housing Policy (NHP)
Pakistan developed its first NHP in 1992. Due
to ineffective implementation of the policy,
many housing related issues related to backlog,
slums/squatters settlement, land, finance,
building codes and technology remained
unaddressed; and some even grew bigger. The
latest NHP that is still in use was developed in
2001 to focus on an enabling strategy aimed at
resource mobilization, development of a
housing finance system, and provision of
incentives through tax rationalization and
enforcement of effective foreclosure laws.
Government of Pakistan in its Medium Term
Development Framework has recognized
housing and construction as priority sectors
that pose substantial potential for employment
generation for the poor segments of the society.
However, analytical reports suggest that in
practice, little is actually done to improve these
sectors. MoHW, SBP and State
27

Housing finance offers Istisna1 for construction
and diminishing musharakah2 for home buying.
Challenges
Pakistans housing sector is facing the following
challenges:
Housing Shortfall: The World Bank estimated a
shortfall of 8 million housing units in Pakistan
in 2009. According to estimates the annual
incremental demand is 600,000 units, of
which 50% is met by the private/public
investment. Most of the gap in the housing
market is for the low-income segment.
Weak Property Rights: due to inefficient legal
framework and land information system.
This also includes improper implementation
of foreclosure laws & outdated building and
zoning regulations
Non- Performing Loans (NPLs): are another
major problem. According to SBP 2011
report, total NPLs were at Rs 19 billion.
Low Public Confidence. The absence of clear
business practices have affected credibility
contributing to the reluctance of financial
institutions in providing development and
construction finance.
Affordability: is another challenge, especially
for the poor. The urban poor cannot afford
even the cheapest houses offered by public or
private developers.
1 It is defined and elaborated as a sale contract between the seller
and the buyer for the sale of an asset described in the sale contract
and transacted before it comes into existence. To fulfill its
obligation, the seller can either manufacture/construct the asset by
itself or can get it manufactured/constructed by someone else to
deliver it to the buyer on the date described in the sale contract. The
buyer can pay the sale price in lump sum at the time of signing the
contract or later in different stages as the
manufacturing/construction process proceeds.
2 It is based on is bases on the principles of Shirkat ul Milk. Under
diminishing Musharaka house is purchased jointly by IFI and
customer. IFI rents out its share in property to customer for an
agreed amount of rent. Share of financier is divided in units of small
denomination. Customer pays the installments to IFI consist of
rentals plus purchase price of a unit. Stake of customer in property is
increasing while of IFI is decreasing with payment of every
installment. Finally with the payment of last installment stake of IFI
reaches to zero and property is transferred in the name of customer.
3. LITERATURE REVIEW
Case Study
Khuda Ki Basti (KKB) Incremental Housing
Scheme was launched by the Hyderabad
Development Authority (HDA) in March 1986 in
Hyderabad. The mechanics adopted in the KKB
were as following:
HDA established a one-window office on the site
and invited homeless urban poor to come to get
plots with immediate possession. In this
connection, the HDA involved informal
developers in identifying beneficiaries and settling
them on the site. The idea of "Reception Area"
was introduced to filter out speculators. The
homeless households were asked to come with
their families and belongings and start living in
the reception area. The staff observed them for a
few days after which, they were allotted a plot.
The households, who were allotted plots, were
asked to put up some kind of shelter immediately.
If the allottee kept the plot unoccupied, the HDA
cancelled its possession letter. This whole process
was meant to kill the speculation.
HDA made an arrangement with the HBFC and
got a block loan of five million rupees. The loan
was given to the households for putting up roofs,
and was recovered in easy installments. HDA
motivated the people to create a representative
organization (called a block organization) for the
responsibility of collecting monthly installments
for development; managing the development at a
lower cost, and helping the HDA in managing
the plot allotment and cancellation process. No
building byelaws were imposed for the
construction of housing units. The scheme
showed significant success in a short span of time;
in three years, over 3,000 low-income households
built their houses and started living in them. This
effort was managed by the HDA without
subsidies, without extra staff and without any
additional overheads.
28
 3. LITERATURE REVIEW

References

Hasnain, S. (2005). Housing Finance Review 2005-2011. Infrastructure, Housing and SME Finance
Department State Bank of Pakistan, 1-14.
Housing Finance Reforms in Pakistan: Strategy for Strengthening the Real Estate Development
Process (2006). State Bank of Pakistan, 1-34.
National Housing Policy (2001). Retrieved August 18, 2013 from: http://www.pakboi.gov.pk/pdf
/Sectoral%20Policies/National%20Housing%20Policy%202001.pdf
State Bank of Pakistan Annual Performance Review 2011-2012. Retrieved August 18, 2013 from:
http://180.222.140.37/videoplayer/CompleteReport.pdf?ich_u_r_i=4f4d616444283b7
ddb16e191339add77&ich_s_t_a_r_t=0&ich_e_n_d=0&ich_k_e_y=1445028927751163132413
&ich_t_y_p_e=1&ich_d_i_s_k_i_d=2&ich_u_n_i_t=1
The Express Tribune (2013). Government Introduces Several New Schemes. Retrieved August 20
from: http://tribune.com.pk/story/562663/government-introduces-several-new-schemes/
Tirmizi, M. A. (1991). Low Housing Strategies in Pakistan with Focus on Urban Housing. Pakistan
Engineering Council Journal, (70), 85-99.

29

F. UNITED ARAB EMIRATES
Historical
Development
The UAE
housing finance
sector was virtually
non-existent before
2000. The Dubai
property market in its
current form is very young, having started with
the birth of Emaar Properties in 1997 and the
subsequent opening of the property market to
non-UAE nationals in Dubai in 2002. Even after
2002, ownership rules and regulations were
unclear. The introduction of both foreign
ownership rules and the supply of properties
targeted to non-UAE nationals fuelled demand
for properties and resulted in the establishment of
the housing finance market.
UAEs housing market began to flourish in 2002,
when Dubaione of the seven states that make
the United Emirates, announced that freehold
ownership of residential and other types of
property in Dubai was available to investors of all
nationalities in specially designated zones. It was
the single most structural change in the history of
housing in the country. Massive demand for
housing was created by international residents in
Dubai. The government utilized the opportunity
and by public interventions (much through the
big three firms: Nakheel, Emaar, and Estithmaar)
and enabling housing development environment
facilitated gigantic housing supply. Projects such
as Dubai Marina with1,026 apartments and 64
luxury villas; Emirates Living with 9,000 units;
Jumaira Beach Residence with 36 residential
towers with 6,400 apartments and four hotel
towers with 4,000 rooms; Arabian Ranches with
6,900 luxury villas and townhouses; Burj Dubai
with six towers; and other large housing projects
as Jumaira Village and Palm Jumaira took off.
Abu Dhabi, Sharjah, Ajman and Ras-Alkhaima
states started housing projects later during 2009.
Among all, Abu Dhabi had the largest projects
implemented by big firmsAlder and Al-Sorouh.
3. LITERATURE REVIEW
The Dubai Islamic Bank, Istithmar and Island
Capital Group (based in the USA) established the
Emirates National Securitization and Finance
Corporation (ENSFC) in January 2004 with the
objective of issuing mortgage-backed securities
(MBS) to be traded on the international markets.
Having real estate market boom, Dubai issued a
comprehensive mortgage law in 2008.
Specialized courts dedicated to property litigation
and foreclosures, which strengthen enforcement
procedures, were also established around that
time. Despite all these efforts, Dubai real estate
market hit with 2009-credit crisis. Lack of
effective regulation, close supervision, proper
mortgage system and high speculation were cited
as the main reasons for the crash.
Public Housing Policy
Government housing policies are most favorable
to Emirati nationals and are conducive for
Emirati residents. In practice, most nationals
have been housed by the State and nationals
have little need to borrow large amounts to fund
their housing. The State has directly built houses
and given it to nationals. However, the
circumstances in which the properties can be
resold are severely restricted and they cannot be
mortgaged. Nationals with a total family income
of between Dhs7,000 and Dhs70,000 per month
are eligible for an interest-free loan of up to
Dhs750,000.Grants are available for those with a
household income below Dhs7,000. All the
private developers have had the benefit of land
being gifted to them by the State.
Two of the largest public housing schemes for
Emirati citizens are the Mohammed bin Rashid
Housing Establishment (MRHE) and Sheikh
Zayed Housing Program Services (SZHP)
projects. Under these projects, eligible citizens
are entitled to ready-made house grants, interest-
free home loans, and land grants. In addition to
Dubai, multibillion projects have been recently
awarded to giant developers like Alder and others
30

to build houses for Emirati citizens in Abu Dhabi
and other states. Lastly, there are many
charitable associations in Gulf Cooperation
Council (GCC) countries to provide free houses
to low-income groups in these countries.
Dubai has a Real Estate Regulatory Authority
(RERA) that regulates the contractual agreement
terms and conditions of mortgage lending and
property renting in the market. A recent initiative
by RERA is the rent cap measure to curb
excessive rent rises. Although this measure is not
well received by financial analysts, the
government is strictly implementing it to control
property rents.
One of the major successes of UAEs housing
policy was opening up the housing sector for
foreign investors freehold ownership in 2002-
2006. With already business friendly, tax-free
environment for foreign investment since 1980s,
this initiative attracted a huge number of business
and executive people from the region and the rest
of the world. Comprising more than 80% of the
population, foreign residents are the main driver
of the housing business in the country, especially
in Dubai and Abu Dhabi.
Government and the Housing Finance
Government is involved in housing finance in two
ways: 1) through subsidized housing programs for
its citizens perhaps for redistribution of oil wealth
and 2) through partial ownerships in major
housing businesses. The first type of involvement
to a greater extent pushes away low and middle
income Emirati citizens as target customers in the
housing sector given that they receive house
grants, in most cases zero interest loans and land
grants. The second type of involvement is more
likely for better implementing housing policies
and generating income given the vastness of
construction and housing sector in the country.
Government of Dubai for instance fully owns
Nakheel and has 38% share in its subsidiary
mortgage company, Tamweel Islamic Housing
Finance Corporationbest known for building
the Palm Jumaira. The government also has up
to 31.2% share in Emaar Properties and
3. LITERATURE REVIEW
Amlak Islamic Housing Finance famous as the
developer of Dubai Marina. Similarly,
government of Abu Dhabi owns 39.1% share of
Alder Properties and 18% of Sorouh Real Estate.
These developers and their respective mortgage
finance companies soundly compete in the
market. They offer competitive mortgage interest
rate, home loan products and borrower friendly
policies to attract customers.
UAE government through Dubai International
Financial Center (DIFC) has been active in
creating instruments and conditions to support
the development of funding for the real estate
market and the mortgage market. DIFC created
legislations and institutions and established the
first ever Real Estate Investment Trust (REIT) in
UAE and Middle East and Northern Africa
(MENA) region. RIETs are most favored method
to attract public ownership of property
investments. DFIC already the worlds leader in
Islamic bondsSukuk, also established the
secondary mortgage market to refinance home
lenders in the real estate sector.
Private Sector and the Housing Finance
Relative to its population and gross domestic
product, the UAE has an unusually high number
of banks21 local, 25 foreign, 2 specialized, and
approximately 50 representative offices of other
foreign banks. All the banks and housing finance
companies offer housing finance to citizens and
residents in line with the federal and state
government policies. Among international banks,
HSBC was the first one to come into the home
loan market in 2003.
Greater market demand for mortgage and other
home loans is met by the recently combined
mortgage finance companiesTamweel and
Amlak. Until Q1 2008, these two giants
accounted for 56% of market share and 23
commercial / Islamic banks accounted for
balance 44%. During recent years, Chinese and
Korean developers have entered Dubai market.
They will probably have positive impact over the
supply side of the housing sector.
31

Types of Loans
All home loan lenders offer house finance
products in both conventional and Islamic
packages. Therefore, there are both fixed and
variable interest rates involved. Mortgage is a big
share of the greater house financing loansthat
include other types of loans such as house
construction, house renovation, land and similar
loan products. Dubai Land Department data has
revealed that unlike pre-crisis times, Dh17.8
billion or 40% of the total property transactions
in Q1 2013 were done through mortgages.
Banks and housing finance corporations offer
home loans to both UAE nationals and expats.
As of August 2013, mortgage tenure ranged from
12 to 25 years and mortgage interest rate in UAE
was between 4% and 6.5%, on average. The
interest rate is subject to the duration of the
mortgage and the percentage of the total value of
the property financed under the loan. Under the
new government regulations, the maximum loan-
to-value (LTV1) ratio was 80% for Emiratis and
50% for residents. Also, according to current
market trends, the maximum home loan could go
as large as AED 15 million (US$4.1 million).
Furthermore, the borrowers should be between
25 to 65 years old and are required to have at
least AED 8,000-20,000 monthly salary to qualify
for the home loan. Last but not the least, a
mandatory home insurance and life insurance
supplements the home loan package.
Islamic banking has assumed a more prominent
role in the UAE in recent years, and most
conventional banks are opening or expanding
Islamic banking departments; sharia-compliant
consumer and investment products also are being
introduced. Government agencies and majority
state-owned companies are using Islamic
bondssukukto finance development and
acquisitions. Islamic house finance loans include
Murabaha always at fixed rate, Ijarah mostly at
variable rate and Estisna at both fixed and
variable rate.
3. LITERATURE REVIEW
Challenges
As mentioned earlier, UAE government, just like
other GCC countries, is vastly involved in
housing finance sector. Two types of problems
often arise with government housing lenders.
First, a quasi monopoly, political
interferences and/or the implicit transfer of
risks to the state induce lax management
practices, leading to frequent public bail-outs;
Second, these banks enjoy specific regulatory
advantages and subsidies (sometimes implicit)
linked to their special mandates.
Furthermore, in contrast to other MENA
countries, UAE has the highest commercial
property to residential housing ratio, making
UAE real estate market exposed to greater
risk of dependency on commercial sector.
Just like the 2009 crisis, any withdrawal of
expatriates will jeopardize the real estate
market again because of lower domestic
demand.
The UAE and other GCC countries lack an
institution providing insurance against
mortgages defaults by individuals
experiencing economic hardship. Time could
not be more appropriate for the UAE to
institute an Emirates Mortgage Guarantee
Corporation. The guarantee facility will help
to bring stability in the sector and gain both
lenders and borrowers confidence in the
mortgage industry.
32

Case Study
Dubai Real Estate Crisis: Many foreigners started
purchasing houses in Dubai after the law of
foreign property ownership was passed in 2006.
With 116% rise in house price from 2007 to 2008
and 400% rise compared to 2002; the huge flow
of foreign capital boosted ambitious Dubai
construction market goals. Europeans including
the Russians accounted for 20%, GCC Arab and
UAE nationals, 28%, Asians 40% and Iranians
12% of property ownership in Dubai.
Then the global credit crunch hit. Amlak and
Tamweel, the UAEs two largest home finance
companies that account for more than 50% of all
mortgages, stopped offering new loans. Foreign
investors suddenly disappeared at the end of
2008. The overall foreign ownership index was
50% down by Q4 2010, from its peak in Q3
2008. More than half of all the UAE's
construction projects, totaling $582bn, either was
put on hold or cancelled. The root of Dubais
trouble is its over-ambitious development plan
that has included world famous infrastructures
and tallest building on earth. Also, reports suggest
the involvement of high-level speculators than
real buyers in the housing market. The country is
still recovering from the housing prices fall.
Dubai residential selling prices dropped almost
56% from their peak in 4Q08 until 1Q11 while
those of Abu Dhabi lost 45% over the same
period. Dubai residential market currently has an
estimated 93,000 vacant units out of a total of
3. LITERATURE REVIEW
309,000 stock with an additional 60,000 units
expected to come in the market through to 2013.
The vacancy rate in Abu Dhabi is more
contained at an average of 3% out of the total
existing stock of 185,000 units at the end of 2010.
In an effort to help the market, Dubai and Abu
Dhabi governments bailed out the big firms to
protect them from defaulting on their bonds.
Dubai government announced over US$45bn
worth of future projects, which includes
investment in transport infrastructure. Other
sources report more than $70bn construction
projects in the pipeline for 2013. This is expected
to create more jobs and increase demand for real
properties. Global Property Guide supports the
argument by stating that Dubais housing market
is now recovering fast, while its neighboring Abu
Dhabi, UAE's capital, is still struggling.
Apartment prices in Dubai increased 11.6% y-o-y
to November 2012. Villa prices soared by 23.7%
over the same period. In contrast, apartment
prices in the capital plunged 10.7% and villa
prices dropped by 1.8%.
To prevent speculations and another property
bubble from emerging, the central bank recently
issued circulars to banks cutting the maximum
LTV ratio for Emiratis from 80% to 70% for the
first property and 60% for the second unit. In
addition, the LTV ratio was further cut for
expatriates to 50% for the first unit and 40% for
the second unit. The new rules are enforced since
the start of 2013.
33
 3. LITERATURE REVIEW

References

Boleat, M. (2004). Housing Finance in the United Arab Emirate. Report Commissioned by Barclays
Bank.

Hassler,O. (2011). Housing and Real Estate Finance in Middle Easand North Africa Countries. The
World Bank Report.

Hope, Bradley.(2010). Abu Dhabi Agency Awards $ 1.28bn Housing Contract. Retrieved August 25,
2013 from : http://www.thenational.ae/business/abu-dhabi-agency-awards-1-28bn-housing-
contracts

International Union for Housing Finance (2010). Housing Finance International: The quarterly
Journal of the International Union for Housing Finance, 1-54.

Saidi, N. (2009). Housing Finance and Advantage of EGMC. Dubai International Finance Center.
Economic Workshop no. 6.

UAE Real Estate Market. Retrieved August 25, 2013 from: http://www.prnewswire.com/news-
releases/uae-real-estate-market-2013-research-report-at-marketreportsonlinecom-
209145701.html

34
 3. LITERATURE REVIEW

G. SUMMARY OF LITERATURE REVIEW & LESSONS LEARNED

An analysis of the literature and information sources reveals that while there are some differences,
there are a number of vast similarities between the housing finance sector in Afghanistan, Malaysia,
Pakistan, India, Nepal and UAE. The most prevalent similarities between these countries are
summarized below:

Loan Type and Conditions: Banking institutions and finance companies in countries such as Pakistan,
Malaysia, and UAE offer house finance products in both conventional and Islamic packages at fixed
and variable interest rates. In terms of the conventional loans, banks typically offer plain-vanilla
mortgages at fixed or variable interest rates or a combination of both. The housing loans, (offered for
construction, renovation or purchasing a new house) have a repayment period ranging on average
from 5 to 35 years depending on the Banks credit acceptance parameters. The loans are provided
against collateral security such as fixed deposits / government bonds, industrial property, urban
commercial complex, residential house or apartment, possessed in the name of the receiver of the loan.
The products offered under Shariah compliant financing generally have the same characteristics as
conventional mortgages but carry mainly fixed profit rates.

In contrast to these countries, Afghanistan, Nepal and India predominantly offer conventional loans.
In Afghanistan, there are two state owned banks (Pashtany Bank and Bank Millie) that provide short
term loans, up to two years, ranging from $400 to $1000. Due to shortage of finance institutions and
banks providing country wide loan term mortgage loans, a majority of the people currently rely on
assistance from family, relatives and friends to meet their housing needs. Similarly, people in Nepal
rely also rely on informal sources (friends, family, informal lenders) in addition to formal sources
(commercial banks, cooperatives and other financial institutions) to access housing loans. The loans are
mostly conventional in nature and offered at both variable and fixed rates or a combination of both
with the repayment period ranging from 5-18 years.

In spite of growth in the Islamic banking and finance industry across the world, there remains a low
level of penetration and a lack of depth across products, signifying untapped potential in countries such
as Afghanistan, Nepal and India. Considering the Muslim population in these countries, there is a vast
potential for them to further tap into and develop Islamic mortgage.

Gap between Demand and Supply: The demand for housing is steadily growing and by far exceeds the
supply in countries such as Afghanistan, Nepal, India, Pakistan and Malaysia. The current financing
mechanism prevalent in these countries mostly target middle and high income sections of the society
while low income and economically weaker sections have no or limited access to housing finance. This
can be attributed to the mismatch between the demand and supply of housing units and the financial
solutions available to address it. On the demand side factors like income levels of people and on the
supply side factors like the lack of availability of land and finance at reasonable rate, legal and
regulatory framework play a critical role.

Affordability: Affordability of housing is another key issue even if housing finance was more widely
available in these countries. While the housing finance needs of the middle and higher income people
have been served by the growing commercial banks and financial institutions in countries such as
Malaysia, Nepal, Pakistan, and India, the needs of the low income people have not been served by
these institutions. High land and rent prices make housing unaffordable, particularly for the poor.

35
 3. LITERATURE REVIEW

Also, since low-cost houses bear less profit compared to medium and high-cost ones; therefore, the
private sector builders prefer investing and building medium and high-cost houses to reap more profit.
To make housing affordable, the financial institutions in these countries would not only have to offer a
reasonable cost of finance, but also undergo a complete overhaul of regulatory land and rental policies.

As for Afghanistan, there is an immense need and demand for housing among the low- income sector
of the society. However, supply of affordable houses and provision of mortgage loans that can meet the
demand of this sector of the society and Afghans in general, is an intractable challenge particularly
when there are only two banks that offer mortgage loans and those too for a very short term and no
state owned mortgage and reconstruction bank in service. As for UAE, the government has several
housing schemes specifically aimed at low income households in order to address this problem.
Therefore, the problem of affordability is not as prevalent in UAE as it is in India, Nepal, Malaysia,
and Pakistan.

Laws and Regulations: There are a number of legal problems facing the housing finance industry
in countries such as Afghanistan, India and UAE. While absence of institutional finance, lack of
policies and processes are some constraints to the development of a solid mortgage industry in
Afghanistan, weak property rights due to inefficient legal framework and land information system
are some of the legal constraints facing the Indian housing finance industry. As for UAE, political
interferences and implicit transfer of risks to the state, leading to frequent public bail-outs also
impacts the mortgage industry.
Government and the Private Sectors Role in the Housing Finance Industry: Another similarity
between the six countries reviewed is that in all the government has predominantly played the role
of a regulator by developing policies and regulations to facilitate implementation of housing plans
while the private sector / financial institutions have assumed the active role of a provider. In
addition to regulating the housing sector for the purposes of maintaining minimum quality and
ensuring affordable prices for all income groups, the government has also concentrated in these
countries (with the exception of Afghanistan) on the delivery of housing units to the lower-income
groups through government financed housing programs / schemes.

The housing finance is a growing industry in countries such as Nepal, India, Pakistan, Malaysia and
UAE. Although there is a vast need for housing in Afghanistan, lack of formal long term loan
programs and financial institutions and banks that provide country wide long term mortgage loans
make the provision of mortgage loans / supply of affordable houses a strenuous challenge. Therefore a
majority of people rely on assistance from family, relatives and friends to fulfill their housing needs.

In terms of loan types, while countries like Malaysia, Pakistan and UAE offer both conventional and
Islamic mortgage loans, others like Afghanistan, Nepal and India predominantly offer conventional
loans. Considering the Muslim population in these countries, there is a vast potential for them to
diversity their products and penetrate further into Islamic mortgage loans.

Lastly, there is a mismatch between the demand and supply of housing units and the financial solutions
available in these countries to address them. This can be attributed to factors such as income level of
people, lack finance at reasonable rate, and legal and regulatory framework. In order to address the
challenges, the financial institutions, banks, and the relevant government agencies should work
together to provide finance at reasonable rate and also make sure that there is enough liquidity, easy
land titling process or simply saying an enabling environment.

36
 3. LITERATURE REVIEW

H. CASE STUDIES

In order to apply the information identified through the literature review of national mortgage
markets, AHG examined two case studies of specific housing projects in Afghanistan. Kabul-e-Jadid
and Aino Mina were selected for this purpose due to the size of the two housing projects and the
availability of their data.

1. K ABUL-E- JADID KABUL NEW CITY

Kabul New City (KNC) is a major housing project

located between Bagram Airbase and Kabul
International Airport and is approximately 1.5 times
larger than the existing Kabul City. The City is planned
to accommodate over 1.5 million people over a time span
of 15 years in three Phases of Development. The KNC is
managed by the state appointed body of Dehsabz -
Barikab City Development Authority (DCDA), which
is tasked with the overall implementation of the Kabul New City Master Plan through providing
quality housing, infrastructure, public amenities and industrial facilities to the mass population. KNC
is expected to be built through a favorable Public Private Partnership (PPP) arrangement between the
Afghan government and the private sector, with the private sector share of investment estimated to be
around 70% of the overall investment volume.

KNC is divided into two separate zones; the Dehsabz and Barikab. The Dehsabz zone is allocated for
residential, commercial and industrial development while the Barikab is planned to be the agricultural
economic zone that will function as a hub for agriculture and industrial development for not only
Kabul New City but all of Afghanistan. The First Phase development of Barikab Agriculture
Economic Zone (BAEZ) will include development of farms, business and commercial centers, poultry
and livestock centers, and creation of orchards and vineyards. According to an official at DCDA that
we interviewed, the standards and quality of the housing development will set KNC apart from all
other developments in the country. The development is to take place according to a set of strict Urban
Development Guidelines, norms, standards and measures that will ensure development of a standard
city that will provide quality service to its residents. The New City will provide and ensure
development of quality public facilities such as hospitals, schools, cultural centers, shopping malls,
recreation centers, and, most important of all, a business environment where jobs will be created for
people.

Given the importance of infrastructure for a modern city, DCDA has already developed plans on how
to provide electricity, water and other important infrastructural needs for KNC. The short-term and
temporary water resources for the new city will be supplied from Pol-e Charkhi, however, by
2016 the permanent water will be provided through Sayad. The electricity supply will be
provided from a closer substation located in Chimtala and ultimately through planned substation
at Tarakhil, Charikar and Baghdara.

37
 3. LITERATURE REVIEW

The First Phase of implementation is expected to create 80,000 Housing Units for 400,000 people.
The First Phase of the project has so far attracted $6.5 billion USD in private investment for the
upcoming 5 years. This Phase of the KNC includes development of 16 individual Parcels, of which
five have been so far awarded to private sector developers. International Home Finance Development
(IHDF), Omarzai Company Limited (OCL), Golden Special Equipment (GSE), Oxin Aryana
Construction Company (OACC) and Khawar Construction Company (KCC) have been awarded
contracts for development of Parcel 1, Parcel 2.1, Parcel 2.6, Parcel 2.2, and Parcel 2.8, respectively.
The developers are currently in the process of detailed development planning and design for respective
Parcels while DCDA is in the process of reviewing and certifying the plans, prior to awarding Notices
to Proceed (NTP). It is important to mention that these developers are required to finance the
development of the project independently or find funding sources for their projects. Based on our
interview with an official of the DCDA, the first phase development of the city is expected to start by
mid- 2014.

According to IHFD, the developer for Parcel 1, Phase One of KNC, the total amount of investment
for the Parcel 1 will reach up to $3 billion US dollars by the time the project is completed. Once
houses are built, IHFD plans to sell the houses through straight cash purchases, short-term
installments, and long-term mortgage loan mechanisms. IHFD expressed that they are cognizant that
it will be impossible to sell the 13,000 dwellings the plan to build on 100 % cash bases. According to
the representative we interviewed, the current challenges facing IHFD include the legal framework,
land titling, and general insecurity of the banks. He expressed that if someone defaults on their
loan we do not have the tools, legal framework to resolve the issue. This is a major concern for
developers because collecting on loans in a timely manner is seen as challenging and investors may lose
interest if there is no clear framework for how to collect loans if someone defaults. Realizing the
business risk in the current Afghanistan contexts, IHFD believes that if there is a mortgage program it
can reduce the perceived risk because the people will be able to pay on long term basis. An official at
DCDA stated that there has to be mortgage programs in place so that people can settle in the KNC.
Without a mortgage program it will be hard for people to buy houses and settle in the
modern dwellings. The official proposes that mortgage should be long-term so that many could
afford to live in the KNC.

38
 3. LITERATURE REVIEW

2. AINO MINA

The Aino Mina project is

one of the biggest housing
construction projects in
Kandahar. The project
started in 2004 on the
northern edge of the
Kandahar city, and is
projected to build up to
20,000 homes and
associated infrastructure
such as roads, water and
sewer systems, community
buildings, and schools. The
Aino Mina project site is
large, about 64 square
kilometers, and when fully
developed, it will be larger than the current city of Kandahar. The project has won two awards: the
Residential Project and Sustainable Project of the Year at the annual Middle East Architect Awards.

At present four thousand families live in Aino Mina and the plots sold are worth over 300 million USD
according to one of the Shareholders of the project. So far around 500 million USD has been
invested in this project), and down the road, the investment can jump to one billion USD the
shareholder stated. The demand has been on the rise in the last couple of years, but this year (2013)
the demand has declined in Kandahar in general and in Aino Mina in particular.

Up to now, all of the properties have been sold on a preconstruction sales basis where Aino Mina
receives 50% of the money when the land is sold to a buyer and they get the remaining 5o % once the
house is fully constructed. The buyers have to get the approval of Aino Mina prior to construction to
ensure that it meets all of the developments standards. It is important to note that the Aino Mina
project sells the land and the buyer has the freedom of choosing an independent construction company
or using The Aino Mina approved Construction Company to build their house.

Apart from the profit motive, the Shareholder we interviewed stated that the main objective for the
project is to bring ease and meet the demand of the citizens for new houses, introduce new
architecture, and a new city lifestyle. Since the Aino Mina project only sells land, a traditional house
mortgage product does not work for this project but rather a building mortgage loan directly to the
consumer will allow for many more people to purchase property in this development.

39
 3. LITERATURE REVIEW

I. IMPLICATIONS FROM LITERATURE REVIEW

Phased Development of Housing and Home Finance Sectors

Figure 1 summarizes the phases and select key activities that took place in Malaysia from the 1960s to the present day.

The literature review within the report reflects that each country has developed its home finance
industry over time through different mechanisms. However in each of the countries the government
has been a key enabler; establishing policies and institutions that encourage or build housing units and
provides access to home financing. Over time as the market is established, government involvement
reduces and the private sector becomes the main source of house building and finance provision.

Implication 1

Establishment of industry to meet housing needs with accessible finance requires government support
to establish a foundation. This can include government supported house building and provision of
finance typically through public institutions or government owned companies. This can also include
government back schemes to encourage the financial sector to lend.

As the industry grows and housing becomes established government policy needs to be reviewed and
updated to ensure long-term objectives such as provision of housing to low-income groups are met.

With increased private sector involvement the Government role moves away from being a provider of
services to a regulatory role ensuring needs of society are being met and appropriate legislative
frameworks in place to protect stakeholders.

40
 3. LITERATURE REVIEW

Challenges in Developing Housing and Home Finance Sectors

Figure 2: Barriers to meeting housing demand in Afghanistan

As reflected in the literature review, Afghanistan similar to other countries has a gap between demand
and supply of housing. This demand is particularly prevalent in low-income sections of society, which
have limited or no access to housing finance. The demand for housing in Afghanistan was estimated at
1.5 million housing units for 2014. However figure 2 reflects a number of barriers exist to meeting this
demand:

Supply of Housing Units typically low cost housing is less profitable for housing developers and
thus supply is inadequate

Inhibiting Legal and Regulatory frameworks perception in Afghanistan that property rights
cannot be enforced

Home Finance Availability two state banks offer short term loans of up to $1000

41
 3. LITERATURE REVIEW

Implication 2

The case studies of new developments with investments of $7 billion USD indicate that there will be an
increased supply of housing units. Successful uptake may require:

Mechanisms to provide housing to low income earners such as requiring developers to build a
minimum number of low cost housing, public housing schemes, subsidized housing finance, etc.

Updates to legal and regulatory framework to provide assurance to providers of finance that
property right in cases of default are clear and enforceable.

Housing finance products require to be aligned with housing cost ensuring available finance and
period of repayment are appropriate similar to other countries state may need to expand its
provision of housing finance and establish policies to encourage commercial lenders.

These activities should be developed taking into consideration that they are complementary and
impacts interconnect.

42
 4. METHODOLOGY

The data sources used and analysis performed for the primary research of this study are explained in
this section.

A. DATA SOURCES

1. HOUSEHOLD SURVEY

A household survey of 1959 homes was conducted across the following 5 provinces of Afghanistan:
Kabul, Balkh, Herat, Nangarhar and Kandahar. These enumerator-administered surveys examined
the public demand for mortgage products. A stratified random geo-spatial sampling strategy using
GPS technology (using probability proportional to population size) was used to identify small
geographical blocks (50 meter square). Our enumerators explained what mortgage is in plain and
simple language to ensure respondents understand the concept. Respondents were asked a total of
twenty questions that focused on public demand for mortgage loans, type i.e. interest based or non-
interest based monthly family income, households saving, and down payments. Questions were coded
into smart phones and the surveys were conducted using the phones.

Quality of data was controlled through time stamps and GPS stamps for each survey. This allowed us
to track the amount of time that each interviewer took to complete the survey and it allowed us to
pinpoint the location of each individual survey. Additionally, the surveys were automatically uploaded
to a cloud-based database, reducing data entry error and significantly reducing the time from data
collection to data analysis. Once the data collection phase was completed, all data was transferred into
SPSS. The following procedure was used for data cleaned up and for dealing with missing data:

1. Start to End Time (108 cases deleted): Pilot testing of the survey showed that between 2
minutes and 30 minutes was the acceptable range for administrating the survey. 47 cases were
deleted from the data set, which had start to end times that were negative (due to equipment
error), and start to end times of 0 or close to 0. 61 cases were deleted because they had start to
end times greater than 30 minutes; which indicates either equipment or enumerator error.
2. Age consideration (21 cases deleted): The study was designed to gather information for
respondents ages 18 and above. 12 cases were deleted because the respondents age was below
12. 9 cases were deleted because the age of the respondent was above 90 (i.e. 242), which
indicates data entry error.
3. Monthly Rent Amount (2 cases deleted): Two cases were deleted that showed monthly rent
amounts of 14 and 50, which indicates data entry error.

There was statistically significant trend in missing data especially, household income X2 (4) = 453.15,
p < .001; meaning that the missing data was not random. About 15 % of the cases had one or more
fields that people either refused to answer or were simply left blank. In order to maintain the statistical
power of our data, we used Multiple Imputations to calculate values for the missing data. Multiple
imputations technique is considered the fields most accepted mechanism for dealing with missing data.

43
 4. METHODOLOGY

a. SMART PHONE TECHNOLOGY

In late June IST Research began working with AHG to develop a data collection environment for the
Harakat Mortgage Market Assessment Survey aiming to grasp an understanding of the public interest
in loans and mortgages. IST Research is a veteran owned company operating out of Fredericksburg,
Virginia and specializes in finding solutions to technological problems in areas where technology and
energy resources are scarce.

IST Researchs past performance and projects provided the team with a head start in the development
and deployment of a dynamic, open source, scalable and non-proprietary system that covered data
collection, analysis and storage. IST Research was able to modify and develop on Googles Open Data
Kit to make the software functional with Dari and Pashto text and to mold the software to the needs of
AHG and Harakat. This software was loaded onto Android smartphones along with the predesigned
survey. The system developed for this project was meant to be reliable and redundant in order to
reduce the chance of data loss. As a result, copies of the data were saved both locally on the phones
Secure Digital (SD) card as well as sent to the online database automatically upon obtaining a data
connection.

The use of smartphones allowed for more accurate and dependable data collection. The GPS
coordinates of where the enumerators where conducting the surveys were collected and stored in the
database for future analysis and visual checks against predetermined locations. IST Research is proud
to provide AHG the ability to find solutions to problems at the edge where technology, connection,
and energy resources are scarce. The pictures below show screen shots of the time stamp, GPS stamp,
and the start of the survey as they appeared on smart-phones used by enumerators.
Time Stamp GPS Stamp Start of Survey

44
 4. METHODOLOGY

2. SATELLITE IMAGERY

To assist with their portion of the Harakat supported Mortgage Feasibility Survey, Digital Globe
gathered readily available geospatial data for five key cities in Afghanistan; Kabul, Mazar-, Jalalabad,
Herat, and Kandahar. With this data, Digital Globe performed analysis to derive grid samples which
would be then be used for verification in the population density survey.

For the Mortgage Feasibility Survey, Digital Globe applied proprietary semi-automated image
extraction and data creation models to existing Government and Digital Globe datasets in an effort to
identify population densities. The approach started with the National Oceanographic and
Atmospheric Administrations (NOAAs) Nightlights dataset, used to identify the extent of individual
cities based on satellite derived city lights. Using that boundary, Digital Globe incorporated Oak
Ridge National Laboratorys LandScan data to identify rough scale (~1km) population distribution
based on travel patterns, land cover, and other sub-national level census information.

By combining these input data sources with data derived from our high-resolution imagery (built up
extent, building footprints, etc.), Digital Globe was able to apply proprietary algorithms to produce an
assessed population density within 200m grid cells for each city. Delivered to AHG and IST-R, those
grid cells were used to plan and execute an on-the-ground operation to survey mortgage feasibility.

Digital Globe Analytics utilizes earth observation data and information from its satellite constellation
and applies it to various applications for decision support. When imagery is combined with additional
geospatial data sources and reliable on-the-ground information, Digital Globe has the expertise to
build, implement and analyze information that supports decision making for on-the-ground activities.
The company does this in many countries around the globe today that rely on the combination of
geospatial information and analysis to note historic trends, monitor near real-time changes, and
predict future activity.

45
 4. METHODOLOGY

3. IN-DEPTH INTERVIEWS & FOCUS GROUPS

In-depth interviews were conducted with representatives from 7 State and Private Banks including the
Da Afghanistan Bank; representatives from 13 relevant Government agencies including with Ministry
of Urban Development, Ministry of Justice, Ministry of Economy, Ministry of Finance, Ministry of
Commerce, Ministry of Justice, and Ministry of Refugees and Repatriation, Supreme Court, Kabul,
Mazar, Kandahar, Herat and Jalalabad Municipalities, Dehsabz- Barikab City Development
Authority (DCDA), and the former Mortgage and Reconstruction Bank; representatives from two
major donor; two experts of Mortgage and Islamic Banking; thirteen developers; and 12 property
dealers in five cities of Kabul, Herat, Mazar, Kandahar and Balkh. The interviews examined, needs
for long-term financing, mortgage loans, land titling, legal requirements, prerequisites, housing
programs, challenges and barriers. Purposive sampling strategy was used for the in-depth interviews
and the respondents were selected based on how much information they possessed. Three focus groups
were conducted with 17 individuals. The first focus groups was with citizens, second with government
agency officials, and the third focus group was with a mixed group of individuals including government
officials, bank employees, and common citizens. The focus groups a third source of information for
purposes of triangulation. A purposive sampling strategy was used for the focus groups.

Qualitative Data Analysis: interview and focus group data was analyzed using the following 3 steps.

Transcription: In each interview and focus group, participants were asked permission for being tape-
recorded. Some of the participants refused to be tape-recorded. Extensive notes were taken with
both tape recorded and non-recorded interviews. Following the interviews and focus groups, all
the data was transcribed.
Focus by question: Following the transcription, questions designed for the study were written down to
concentrate on the purpose of the evaluation and how results are used.
Coding: When meaningful segments of text were found in the transcript, a code was assigned. This
process continued throughout the data analysis until related themes were categorized, initial
coding was completed and a master list was developed. Different color code was used for each of
the bank, government agency and developer to distinguish one from the other and compare and
contrast responses.

46
 5. RESULTS
A. RESPONDENT DEMOGRAPHICS

The results of this research are presented in this section. Survey responses are provided first, followed
by findings organized according to the three objectives outlined by Harakat Management: 1) market
demand for housing finance, 2) assessment of the business environment, and 3) views, needs, and
requirements of the private sector.

1. CURRENT HOME OWNERSHIP

Graph 1. Home ownership Graph 2. Non-ownership arrangement

Occupying
for Free,
Don't Own 11%
665
34%
Giraw, 20%

Own Renting,
1294 67%
66%

Sixty six percent (66 %) of the 1959 respondents

Table 1. Home ownership
(1294 households) owned their own home. And the
City Own Don't Own overwhelming majority (95 %) acquired their home
Kabul 704 67% 350 33% either through personal financing or inherited it from
Mazar 126 67% 61 33% their families. This trend was not significantly
Herat 201 63% 118 37% different between the five cities (X2 (2) = 2.07, p =
Jalalabad 128 67% 62 33% .723, V = 032).
Kandahar 135 65% 74 35%
Out of the 34.7 percent (665 households) of
Table 2. Mechanism for acquisition of home respondents that did not own their home 67 percent
paid rent, 20 percent were in a giraw arrangement, and
How Property was Acquired Frequency
11percent occupied the dwelling for free. A very small
Purchased with Own Money 659 52% minority had some other type of arrangement and 2
Loan from Family or Friends 46 4% percent refused to answer.
Loan from Bank 5 0%
Table 3. Non-ownership arrangement of home
Inherited from Family 545 43%
Non-Ownership Arrangement Frequency
Gift 3 0%
Some other means 6 0% Renting 439 67%
Refused to Answer 15 1% Giraw 134 20%
Total 1279 100% Occupying for Free 73 11%
Some Other mechanism 3 0%
Refused to Answer 10 2%
Total 659 100%

47
 5. RESULTS
A. RESPONDENT DEMOGRAPHICS

2. SAMPLE SIZE, GENDER, & AGE DISTRIBUTION

In order to determine the demand for housing we surveyed 1959 households in five cities. We used a
stratified geo-spatial random sampling strategy based on relative urban population size for each city.

The table below outlines the number of respondents for each city and its relation to the cities
estimated population.

Table 4. Household sample

Target Stratified Population Actual Household Difference Between
Relative Population and
Actual Survey

Provincial Urban Percentage Households Percentage Difference

Capital Pop of of Sample
(1000)1 Population

Kabul 3188.3 67.81% 1054 53.80% -14.01%

Nangarhar 204.7 4.35% 190 9.70% 5.34%
Kandahar 385.7 8.20% 209 10.67% 2.46%
Heart 485.5 10.33% 319 16.28% 5.96%
Balkh 437.3 9.30% 187 9.55% 0.24%
Total 4701.5 100.00% 1959 100.00% 0.00%
1From CSO 2011-2012

Eighty four percent (84 %)of our respondents were male and (16 %) were female, and which is
common in household surveys in Afghanistan that result from door knocking. The largest number
of female respondents was in Mazar (39 %) and the lowest number was in Kandahar (3 %).

A normal distribution of age ranges was observed in our respondents, with 67 % below age 40.
Table 5. Respondents age range
Age Range

City 18 - 21 22- 25 26 - 30 31 - 40 41- 50 51 - 60 Above 61 Total

Count 153 147 136 215 202 116 85 1054
Kabul
% City 15% 14% 13% 20% 19% 11% 8% 100%
Count 11 30 22 54 28 25 17 187
Mazar
% City 6% 16% 12% 29% 15% 13% 9% 100%
Count 24 59 74 81 43 29 9 319
Herat
% City 8% 19% 23% 25% 14% 9% 3% 100%
Count 53 26 35 36 25 14 1 190
Jalalabad
% City 28% 14% 18% 19% 13% 7% 1% 100%
Count 20 24 47 64 41 5 8 209
Kandahar
% City 10% 12% 23% 31% 20% 2% 4% 100%
Count 261 286 314 450 339 189 120 1959
Total
% City 13% 15% 16% 23% 17% 10% 6% 100%

48
 5. RESULTS
A. RESPONDENT DEMOGRAPHICS

3. EDUCATION

The majority (68 %) of our Graph 3. Respondents educational attainment

respondents education level

was between 6-14 years of No Education 6th Grade
schooling. There was a weak
relationship, X2 (24) = 103.37, 366
Doctorate 455
p < .001, V = 0.116, between Masters 1
the level of education and the 40

respondents city. Kandahar 16th Bachelors 214

(28 %) and Mazar (25 %) had
the highest levels of respondents 150
710
with no education and Herat
14th (Associates)
(11 %) and Jalalabad (16%) had 12th Grade
the lowest levels of respondents
with no education.

Table 6. Respondents educational attainment

Education Level

6th 12th 14th 16th 18th

City PhD No Education
Grade Grade (Associates) (Bachelors) (Master)

Count 238 388 79 122 23 0 198

Kabul % 23% 37% 8% 12% 2% 0% 19%
City
Count 44 57 18 11 5 1 46
Mazar % 24% 31% 10% 6% 3% 1% 25%
City
Count 114 126 16 19 3 0 34
Herat % 37% 40% 5% 6% 1% 0% 11%
City
Count 32 75 21 25 5 0 31
Jalalabad % 17% 40% 11% 13% 3% 0% 16%
City
Count 27 64 16 37 4 0 57
Kandahar % 13% 31% 8% 18% 2% 0% 28%
City
Count 455 710 150 214 40 1 366
Total % 24% 37% 8% 11% 2% 0% 19%
City

49
 5. RESULTS
A. RESPONDENT DEMOGRAPHICS

4. EMPLOYMENT

Graph 4. Respondents employment

Retired, 4%

Government
80 Employee, 21%
419
Unemployed,
32% 629 Employee of
87 Donor Agency,
4%

744
Employed by
Private Sector or
Civil Society,
38%

A large portion (38 %) of the respondents was employed by the private sector or civil society
(NGOs) with an aggregate unemployment rate of 32. There was a weak relationship, X2 (16) =
272.42, p < .001, V = 0.186, between employment status and the respondents city. Mazar (65 %) had
the highest level of unemployed and Kandahar (25 %) had the lowest levels of respondents reporting to
be unemployed.
Table 7. Respondents employment
Employment Status

Private
Government Donor Sector or
City Unemployed Retired Total
Employee Agency Civil
Society
Count 234 12 472 289 47 1054
Kabul
% City 22% 1% 45% 27% 5% 100%
Count 32 5 24 122 4 187
Mazar
% City 17% 3% 13% 65% 2% 100%
Count 47 42 117 99 14 319
Herat
% City 15% 13% 37% 31% 4% 100%
Count 45 1 76 66 2 190
Jalalabad
% City 24% 1% 40% 35% 1% 100%
Count 61 27 55 53 13 209
Kandahar
% City 29% 13% 26% 25% 6% 100%
Count 419 87 744 629 80 1959
Total
% City 21% 4% 38% 32% 4% 100%

50
 5. RESULTS
B. MARKET DEMAND FOR HOUSING FINANCE

Graph 5. Loan-length preference Graph 6. Interest in loan Graph 7. Loan-type preference

Our survey of 1959 households across the five 99 Graph 8. Interest in loan by city
cities shows an overwhelming demand for
mortgage loans. The majority of the respondents
Yes No
(83 %) reported that they are interested in getting
a long-term, non-interest based (sharia-
compliant), loan for purchasing new homes. 955
99
40 21 68
There is a significant but weak association
220
between city and demand for mortgage, X2 (4) = 147 169 141
132.61, p < .001, V = 0.26; with the highest Kabul Mazar Herat Jalalabad Kandahar
demand in Kabul and lowest in Kandahar. There
is significant but weak association between city 35
Graph 9. Loan-length preference by city
and length of loan, X2 (4) = 64.27, p < .001, V =
0.18; with Herat and Jalalabad more open to Short-term
short-term loans. There is significant and Long-term
moderate association between city and type of 1019
loan, X2 (4) = 132.61, p < .001, V = 0.40. In 45
22 27 20
comparison to other cities, Mazar is more open to
274 189
interest based loans. Only 47 % of respondents in 165 163

Mazar preferred non-interest based loans. In Kabul Mazar Herat Jalalabad Kandahar
Kabul, Herat, Jalalabad, and Kandahar,
preference for interest-based loans is almost zero. Graph 9. Loan-type preference by city
3

Although, Chi-Square tests showed significant Either

association between the five cities and the Non-Interest

demand for mortgage products, most of the Interest

1046
associations were very weak. For practical 15
purposes, we can assume general uniformity in 67 4 9

views. The small differences do not warrant 89

298
186 197
5 31 6 0 3
significantly different mortgage products.
Kabul Mazar Herat Jalalabad Kandahar

51
 5. RESULTS
C. ASSESSMENT OF BUSINESS ENVIRONMENT
1. INVESTMENT INTO SECTOR BY DEVELOPERS
Graph 10. Land area under development for residence
Understanding the current investment made in
the housing market is crucial to understanding
the market potential for mortgage products. Our
review of residential development data from the
Ministry of Urban Development Affairs (MUDA)
for the five cities shows that there is an estimated
115,533 jeribs of land area that is being developed
into sharaks, or residential dwellings, in the cities
of Kabul, Mazar, Herat, Jalalabad, Kandahar,
and their surrounding districts. In order to get an
estimate of the potential market price of the
investment made in these sharaks we used the
following formula:
Market Value =
(Unit Cost of Property) X (Number of Units)
Table 8. Estimated market value of residential construction
Estimated Market Value of Residential Construction
Units Price/Unit Market Value (USD)
Known Jeribs and Plots 29,427 $80,000.00
Apartments 12,196 $115,000.00
Estimated Plots 143,552 $80,000.00
Total 185,175 $15,240,860,000.00
Afghanistan does not have a housing price index
(HPI) to track the price of residential housing in
the country and the developers we interviewed
were not forthcoming with regards to their
investment, the estimated market value of their
properties, and the number of dwellings they
were planning on building. Furthermore the
MUDA data we reviewed was incomplete with
only 33 percent (or 26 developments out of the 80
developments for houses) listing both the total
area in jeribs and the number of plots (numra) for
the development. In order to get an estimated
market value of the investment we used the
following approaches:
We interviewed representatives of both
townships and property dealers to get an
estimated average selling cost of a 3-bedroom
property. This value ranged from $35,000 to
$140,000. There was overall concurrence
between prices we obtained from townships
and property dealers. For the purposes of this
analysis we picked $80,000.00 as the average
house price for illustrative purposes.
Ten percent of developments were apartment
complexes. For these units we used an
estimated market value of $115,000.00 per
unit based on the same strategy.
We applied the average of plots per jerib
(1.62 plots / jerib) from the set of records
with full data (taking out outliers and missing
data) to fill in the unknown
plot fields. Using this approach
we estimate the total market
$2,354,160,000.00
value of single-family homes is
at 13.8 billion USD, and for
$1,402,540,000.00 apartments it is 1.4 billion
USD, for a combined market
$11,484,160,000.00
value of 15.2 billion USD in
residential construction within
the five cities.
52
 5. RESULTS
C. ASSESSMENT OF BUSINESS ENVIRONMENT

The table in this page, and the next, presents information on residential developments that we
obtained from MUDA. The residential development projects are divided into province, district, name
of the shahrak, and the type of development. Units depict either house plots or apartment units; values
of units that are in red are based on calculations using the average of plots (numra) per jerib. N/A
indicates information that was either not present or does not apply to the particular field.

Table 9. List of residential developments

AVG Unit Total Price

Township Name Type Province District Jerib Units Price USD USD
1 Ahmadshah Masood House Balkh Mazar City 3500 5670 $80,000.00 $453,600,000
2 Ali Abad House Balkh Mazar City 2848 4612 $80,000.00 $368,960,000
3 Amiri 1 House Balkh Mazar City 1312 2125 $80,000.00 $170,000,000
4 Amiri 2 House Balkh Mazar City 1270 2058 $80,000.00 $164,640,000
5 Azadi House Balkh Mazar City 7285 11802 $80,000.00 $944,160,000
6 Etifaq House Balkh Mazar City 178 535 $80,000.00 $42,800,000
7 Farid Ilmi House Balkh Mazar City 1089 1800 $80,000.00 $144,000,000
8 Ghazanfar House Balkh Mazar City 500 810 $80,000.00 $64,800,000
9 Gulistan House Balkh Mazar City 1000 3731 $80,000.00 $298,480,000
10 Hazrat Omar Faroq House Balkh Mazar City 2800 4017 $80,000.00 $321,360,000
11 ImamSajad House Balkh Mazar City 1241 2010 $80,000.00 $160,800,000
12 Jafaria House Balkh Mazar City 46 73 $80,000.00 $5,840,000
13 Kamal Nabizada House Balkh Mazar City 500 417 $80,000.00 $33,360,000
14 Karte Ali Chopan House Balkh Mazar City 196 318 $80,000.00 $25,440,000
15 Khalid Ibn Walid House Balkh Mazar City 5000 8100 $80,000.00 $648,000,000
16 Khatam-ul Anbia House Balkh Mazar City 600 688 $80,000.00 $55,040,000
17 Mawlanai Balkh House Balkh Mazar City 1000 1720 $80,000.00 $137,600,000
18 Mayar Meena House Balkh Mazar City 300 486 $80,000.00 $38,880,000
19 Nasrat Abad House Balkh Mazar City 200 324 $80,000.00 $25,920,000
20 Porozhe Motahid House Balkh Mazar City 887 489 $80,000.00 $39,120,000
21 Qalai Mansoor House Balkh Mazar City 200 350 $80,000.00 $28,000,000
22 Qesmat U House Balkh Mazar City 604 978 $80,000.00 $78,240,000
23 Rasol Barat House Balkh Mazar City 261 585 $80,000.00 $46,800,000
24 Saighani House Balkh Mazar City 200 3243 $80,000.00 $259,440,000
25 Sakhi Abad House Balkh Mazar City 2574 4170 $80,000.00 $333,600,000
26 Shohada 1 House Balkh Mazar City 900 1458 $80,000.00 $116,640,000
27 Shohada 2 House Balkh Mazar City 1156 1873 $80,000.00 $149,840,000
28 Shohadaye Mazar House Balkh Mazar City 1140 1874 $80,000.00 $149,920,000
29 Zainabia House Balkh Mazar City 1600 1219 $80,000.00 $97,520,000
Total Balkh 40387 67535 $5,402,800,000
30 Ariana House Herat N/A 1700 2755 $80,000.00 $220,400,000
31 Aslami House Herat Herat City 400 648 $80,000.00 $51,840,000
32 Aziz Abad House Herat Aziz Abad 1354 2754 $80,000.00 $220,320,000

53
 5. RESULTS
C. ASSESSMENT OF BUSINESS ENVIRONMENT

33 Bandi Salma House Herat Herat City 1009 1635 $80,000.00 $130,800,000
34 Khowaja Shaikh Ahmad House Herat Anjil 711 1152 $80,000.00 $92,160,000
35 Kowsar House Herat Kowsar 500 810 $80,000.00 $64,800,000
36 Mahajirin Taqi Naqi House Herat N/A 6061 9821 $80,000.00 $785,680,000
37 Mai Forosh House Herat Herat City 1000 944 $80,000.00 $75,520,000
38 Mohajirin House Herat Herat City 42 10708 $80,000.00 $856,640,000
39 Qalin Bafi House Herat Herat City 1000 1620 $80,000.00 $129,600,000
40 Sayed Jamaludin House Herat Herat City 660 1700 $80,000.00 $136,000,000
Total Herat 14437 34547 $2,763,760,000
41 26 Tajir House Kabul Kabul City 111 1790 $80,000.00 $143,200,000
42 Aiyaran House Kabul N/A 2000 3241 $80,000.00 $259,280,000
43 Barikab Mahajirin House Kabul N/A 1075 1538 $80,000.00 $123,040,000
44 Chel Dokhtaran House Kabul ChaharAsiab 613 400 $80,000.00 $32,000,000
45 Darwishan Apartment Kabul 622 1008 $115,000.00 $115,920,000
46 Dawlatzai Kuchi House Kabul Butkhak 1080 2058 $80,000.00 $164,640,000
47 Deh Qlander Deh Dana House Kabul N/A 60 97 $80,000.00 $7,760,000
48 Ghaznawyan House Kabul Kabul City 150 243 $80,000.00 $19,440,000
49 Habib House Kabul Kabul City 180 292 $80,000.00 $23,360,000
50 Haji Adrogul House Kabul Kabul City 80 164 $80,000.00 $13,120,000
51 Hashmat Ghani House Kabul N/A 35 56 $80,000.00 $4,480,000
52 Heels House Kabul De Sabz 375 608 $80,000.00 $48,640,000
53 Kamyab House Kabul Kabul City 450 455 $80,000.00 $36,400,000
54 Karte Nejat Mena House Kabul Kabul City 200 446 $80,000.00 $35,680,000
55 Mahdia House Kabul De Sabz 458 742 $80,000.00 $59,360,000
56 Mahdie House Kabul De Sabz 485 786 $80,000.00 $62,880,000
57 Marjan House Kabul Kabul City 700 1134 $80,000.00 $90,720,000
58 Mohajerin Mamozai House Kabul Bagrami 650 1053 $80,000.00 $84,240,000
59 Mujtama Rahaieshi House Kabul Kabul City 24 55 $80,000.00 $4,400,000
60 Munshi Mir Ghulam House Kabul Kabul City 1100 2111 $80,000.00 $168,880,000
61 Nawroz Abad House Kabul Bagrami 980 673 $80,000.00 $53,840,000
62 Nejat Mena House Kabul Kabul City 1435 1255 $80,000.00 $100,400,000
63 Omid Sabz House Kabul Kabul City 1000 2140 $80,000.00 $171,200,000
64 Omid Sabz Elhaqi House Kabul Kabul City 982 1503 $80,000.00 $120,240,000
65 Onix Apartment Kabul Kabul City 133 252 $115,000.00 $28,980,000
66 Rehaishi Estiqlal Apartment Kabul Kabul City N/A 1600 $115,000.00 $184,000,000
67 Rostam Haidery Apartment Kabul 23 37 $115,000.00 $4,255,000
Shakar
68 Safai Chamtala House Kabul Derah 240 648 $80,000.00 $51,840,000
69 Safai Sabz House Kabul Paghamn 285 692 $80,000.00 $55,360,000
70 Said Jamaludin House Kabul Bagrami 558 904 $80,000.00 $72,320,000

54
 5. RESULTS
C. ASSESSMENT OF BUSINESS ENVIRONMENT

71 Salim Karwan Apartment Kabul Kabul City N/A 490 $115,000.00 $56,350,000
72 Sayd Abad House Kabul Kabul City 1600 2592 $80,000.00 $207,360,000
73 ShadabZafar Apartment Kabul Kabul City N/A 6000 $115,000.00 $690,000,000
Shahid Haji Nazir
74 Meena House Kabul Bagrami 800 1465 $80,000.00 $117,200,000
75 Shahrak Aria Apartment Kabul Kabul City N/A 1500 $115,000.00 $172,500,000
76 Shahrak Sabz Apartment Kabul De Sabz 125 203 $115,000.00 $23,345,000
77 Shahrak Telai Apartment Kabul Kabul City N/A 1106 $115,000.00 $127,190,000
78 Shohada Malolin House Kabul N/A 167 693 $80,000.00 $55,440,000
79 Telai House Kabul N/A 500 810 $80,000.00 $64,800,000
Tosie Monshi
80 Mirghulam 1 House Kabul N/A 212 344 $80,000.00 $27,520,000
Tosie Monshi
81 Mirghulam 2 House Kabul N/A 288 467 $80,000.00 $37,360,000
Total Kabul 19777 43651 $3,918,940,000
Kandahar
82 Aino Mina House Kandahar City 1280 20000 $80,000.00 $1,600,000,000
Kandahar
83 Ayub Khan House Kandahar City 20 32 $80,000.00 $2,560,000
Kandahar
84 Dawood Mina House Kandahar City 60 97 $80,000.00 $7,760,000
Kandahar
85 Estiqlal Mina House Kandahar City 300 486 $80,000.00 $38,880,000
Kandahar
86 Naib Sultan House Kandahar City 132 2193 $80,000.00 $175,440,000
Total Kandahar 1792 22808 $1,824,640,000
DashtSar
87 Ghazi Amanullah House Nangarhar shahi 4950 8019 $80,000.00 $641,520,000
Jalaabad
88 Said Jamaludin Afghan House Nangarhar City 182 298 $80,000.00 $23,840,000
89 Shaikh Mesri House Nangarhar District 5134 8317 $80,000.00 $665,360,000
Total Nangarhar 10266 16634 $1,330,720,000

Grand Total 86,658 185,175 $15,240,860,000

Note: It should be noted that the official data that we obtained from MUDA is not 100% reliable. For example, Aino
Mina is listed as 400 jeribs with MUDA while based on our interview with the developer the property is 1280 jeribs.

55
 5. RESULTS
C. ASSESSMENT OF BUSINESS ENVIRONMENT

2. INCOME PROFILE a. ESTIMATED MONTHLY INCOME & SAVINGS

Table 10. Estimated household monthly income
We asked participants to report their
Monthly Income Range Frequency Percent estimated household monthly income.
Less than 5000 Afs 101 5.2 The majority of respondents reported a
5,001 to 15,000 Afs 730 37.3 monthly income between 5,000 and
15,001 to 25,000 Afs 527 26.9 50,000 Afghani per month. Only 1
25,001 to 50,000 Afs 477 24.3 percent of the participants stated that
50,001 to 100,000 Afs 96 4.9 they make above 100,000 Afghani per
Above 100,000 Afs 28 1.4 month.
Total 1959 100
There is a significant but weak
Table 11. Monthly income distribution association between city and estimated
Income Level (Percentage) monthly income, X2 (20) = 135.17, p <
City Lower Lower Upper Upper .001, V = 0.13. This indicates that the
Middle Middle income profile is not drastically different
Less 5K to 25K 25K to 100K Above
5K 100K
between cities, although Mazar and
Kabul 4.5 67.5 26.8 1.2 Kandahar do seem to have a larger
Mazar 7.0 48.1 44.9 0.0 upper middle class population.
Herat 6.6 75.9 16.9 0.6
The majority of the respondents (93
Jalalabad 6.3 63.1 28.4 2.1 percent) reported that they saved 5,000
Kandahar 3.8 44.5 47.3 4.3 or less Afghanis (71 percent) or between
Total 5.3 64.3 29.3 1.1 5,000 and 15,000 Afghanis (22 percent).

b. MONTHLY RENT 49% Graph 11. Average rental rates

Out of the 1959 households that were 35%

surveyed, 439 households rented their

dwelling. Out of this group, 431
10%
reported how much rent they pay per 1% 4% 1%
month. The majority of households (85
percent) pay 10,000 Afs or less per 0 to 999 1,000 to 5,001 to 10,001 to 20,001 to Over
5,000 10,000 20,000 50,000 50,000
month for rent. Ten percent pays
between 10,000 and 20,000 Afs, four
Table 12. Monthly rent distribution
percent pays between 20,000 and 50,000
Monthly Rent (Percentage)
Afs, and only one percent pays rent in
excess of 50,000 Afs. City Less 1K to 10K to 50K Above
1K 10K 50K
There is a significant but weak Kabul 0.0 81.9 15.7 2.4
association between city and monthly Mazar 10.3 82.7 6.9 0.0
rent, X2 (20) = 34.23, p < .05, V = 0.14. Heart 1.5 89.5 6.0 3
This indicates that rent prices are not Jalalabad 1.9 80.7 13.4 3.8
drastically different between cities. Kandahar 3.4 86.2 10.3 0.0

56
 5. RESULTS
C. ASSESSMENT OF BUSINESS ENVIRONMENT

c. MORTGAGED PROPERTY (GIRAW) & ESTIMATED DOWN-PAYMENT

Table 13. Estimated monthly giraw 134 out of the 1959 households that
Giraw Amount (Afs) Frequency Valid Cumulative were surveyed had a giraw
Percent Percent arrangement. A giraw arrangement
is where a property owner is in
0 to 49,999 7 5.2 5.2
need of money and decides to
50,000 to 100,000 11 8.2 13.4
mortgage his property for a fixed
100,001 to 200,000 38 28.4 41.8 time and price. The person paying
200,001 to 400,000 55 41 82.8 the giraw amount gets full dwelling
400,001 to 500,000 16 11.9 94.8 rights to the property for an agreed
Above 500,000 7 5.2 100 time period. Upon return of the
Total 134 100 money by the property owner, the
Table 14. Estimated monthly giraw distribution by city possession of the property shifts
City Less 50K - 100K - 200K - 400K - Above
back to the owner. Almost 83
50K 100K 200K 400K 500K 500K percent of respondents reported
Kabul 3 10 29 5 5 5 that they had paid 400,000 Afs or
Mazar 1 0 1 7 5 0 less for their giraw arrangement.
Herat 0 1 4 26 2 1 Twelve percent had paid 400,000
Jalalabad 1 0 0 1 0 0 to 500,000 Afs. Only 5.2 percent
Kandahar 2 0 4 16 4 1 had paid above 500,000 Afs.
Total 7 11 38 55 16 7
There was a significant association between city and the giraw amount, X2 (20) = 77.15, p < .001, V =
0.38; but this was due to the small sample for giraw arrangements (134) and only 2 giraw data points
for Jalalabad.

Table 15. Estimated down-payment ability (amount) by city

City Less Percent 250 - Percent 500K - Percent 750K - Percent Above Percent Total
250K City 500K City 750K City 1,000K City 1,000K City
Kabul 736 70% 220 21% 54 5% 23 2% 21 2% 1054
Mazar 123 66% 39 21% 12 6% 12 6% 1 1% 187
Herat 269 84% 36 11% 7 2% 6 2% 1 0% 319
Jalalabad 141 74% 37 19% 5 3% 4 2% 3 2% 190
Kandahar 131 63% 61 29% 11 5% 4 2% 2 1% 209
Total 1400 71% 393 20% 89 5% 49 3% 28 1% 1959

When we asked respondents how much they would be willing to put down for a new home that would
cost 5,000,000 Afghanis. The majority (91.5 %) of the respondents reported that they would only be
able to pay up to 10% (500,000 Afs) for down payment on a house.

There was a significant but very weak association between city and the amount of down payment
respondents were willing to pay, X2 (16) = 59.62, p < .001, V = 0.09. This indicates that capacity for
down payment does not change drastically between cities.

57
 5. RESULTS
C. ASSESSMENT OF BUSINESS ENVIRONMENT

3. AFFORDABILITY

A major objective of this study was to gain

a sense of income profile and analyze the
viability of offering mortgage products in
these five major cities. The general
formula for a front-end ratio of gross
income vs. monthly mortgage amount is
(monthly salary * 0.28). Meaning that
more than 28 percent of a persons
monthly salary should not go towards a
mortgage.
For a majority of our respondents their
monthly income was below 50,000 Afghani
per month. Which means that in order to
reach the majority of the Afghan
population, a conservative estimate is that
the monthly mortgage should be below
14,000 Afghani per month. It should be
noted that monthly income is a sensitive
subject and it is likely that most
respondents reported low figure.
Front-End Ratio
The front-end ratio is the percentage of a persons
yearly gross income dedicated toward paying a
mortgage each month. Mortgage payment
consists of four components: principal, profit or
interest, taxes and insurance (often collectively
referred to as PITI). A good rule of thumb is that
PITI should not exceed 28% of your gross
income. However, many lenders let borrowers
exceed 30%, and some even let borrowers exceed
40%. To calculate the maximum monthly debt
based on this ratio, multiply the persons gross
monthly income by 0.28. For example, if a person
earns $1,000 per month, their maximum monthly
mortgage payment should not exceed $280.
Source www.investopedia.com
Mortgage Calculation Example

Triangulation with the distribution of Afghani US Dollar

monthly rent confirms that most families House value 4,500,000 79,858
Down-payment 450,000 7,986
pay between 10,000 to 15,000 Afghanis
Loan amount 4,050,000 71,872
when they rent. However, if a more liberal Monthly payment 26,728 474
approach is adopted, targeting those with Total profit 2,364,770 41,966
income of 75,000 per month and using .40 Total cost of loan 6,414,770 113,838
instead of .28, the monthly mortgage Annual profit1 rate 5%
amount can be as high as 30,000 Afs per Loan period in
month. The optimal down payment rate years 20
seems to be around 500,000 AFS, which is Number of
corroborated with what is usually paid as payments 240
Start date of loan 1/1/2014
Giraw.
Loan end date 12/31/2034
The example on the right serves illustrative 1. Profit is used here instead of interest, based on an
Islamic co-ownership model in which the customer would
purposes to show monthly payments of pay a "rental fee" as a profit for the use of mortgage
26,728 Afghanis for a 4.5 million Afghani company's share of the house.
house with a 10% down-payment and a
5% profit rate on an Islamic co-ownership
mortgage program.

58
 5. RESULTS
D. IMPLICATIONS FROM THE SURVEY

83% interested
in long term
sharia compliant
loans

68% had school SURVEY Average house

price
level education
FINDINGS approximately
$80,000

88.5% monthly
income between
5,000 to 10,000
AFS
Figure 1. Select findings of household survey

The survey findings have a number of implications that need to be considered for the development of
housing and home finance in Afghanistan. Implications from select findings are noted below.

1. ISLAMIC HOME FINANCE

One of the clear findings of the report was the significant interest in long term non-interest based
(sharia-compliant) home finance. With a religious make up in Afghanistan that is 99% Muslim1, it is
unsurprising that 83% of respondents indicated interest in Islamic home finance.

Implication 1
Current housing finance options in Afghanistan are predominantly conventional loans. A number of
actions would require to be taken to establish an Islamic home finance industry. (Page 73 further
expands on Islamic home financing implications).

2. HOUSE PRICES AND AFFORDABILITY

In assessing the business environment the report estimated the average price of a house to be $80,000
(~ 4,500,000 Afs) and the average price of an apartment to be $115,000 (~6,500,000 Afs). From the
survey 88.5% of respondents had a monthly income between 5,000 and 50,000 Afghani. In
considering a down-payment the majority of respondents said they would be willing to pay 10% of the
house price.

1 The World Factbook, Central Intelligence Agency, www.cia.gov/ /library/publications/the-world-factbook/

59
 5. RESULTS
D. IMPLICATIONS FROM THE SURVEY

The findings indicate that in order to reach the majority of the population a conservative estimate of
the monthly mortgage payments should be below 14,000 Afs. However with the current average house
prices the required monthly mortgage payment would be over 26,000 Afs. This is based on an average
house price of 4,500,000 Afs, 10% down payment, loan period of 20 years and a profit rate or interest
rate of 5%. (Note this assumes the availability of housing finance products not currently available in
Afghanistan.)

Implication 2
There is a significant gap between what the majority of the population can afford for mortgage
payments and what would be required based on house prices. Several options will need to be
considered to address this gap; these could include:
Help to buy schemes such as government equity loans to buyers, and government mortgage
guarantee schemes.
Government supported companies / institutions providing finance either directly to
householders or indirectly through local banks.
Government support to have lower cost housing either through government built housing or
through requirements for developers to include a set amount of lower cost housing in
developments.

3. CONSUMER PROTECTION

Home finance products can be complex and typically create a long-term contractual obligation for
customers. Even in countries that have well educated consumers with experience in a developed
housing and home-financing sectors there is need for consumer protection so that people are not
cheated out of their money by lenders. The majority of survey respondents (68%) had an education
level that was limited to school level.

Implication 3
Measures will be required to be put in place in order to provide assurance there will be an
adequate level of protection in place for consumers, this may include:
An industry regulator that establishes guidelines on selling, minimum documentation,
monitors compliance, and considers and adjudicates complaints.
Legislation covering home mortgage disclosures - the amount and type of information lenders
must provide so that loan terms and conditions are understood.
Consumer education and awareness campaigns that explain home finance: characteristics,
obligations, consumer rights, etc.

60
 5. RESULTS
E. VIEWS, NEEDS, & REQUIREMENTS OF THE PRIVATE SECTOR

1. PROVISION OF MORTGAGE PRODUCTS

There was an overall agreement between all sector

representatives that the provision of mortgage products is a
necessity that will lead to economic growth because of the size of
the housing market, the huge public demand, and because the
housing market is connected to so many different sectors. AHG
asked bank representatives specifically about their views in
regards to investment in mortgage products. All bankers stressed
the importance and necessity of mortgage products. Words such
as important, necessity, crucial, and conducive appeared
repeatedly in interviews. Bankers were very cognizant of the
tremendous market demand for mortgage products. They also
stressed that mortgage products will be very conducive to economic growth of the country and create
jobs. The creation of partnerships between different sectors, especially between banks and developers,
appeared in several interviews.

Developers, particularly, emphasized the need for banks to step in

and meet the public demand for mortgage products. Developers
emphasized the need for low-interest long-term loans. Their view
was that the few options that currently exist for loans that can be
used towards the purchase of residential property are short term
and very high interest products that do not make the product
feasible, or attractive, for the majority of the population.

We asked government officials

specifically how they plan to meet the
growing demand for housing. The
response from our participants was
almost unanimous. Mortgage products
were seen as the most feasible way of
meeting the increasing demand for
housing nationwide. The government officials that we interviewed were of the opinion that the
government is ready and willing to support a robust national mortgage program.

NOTE: The word collages that are used in this page and the following pages are the actual codes
that resulted from our analysis of the expert interviews. The relative sizes of the different words are
used for the purposes of showing level of importance each concept/word had for our participants. The
relative size of the different words represents accurately the number of times each concept was
emphasized by our interview participants. Therefore, the more a word/concept was mentioned by our
interviewees the bigger the size of the word in the word collage.

61
 5. RESULTS
E. VIEWS, NEEDS, & REQUIREMENTS OF THE PRIVATE SECTOR

2. NEEDED PREREQUISITES FOR DEVELOPING MORTGAGE PRODUCTS

AHG asked interviewees from the different sectors

what prerequisites they need for developing
mortgage products. The overwhelming consensus
was more supportive laws and a more effective
court system. Participants felt that current laws
were either non-supportive, too vague, or did not
address the real challenges. Our analysis is that
rather than the laws; the enforcement of laws is the
primary challenge. For a full legal analysis please
refer to page 68. Other areas of emphasis for an
enabling environment included better security, a
healthy economy and greater employment to enable people to afford a mortgage products and greater
capacity within banks. This last point was of particular interest as many of the experts we interviewed
expressed the lack of capacity and experience within banks with mortgage loans.
3. CHALLENGES AND BARRIERS TO INVESTING IN MORTGAGE PRODUCTS

The experts we interviewed echoed many similar themes from the needs and pre-requisites when we
asked them what were some of the major challenges and barriers to starting mortgage products. The
biggest two areas of challenge highlighted by our experts from banks, developers, and government
representatives were: 1) an ineffective court system and 2) lack of law enforcement. The courts were
viewed as both corrupt where enforcement of laws were selective, and bureaucratic where repossession
of property in case of default was almost impossible for banks.

The lack of a unique identification system for individuals, and the lack of an effective postal address
system were highlighted as major difficulties. The bank representatives felt without a clear tracking
system it would be very risky for them to provide long term loans. Other areas that were emphasized
included the lack of a clear financing mechanism for banks. Bankers felt their current financing
structure was not sufficient to provide large-scale mortgage products. Lack of capacity in dealing with
mortgage products and a clear payment collection mechanism were also mentioned by several of our
participants as distinct challenges that
banks were faced with.

According to the government

representatives and developers we
interviewed, the cost of purchasing a house
coupled with a weak economy, high
unemployment, and the current interest
rates for loans, were barriers that made
owning a house very difficult for a major
portion of the society.

62
 5. RESULTS
E. VIEWS, NEEDS, & REQUIREMENTS OF THE PRIVATE SECTOR

4. RECOMMENDATIONS OF THE PRIVATE SECTOR

We asked participants to suggest recommendations for overcoming the challenges that they identified
in the previous question. Unlike the previous questions, there was a distinctive difference between the
responses provided by representatives of banks, government, and developers that we interviewed.

Representatives of banks that we

interviewed focused on two major areas as
solutions to creating an enabling
environment. Improvement of the current
mortgage laws continued to emerge as one
of the most important interventions
recommended for development of an
enabling environment for mortgage
products. Additionally, partnerships with
developers was recommended as a way for
banks to overcome some of their financial limitations and work jointly to provide a mutually beneficial
product. Mechanisms to track individuals, reform of the court system, securing long term financing for
banks, and provision of soft loans (low interest loans were other important recommendations made by
bank representatives. There was also a
recommendation for greater autonomy for banks
with noninterference from the government.

Recommendations by the development sector

representatives that we interviewed mainly
focused on three areas. The most prominent
recommendation was their insistence that banks
provide lower interest rate loan products than
what is available in the market currently.
Additionally, the need for greater security and for alleviating the unemployment rates were also
highlighted as important factors for creating an enabling environment for the mortgage industry.

Representatives of the government that we interviewed, like the bankers, highlighted the need for
better laws and better enforcement of existing laws. Their contention was that laws are not equally
enforced. They were also very vocal about the
need to improve and support state owned
enterprises. For mortgage products this
translates into government housing projects.
Similarly, government representatives were the
only group that expressed the need for
provision of subsidies for the development of
mortgage products.

63
 VI. RESULTS
E. VIEWS, NEEDS, & REQUIREMENTS OF THE PRIVATE SECTOR

EXPERT INTERVIEWS
5. PREREQUISTES FOR CREATING AN ENABLING
Experts From: No
ENVIRONMENT
Banks 9
A primary objective of this research was to identify the needs,
requirements, and views of the private sector in order to Government 17
determine the enabling environment needed for them to invest in Representatives
the market for housing finance.
Developers 16
Our interviews with 56 experts and three focus groups, which was
Property Dealers 12
presented in detail in the previous section, highlighted four major
prerequisites that the private sector, and government Donors & Other Experts 2
representatives, felt were important for an enabling environment
in-order to provide mortgage products. Total 56

Clear foreclosure and eviction laws: Banks argue that

given current laws, house repositions in case of default is
almost impossible. They argue that the law does not allow FOCUS GROUPS
banks or developers to evict individuals out of dwellings
Participants No
because homeowners are constitutionally immune from
forceful removal. Government Reps 7

Our review of relevant laws that deal with this issue shows Ordinary Citizens 5
that homeowners are not immune from eviction, but rather
Mixed 5
that a court order is needed. More specifically article 38 of
Afghanistans constitution stipulates, personal residence shall Total 17
be immune from trespassing. The article further stipulates,
no one, including the state shall have the right to enter a
personal residence or search it without the owners permission
or by order of an authoritative court. Article 40 of the However, the procedures
constitution stipulates, property shall be safe from violation. needed for the order of the
The article continues no ones property shall be confiscated law to be used to confiscate
without the order of the law and decision of an authoritative property are not outlined. It is
court. clear that detailed laws are
needed that outline procedures
From these constitutional articles relating to personal property for foreclosure and eviction in
it is clear that individuals can be evicted for non-payment. case of default on mortgage.

people are in great need of new houses and if the government, banks, and developers want to meet and capitalize on this
public demand, investment in housing finance should become a national priority.

housing finance is a necessity both for health of both banks and the welfare for the ordinary citizens.
bank representative

64
 5. RESULTS
D. VIEWS, NEEDS, & REQUIREMENTS OF THE PRIVATE SECTOR

Non-depositor funding: Banks state that most of their money is from individual depositors and
it is nearly impossible to provide mortgage loans with depositor money because they can withdraw
their deposit at any time. They argue that there is a mismatch of liabilities and asset. Therefore
banks need Central Banks support to establish refinancing institutions.

Individual unique identification and postal addresses: Banks state that lack of proper
national identity cards, and the lack of postal addresses make the provision of mortgage very
difficult. Digital national identity cards and exact postal addresses will ease the process of tracking.

Ease in banking policies: Banks would like greater flexibility in the areas of business they can
engage in and a relaxation of investment restrictions. Representative of banks claim that they are
not allowed to engage in activities other than banking. They argue that if they work in partnership
with construction companies, it will make their job easier instead of working directly with
individuals. Similarly developers argue that if they work with banks they will have better chances
of collecting on payments because the public views them as more trustworthy. Additionally Banks
would like the Central Bank of Afghanistan to allow them to invest up to 30 percent of their total
portfolio in the housing and not just 40 percent of their capital.
Detailed List of Expert Interviews
No. of No. of
Organization Organization
Individuals Individuals
Banks Government
Da Afghanistan Bank 1 Ministry of Economy 1
Bank-i-Melie 1 Ministry of Urban Development 2
Azizi Bank 1 Ministry of Commerce 2
New Kabul Bank 2 Ministry of Justice 2
First MicroFiance Bank 1 Ministry of Refugees and Repatriation 1
Maiwand Bank 1 Kabul Municipality 2
Afghanistan International Bank 2 Kandahar Municipality 1
Subtotal 9 Nangarhar Municipality 1
Developers Mazar municipality 1
Aria City 1 Herat Municipality 1
Salim Karwan 1 Supreme Court 1
Foshanj Construction Company 2 DCDA 1
Ex-President of Mortgage and
Omid Sabz 1 1
Reconstruction Bank
Aino Mina 1 Subtotal 17
Estiqlal City 1 Donors
Shams City 1 World Bank 1
Ashiana City 1 USAID 1
Amiri 1 Subtotal 2
Destagi Sakhtomani Afghani 1 Property Dealers
IHFD 3 Property Dealers 12
Elite 1
Grand Total: 56
ANCC 1
Subtotal 16

65
 5. RESULTS
E. VIEWS, NEEDS, & REQUIREMENTS OF THE PRIVATE SECTOR

6. REQUIREMENTS OF THE PRIVATE SECTOR

In general, the experts interviewed for this study were of the opinion that the market is ripe for the
provision of mortgage products in Afghanistan because of the very high public demand. Interviewees
did not say anything about the timing and sequence of the prerequisites, however they were of the
opinion that whenever the above requirements are met and challenges are addressed banks will be
ready to launch mortgage products.

Banks Government Developers

Given the need, demand, and Provision of mortgage and long-term Mortgage loans will bring more
potential return on investment, long- financing can bring equality in business to the construction
term financing should be a priority for society companies
the banking sector
Investment in the housing can boost Long-term financing of mortgages can Demand for mortgage loans is very
the countrys overall economy: avoid the nations brain-drain and high; necessary steps should be taken
construction companies, cement unnecessary migration by banks and the government to provide
factories, iron factories, electrical mortgage products
industries, all sector can grow
Housing finance is a great investment Provision of mortgage loans can bring Majority of the house buyers ask us
opportunity peace of mind to citizens for some sort of long-term financing
option and we offer just 2-3 years
financing through installments
In terms of private sector views with regards to investment in the housing sector and provision of
mortgage products, interviewees see long-term financing of mortgage products important and crucial
to the health of the banks, private sector, and the nations overall economy. Experts interviewed stated
that provision of mortgage has a multiplier effect that can:

Address the growing demand for housing

Create business and money for the banks
Create jobs for people involved in the construction business, and other sectors tied to housing
Increase the production and sale of housing materials

Ordinary citizens, including property dealers, who participated in focus groups share the views of
bankers in terms of importance of mortgage loans. Citizens interviewed stated that they support any
steps that would facilitate provision of mortgage products. The need for additional housing is great,
currently there are houses in which 3-4 families live together because they do not have a means of
purchasing a house or their own.

mortgage loans will help in the development of the country aside from many other problems, many Afghan citizens
leave the country and settle in Europe, Canada or the United States mainly to be able to own a house mortgage
products will help stop the brain drain in this country. -government representative

if the banks provide mortgage product, our business will flourish and quite a good number of people will find employment
if banks provide mortgage, people will come to them to buy houses they build. -developer

66
 6. MORTGAGE MARKET IMPLICATIONS

The results of the household survey clearly identify market potential for mortgage protects. Of
particular importance is that roughly two-thirds of survey respondents owned their home, but 95% of
homeowners acquired their homes through personal financing or inheritance. This suggests that a
sizeable portion of the population might not own their home because they do not have the means to
acquire one, and thus require an alternative financing mechanism. Direct questioning about the
demand for mortgage products corroborate these findings. Over four-fifths of survey respondents
reported that they are interested in acquiring long-term loans for the purposes of purchasing new
homes.

Afghanistans housing market is currently being developed. Market value in the five cities studied in
this report is worth an estimated $15.8 billion USD. According to the literature review, however,
investors are incentivized to develop higher-cost living units due to their greater profit margins. These
development strategies juxtaposed against low household incomes create an environment in which
mortgage products are highly desirable if they are priced properly.

While the demand and market capacity for mortgage products are present, commercial banks have
encountered difficulty in offering such products. Ineffective adjudication and unreliable law
enforcement were cited as the two most important reasons why mortgage products have not received
significant investment. Banks are concerned that the government might not support the regulations
that oversee the mortgage product market, and thus the investment that banks make would be
unprotected and subject to extreme risk. Interviewees thought that laws and regulations governing
mortgage products need to be developed, made clear, and enforced in order for the mortgage market
to grow.

In the next several pages, expert opinions on the legal environment and the implications of this
research on developing a home finance sector in Afghanistan are presented. The legal review is
outlined first and is based on a comprehensive review of existing legal frameworks by attorneys from
Afghanistan Legal Services (ALS) who are intimately familiar with Afghanistans legal environment.
The implications of this research on developing a home finance sector is based on the review of Islamic
Finance Council UKs (IFC) expert team, specifically commissioned for this report.

67
 7. REVIEW OF AFGHANISTANS MORTGAGE LAW

The following legal memo is prepared by Afghanistan Legal Services and was specifically
commissioned for this report.

Purpose

This memo on mortgage laws in Afghanistan serves to correct the contention that defaulters of
mortgage are constitutionally immune from eviction by briefly describing the process by which a
mortgagee can repossess property in the event of a default.

Foreclosure and repossession

To begin with, the contention that individuals in default of their mortgage payment are
constitutionally immune from eviction is legally incorrect. Under the Afghanistan Mortgage Law,
foreclosure and repossession is exercised by a power of sale through a private sale or public auction1 on
the following conditions:

a) Service of Notice requiring payment to the Mortgagor; and

b) Service of Notice to other mortgagee(s), execution creditors and lien holders containing particular
details2; and

c) Announcement to a local newspaper or other means specifying details of the mortgage; or if,

d) There has been a breach of law or mortgage deed on part of the mortgagor; and

e) The mortgagor remains in default.

In practice, courts avoid decisions granting foreclosure that lead to home evictions. In fact even in
cases where a court grants a power of sale, it is practically difficult to uproot a person and his/her
family from their home in a country like Afghanistan where government financing for low-income
household is also lacking. This becomes an issue of enforceability. Above this, issues such as lack of
documents, name changes, inheritance disputes, alterations in boundaries and other extensions
complicate the chain of ownership. Consequently, loans are practically unsecured and mortgages
retain its short-term maturity/high-interest rates characteristic.

Under the mortgage law, a power of sale comes about through an application to a court for a Power of
Sale over the mortgaged property. The applicant submits certain documentation: the mortgage deed,
loan agreement, proof of payment of debt installments, a copy of the Notice of non-payment and an
attestation of default within the agreed time period. The court merely has to confirm that these
documents fulfill the requirements of law. If the documents submitted are legally sufficient, but the
Court does not issue an order granting the power of sale within 20 days, the Mortgagee is still permitted
to exercise the power of sale absent a court approval.3

1 Article 30
2 Article 28 (1)(1)
3 Article 27 and 28 Mortgage Law

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 7. REVIEW OF AFGHANISTANS MORTGAGE LAW

Alternative to a power of sale, the mortgagee can opt to collect rent, profit and other payments related
to the property from the mortgagor or his/her tenant.4

To explore further the rights of mortgagors and mortgagees: a mortgagor can only commence a legal
action to stop the sale of the property if the following conditions exist:5

a) there is no mortgage to begin with;

b) a mortgage deed exists, but the mortgagor has not defaulted;

c) a notice of non-payment has not been served;

d) the time given to the mortgagor was insufficient for payment;

e) or there was a breach of provision in the law, mortgage deed or loan agreement.

The nature and breadth of powers by a mortgagee is comparable with that of other countries. Should
stipulated procedures be followed, a mortgagee can convey the property sold, freed from all interests
and rights to which the mortgage has priority to. The mortgagee is only encumbered by two
constraints:

a) all other interests and rights which have priority to the mortgage and

b) the rights of person(s) who have leased the property or any part thereof, i.e. they cannot be forced to
vacate the property until the lease expires. Alternatively they may agree to termination of the lease
with due compensation.

It is worthy to mention that for situation (b), the mortgagee does not lose its title, but that its right of
possession is temporarily encumbered.

On the whole Afghanistans mortgage laws are sufficiently clear:

1. The law details the particulars required for a loan agreement or mortgage deed to service as a
contract. The particulars include amongst others, legal description of the property, existing interests
and claims, date of commencement and a schedule on how a payment is to be made.

2. The rights and obligations of mortgagees and mortgagors are sufficiently defined. These include
amongst others, accuracy of representations,6 commitment to refrain from encumbering the property,7
to pay all relevant costs,8 to maintain the property in good condition,9 to insure the property,10 to pay
taxes11 and to permit entry and inspection by the mortgagee12. In turn mortgagees covenant to be in
quiet possession of the property until default.13
4 Article 25(3)(2) 9 Article 9(1)(6)
5 Article 29 10 Article 9(1)(5)
6 Article 9(2) 11 Article 9(2)(4)
7 Article 8(2)(1) 12 Article 9(2)(3)
8 Article 8(2)(2) and 8(2)(4) 13 Article 10(3)

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 7. REVIEW OF AFGHANISTANS MORTGAGE LAW

Conclusion

The mortgage law provides sufficient details for the procedures and particulars required for a
mortgage property to be sold and repossessed by a mortgagee. However due to a lack of clearly
registered documents, ongoing land disputes, protracted inefficiency of courts and poor enforcement
mechanisms, the ability to repossess mortgaged property in the event of a default remains a challenge.

Afghanistan Legal Services (ALS) was founded in 2009, and is headquartered in Kabul, Afghanistan
(www.als.af). ALS provides a comprehensive solution to legal and rule-of-law challenges facing
Afghanistan. ALS staff is experienced in both the local and international justice sectors. ALS provides
commercial legal support to the private sector, including commercial contracting, taxation, banking,
employment, intellectual property, arbitration, product liability and corporate restructuring. ALS also
provides high-level legal assistance and advice for rule of law projects and human rights cases, and
represents and advises on all aspects of organizational and business operations specific to the
Afghanistan context. ALS is DLA Pipers preferred partner in Afghanistan.

Land Titles

This report has highlighted the difficulties related to aquiring land titles in various places. The
following flow charts in the following pages tries to layout the process of aquiring land titles for
individual properties and those that are faciliated by townships.

Process for getting land titles

The process of acquiring a land title is lengthy and time consuming. Generally any individual who
wants to receive a land title when buying a land or a house needs to go through the steps outlined in
figure 2, on the following page.

For townships, the buyer has two options. The buyer can follow the procedures outlined in figure 2, or
the buyer can opt to have the township facilitate the paper work and complete the lengthy process, by
paying a set amount to the townships to complete the process for the buyer.

Figure 3 on page 72, outlines the process of obtaining a land title through townships. These steps
outline the process for townships that sell the apartments/houses in four installments (30% first
installment, 30% second installment, 30% thirds installment and 10% final installment) as an
illustrative example.

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 7. REVIEW OF AFGHANISTANS MORTGAGE LAW

Write an application letter to the Directorate of Property at the Municipalities

Step 1

The Directorate of Property provides the applicants with a form to complete

and introduces him/her to a special commission at each district municipality.
Step 2

The applicant then take the completed form to a special commission for review
Step 3 and verification.

After the commission review is completed and approval is given, the applicant is
introduced to a bank to make a payment to the government (property tax). The
Step 4 payment is 3 % of the total price of the house.

Following the payment, the bank provides the applicant with a receipt. The
receipt serves as a credible document that allows the applicant to start
Step 5 construction on the house.

When the applicant completes 40 % of the construction, the municipality gives

him/her ownership documents. Following the receipt of ownership documents,
he/she needs to complete the construction work. Following construction work
Step 6 he/she can go to courts to obtain the land title.

The courts have all the record for both government and private properties. The
Courts then verifies the paper work and the bank receipts, asks the applicant to
provide two people to give testimony. The court also charges 3% of the total
Step 7 price of the house (the house price is determined by the district municipality).

After the courts procedures are completed, the applicant will then receive the
land title for his/her property.
Step 8

Figure 2. Process of obtaining land titles

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 7. REVIEW OF AFGHANISTANS MORTGAGE LAW

After the first installment, the township provides the buyer a receipt/
document indicating that the buyer has bought the house/apartment.
Step 1

Following the second and thirds installments, the township gives the key to
the house/apartment and an option as to whether the buyer will complete
the steps for getting the land title or the buyer wants the township to do it
for him/her. If the buyer chooses the township to do the paperwork, then
Step 2 the buyer will between $ 1,000-15,000 USD to the township to get the title
for him.

After the receipt of the land title, the buyer will pay the final (10%)
installment to the township.
Step 3

Figure 3. Process for obtaining land title through township (example)

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 8. DEVELOPING THE HOME FINANCE SECTOR

A. IMPORTANCE OF ESTABLISHING HOUSING AND HOME FINANCE SECTORS

Economy

ECONOMIC
WELL
BEING

Community Finance

Figure 4. Key benefits of housing finance industry

The importance of developing the housing market and associated housing finance industry is
highlighted in this report. The key benefits as summarized in figure 4 are:

Economy as noted earlier, expert views recognized that the establishment of the housing sector
supported by housing finance will lead to economic growth and job creation. The housing
construction and banking industries will directly provide jobs as they grow. In addition as
communities grow employment will also be provided through ancillary services around
communications, landscaping, childcare, etc.

Financial home ownership is recognized as having financial benefits for the owner. Purchasing a
home and paying off finance provides a form of investment. As the home loan is paid down the
owner(s) will have equity build up and appreciation of their property. In addition home ownership
can increase borrowing power of homeowners, equity can be used to obtain loans to assist with
improvements, emergencies, etc.

Community it is an established perspective that home ownership brings a number of benefits. It

provides stability and security to owners and is the base from which communities can develop.
Research has supported the view that home ownership provides numerous social benefits
including: improved educational outcomes, enhanced opportunities of positive parenting behavior,
increased community participation, positive impact on health and esteem.

B. DEVELOPING THE ISLAMIC HOME FINANCE SECTOR

The survey results in this report include a key result that needs to be addressed 83% of respondents
were interested in getting long-term sharia compliant home finance. Alongside the benefits of
establishing housing and home finance that were noted earlier, an established Islamic home finance
industry has a number of additional benefits that enriches the banking industry. A high level overview
of the key benefits is summarized in the next page.

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 VII. DEVELOPING THE HOME FINANCE SECTOR

Ethical
Approach

Islamic
Home
Finance
Financial Stable
Inclusion Banking

Figure 5. Key benefits of Islamic home finance

Financial Inclusion

This report notes that existing home finance options in Afghanistan are conventional interest based
mortgages and by default it excludes a large portion of the population from engaging with the sector.
As Islamic law has provisions based on necessity (darrura) pragmatic short-term concessions are
available where no Islamic finance alternative is available. However conservative Muslims will
nonetheless not engage with conventional banks with the remainder of the Muslim community weary
of the injunctions against interest, reduce their degree of engagement. In addition the principles of
Islamic finance are aligned to microfinance objectives and Islamic microfinance can be an effective
mechanism to provide to financial access to the poor.

Ethical Approach

Islamic finance is a natural fit with ethical finance and is viewed by many industry specialists as a sub-
sector of ethical finance with the additional parameter extending the ethical principles to the manner
in which a company conducts its financing arrangements. There are a number of principles within
Islamic finance that are concurrent with ethical finance and are summarized in figure 6 below.

Risk and Return Sharing Profit through exploitation or unfair

means is not permissible

Partner Fairness

Public
Trade Interest
Real wealth generation from
legitimate trade avoiding artifical Social benefits beyond pure return
transactions

Figure 6. Principles of Islamic home finance

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 8. DEVELOPING THE HOME FINANCE SECTOR

Stable Banking

An established Islamic banking sector that provides Islamic home finance would be a stable and
resilient industry supporting a successful economy in Afghanistan. Research has found that during the
global financial crisis Islamic banks showed stronger resilience1.

The relative success of Islamic banking was attributed by industry commentators to a number of
reasons including:

Asset backed system - money is not seen as an item to trade but only as a medium of exchange and
profit can only be generated when something with intrinsic value is sold or when currencies are
exchanged. Financing in Islam is always based on illiquid assets which creates real assets and
inventories.

Responsible financial practices being solely focused on a profit motive can lead to irresponsible
financial practices illustrated in the US subprime mortgage market crisis. One of the key causal
factors was the role of mortgage brokers. They had major financial incentives for selling complex,
adjustable rate mortgages as they earned higher commissions.

Bank activities the principles of Islamic finance ensure there are rules in place that forbid
speculation, deter the repackaging of debt and restrict the use of complex financial instruments.

In addition, depending on the Islamic structure used to create a home purchase plan, it is possible to
have a scenario where the financier genuinely shares on the capital gain and/or loss caused by market
price fluctuation. Whilst in general, most Islamic banks operating globally do not do such (passing this
capital gain/loss onto the co-owner, i.e. ultimate purchaser) there is the possibility for the financing
provider to be exposed to such. If capital price movements are equally shared, it would mean that the
borrower (ultimate purchaser) can never be in a scenario of negative equity (i.e. where the debt on the
property is worth more than the property itself). Further this approach would also place a greater
responsibility on the financier to ensure that the credit provided against the underlying property is
diligenced thoroughly.

The above scenario occurs where a co-owenership (mushariaka) structure is utilised. In this scenario
the customer and bank are co-owners in the property. The customer will rent the portion of the house
owned by the bank and over time the bank will sell down its portion to the customer. Hence it is often
referred to as a dminishing musharika. Whilst this is the more preferred structured utilised by Islamic
banks globally, another structure historically utilised is the murabaha. In this scenario the banks buys
the property and sells it the customer with a fixed markup and providing deferred payment to the
customer over x years (e.g. 15, 20, etc.). This structure is akin to a fixed rate mortgage, however it
should be noted that the ultimate price agreed cannot be increased should the customer delay
payment. Due to the fixed rate nature it is typically not preferred by banks. After the sale by the bank
the customer becomes the technical owner of the property and any mark price movements are not the
concern of the bank.
1The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study, Maher Hasan and Jemma Dridi, September
2010

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 8. DEVELOPING THE HOME FINANCE SECTOR

The musharika structures utilised in Islamic finance if applied as noted in a true risk sharing paradigm,
as described above, can significantly change the mortgage market shape. The returns profile changes
for the financier, the payback period changes for the borrower, the macroeconomic risk of asset price
bubbles induced by excessive, unchecked credit being provided by banks is likely to reduce. Musharika
/ equity like financing, can result in a better broader alignment of the financial services sector and the
real economy. In practice though, it is typical for the banks to forego any capital gain or loss by passing
this onto the consumer as part of the musharika agreement.

It should be noted that the above approach also opens the door to large asset managers, pension funds
in particular, to enter into the market as potential mortgage financiers. Their investment horizons are
likely to be better aligned than those of banks who inherently have maturity mismatch challenges when
providing mortgage financing. In addition, under Basel III, capital requirements are typically higher
for banks taking on equity risk.

Another alternative could be tapping the debt capital markets to provide financing backed against
mortgage certificates. If structured correctly at the outset, Islamic mortgages can be securitised and
issued as notes through the debt capital markets, which maybe more appealing to banks with their
tradability nature.

As the number of Islamic banks, insurance companies and asset managers grow they will need assets to
deploy their funding/liabilities and these by mandate must be shariah compliant. Hence the role of
Islamic mortgages will be important in providing quality assets and thus further increase the level of
demand for Islamic products.

Additional considerations relevant to Islamic mortgages worth noting are:

Tax many international governments (including the UK) have had to make amendments to
their tax law to provide a level playing field between the conventional and Islamic options. As
a result of the Islamic structures it is possible to inadvertently trigger double taxation, which
can be a significant hindrance to the growth of the market. For example many countries have
a stamp duty land tax applied when a purchase of a property occurs. Using an Islamic
murabaha structure (or indeed a co-ownership/musharika with rent /Ijaraa structure) there
will typically be two buy and sale transactions. This is because the bank is Islamically required
to buy the property first before it sells it onto the customer/ ultimate owner. In the murabaha
the bank buys the property first and then sells it to the customer with deferred payment with a
mark-up. The legal form is two transactions, however taking the economic substance over the
legal form it is intended as a single sale transaction. Accordingly the UK Government and
other governments, have put in place legislation to ensure the economic substance is
evaluated and a fair treatment is given to Islamic financial products so they are treated at
parity to their conventional counterparts. This is an issue, which the Afghanistan tax and
banking authorities will have to consider in the development of the Islamic finance market.

Legal title the musharika structure used in Islamic home financing (one of the more
preferred structures) requires the ownership of the property to be split from day one between
the co-owners i.e. the bank and the customer. Accordingly a legal analysis will have to be
undertaken to examine if under Afghan law can legal titles be split. In the UK this has been
done by separating legal title from beneficial ownership and having additional lease and co-

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 8. DEVELOPING THE HOME FINANCE SECTOR

ownership agreements. Implications of these structures should also be considered as part of the
legal analysis for example if there are time restrictions on the length of a lease, other risks
which may arise for the bank as co-owner under buy-to-let scenarios (e.g. multiple-occupancy,
anti-social behavior legislation, etc.).

Benchmarking Islamic banks when providing mortgages often benchmark their profit rate
or rental rate against mainstream interest benchmarks such as the local central bank rate
(LIBOR, KIBOR, etc.). Whilst this practice is not favored by the scholars it has been signed
of as Islamic by them and has damaged consumer confidence in the sector. The alternative to
such is the use of a market recognized rental price index. Accordingly it should be considered
as to how the local Afghan market is likely to deal with the issue of benchmarking, the local
scholar views on such and if there is a possibility to create an alternative rental price index.

Regulatory guidelines for Islamic finance whilst the scope of this report does not cover a
review of the Da Afghanistan Banks prudential guidelines for Islamic banks, it is important to
note that Islamic financing as an option will be subject to the number of Islamic banks in the
market which is directly related to the regulatory clarity and position on the establishment on
such.

The Islamic Finance Council UK (IFC) is a specialist advisory and development body established to promote
and enhance the global Islamic and ethical finance industry. Operating since 2005, the IFC Executive Board
brings together a unique blend of seasoned practitioners who are recognised leaders in the Islamic finance
market and have worked for leading global institutions. These individuals see the Council as a professional and
progressive platform by which they can personally give back to the industry to encourage its positive growth.

The Council has successfully pioneered in a number of unique developmental and educational programmes and
as a result has benefited from global endorsements including UK Government Ministers and House of Lords
Peers, Governor Al Miraj of the Central Bank of Bahrain, Dr Nasser Saidi from DIFC and a number of other
industry leaders. IFC team have advised governments, presented at conferences and business schools and trained
executives around the world and are often quoted in various media forums (including Financial Times, BBC,
Bloomberg and CNBC Arabia amongst others).The real differentiated strength of the Council lies fundamentally
in the talent, sincerity and hard work of the team and all our supporters who have contributed towards the
success of the Council.

Along with general advisory and education, the four core IFC areas of work are:
1. Government policy advisory policy strategy, drafting legislative frameworks for regulatory and fiscal bodies
2. Shariah development empowering shariah scholars through a unique global CPD training programme,
establishing operating frameworks for shariah departments and supporting shariah audits
3. Executive training delivering tailored capacity building projects exclusively for finance practitioners which
are focused on commercial issues and delivered by expert practitioners
4. Ethical finance promoting coordination and better understanding between players in Islamic finance and the
broader ethical finance arena.

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9. RECOMMENDATIONS

We believe that investment into the mortgage industry has both direct benefits for the
investor community, as well as secondary positive economic and social impacts by
stimulating many other economic activities. This survey highlights massive demand in
residential mortgages, but also a number of key issues that need to be addressed. We
believe each of the issues can be mitigated to a great extent. In what follows, general
recommendations are presented first, followed by more specific recommendations are
presented in the form of an action plan.

Insurance issues. There are several types of insurance - property insurance (in case of
natural or man-made disasters like flood, fire, storm), renter's insurance (in case of theft
of contents), title insurance (in case someone disputes the deed), and many more. There
are three main insurance companies in Afghanistan (AIC, ICA, IGA), but the premiums
are very high. The solution for this is to reduce risk as much as possible - through each of
the below mitigating strategies. Insurance premiums will come down, and the financers
can obtain group rates for all their mortgaged properties.

Lack of inspectors. There are concerns that due to the lack of qualified government
inspectors, the quality of construction, electrical, plumbing, etc is difficult to assess and
therefore increases the risk of costly repairs later that would derail mortgage payments.
We recommend the financier employ its own inspectors to check every property before a
mortgage is issued. No need to depend on government inspectors.

Lack of appraisers. There are concerns that the value of a property will be difficult to
appraise, given fluctuations in market prices of land and buildings. We recommend the
financier conduct its own conservative appraisal by using 1) the report from its inspectors
on the condition, 2) the cost price to build (actuals if available, or professionally
estimated), and 3) the price of comparable properties in the neighborhood.

Land titling issues. Given multiple government administrations over the past 40
years, land titling in Afghanistan is in extremely poor shape. Often there are several titles
for the same piece of land, and many fraudulent deeds as well. It is estimated over 70%
of the cases in the civil courts relate to land disputes. However, USAID's LTERA project
and Harakat's Land Records Modernization Project (LRMP) have started digitalizing
hundreds of thousands of land titles in certain districts. Harakat's Afghanistan Land
Authority (ALA) project is also making available government land and allowing long
term land leases. Given the massive demand for mortgages, we recommend verifying
areas of land where the title has been fully cleared, and restricting mortgages for
residential units only to pre-vetted land options such as developments. This will reduce
the cost of title insurance as well, if desired.

78


Collection ability. There are concerns if mortgage financers will be able to collect
monthly mortgage payments from home owners. We recommend offering numerous
options for payment to make it as easy as possible - pay via any bank, online, or even via
mobile money. However, the best solution for this is to require the employer to withhold
mortgage payments from salary disbursement, and remitting directly to the financer.
The mortgage financer can setup agreements with the largest employers (public and
private) for this arrangement.

Affordability. There are concerns that most people will not be able to afford mortgage
payments - given Afghanistan is a poor country, the economy is uncertain and income
levels are unstable. Given the massive demand for mortgages, we recommend at this
stage focusing on the highest end of the market to start with - those who can most easily
afford payments, while at the same time the Afghan government develops affordable
housing program. Also, there can be programs whereby the sharing the cost of
residential mortgage is a benefit from the employer, paid alongside a salary deduction.

Inability to foreclose. There are concerns that while Afghanistan has passed the
Mortgage Law, the courts may not be supportive in foreclosing against a default. First of
all, by utilizing Sharia compliant mortgage structures (where the financer and applicant
become co-owners), the risk of default drops dramatically, as proven in countries around
the world. Liens can be registered in the Afghanistan Collateral Registry supported by
Harakat. These liens can be recorded with specific clauses agreed by both parties as well
as third party enforcers. For example, Da Breshna Shirkat agrees to cut off electrical
power if the financer (the co-owner) requests it when the applicant fails to pay. Or the
employer agrees to divert a higher percentage of salary to the financier, should the
applicant fail to pay.

Lack of postal address. There are concerns that it is hard to track properties in
Afghanistan given the lack of postal addresses. This can be easily solved by identifying
every mortgaged property with GPS coordinates after the initial visit from the financier
representative.

Lack of individual identification. There are concerns that it will be hard to track
an applicant, especially in cases of default. With the potential of biometric electronic
Tazkira and electronic passport programs development in Afghanistan in the near
future, we recommend financiers require applicants to have an electronic government
issued identification and conduct background checks before approval. We further
recommend the applicant include at lease three guarantors on the application to ensure
peer pressure in honoring agreements and additional points of contact to reach out to in
case of any challenges.

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Exchange rates issues. There are concerns that financers selling mortgages in
Afghani while receiving long term capital in U.S. Dollars will be susceptible to exchange
rate losses as the market fluctuates. Article 35.1 of the DAB Law requires that Afghani
"shall be accepted" meaning that if someone is offered Afghani as payment, the payee
must accept. However, this does not mean that payment in other currencies is not
allowed, if agreed by the payer and payee (Articles 46 and 47). However, the
Government of Afghanistan greatly encourages all transactions to be performed in
Afghani currency only. This is currently only enforced in restaurants, hotels and other
public venues that must list prices in Afghani currency. They may choose to list prices in
another foreign currency (in addition to Afghani currency, not instead of) for the
convenience of its customers. Therefore, we recommend financers sell mortgages in the
same currency as they receive their long term capital. In addition, exchange rate hedging
instruments (capital market financial instruments) can be utilized to manage this risk very
easily. There several options depending on the exercise time the determination of the
payoff price or the possibility of a payoff. While many different varieties exist, there are
some options that corporations in other countries have found useful for the purposes of
hedging transaction exposures.

One possible option is the average rate option. This option has an average spot price
over the life of the contract.

Evaluating credit worthiness. There are concerns that it will be difficult for
financiers to evaluate credit worthiness of applicants. Given the massive demand, we
recommend financiers apply a rigorous application process to ensure only the most
qualified applicants are approved. Also, a Harakat supported Afghanistan Credit
Registry can begin to gather data of use from numerous sources for financiers to use, and
vice versa we recommend all mortgage financiers provide data to the Registry.

Lack of qualified credit officers. There are concerns that there is a dearth of
qualified financial professionals to be cost effectively hired for reviewing applications.
Harakat's supported institute for banking and finance and commercial law awareness
programs are important in developing the sector along with an association of qualified
accountants. We also recommend by utilizing technology to the greatest extent to accept
applications electronically, review them, compare them, and run risk analysis can be very
powerful such that only a few qualified credit officers can easily handle a large pipeline of
applicants.

Lack of long term capital. There are concerns that financers do not currently have
access to long term capital such as 15 or 30 years instruments. We recommend financiers
use a Sharia compliant vehicle to obtain long term financing from OPIC, who have
provided $250 million in long term capital to many countries in similar situations.
Furthermore, we recommend the Afghan Government and Banks be allowed to issue
long-term capital notes and sukok bonds to raise capital for financers.

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This section provides a high level set of recommendations in the form of an action plan.
This is not a comprehensive plan but is an illustration that is focused on select steps that
can be taken to address implications from the literature review, implications of the survey
results, and requirements to develop the housing finance sector in Afghanistan. Each of
the recommendations is categorized as either a short-term or medium term goal.

Home finance working group. A policy-working group sponsored by appropriate

Government entities should be set up in collaboration with sector stakeholders. This
Group should consider the most appropriate policies for Afghanistan to facilitate home
ownership and address the issues raised in this report. This is a short term goal.

Affordable housing. Specific mechanisms are required to be designed in order to

facilitate the provision of adequate housing to all sections of society. For low income, this
could include housing microfinance, rental frameworks, financing for self-construction,
etc. This is a medium term goal.

Mortgage regulation. The current legal and regulatory framework should be

reviewed to ensure its adequacy to support a developed home finance sector. This should
include aspects such as minimum product standards in loan to value and payments to
income, foreclosure, etc. This is a short term goal.

Islamic home financing. A strategy to establish an Islamic home finance industry

and the provision of products should be established. This strategy should incorporate
actions, including: (a) Capacity building of government and industry representatives on
the principles of Islamic finance; (b) Review and update as required of legal, fiscal and
regulatory frameworks to ensure Islamic home finance products can be provided; (c)
Create awareness of Islamic home finance through media campaigns; (d) Establish
supporting frameworks for Islamic finance including professional development of Islamic
scholars

Consumer protection. An appropriate consumer protection and campaign on home

finance literacy should be undertaken. To protect consumers this should include
minimum disclosure requirements, complaints handling procedures and independent
arbitration process. Alongside this to ensure home finance and its implications are
understood a campaign to explain home finance and how it works should also be
undertaken. This is a medium term goal.

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RESEARCH TEAM

Research Team
Omar Qargha: Managing Partner Afghanistan Holding Group- Lead Research Designer
Parwez Besmel: Director Afghanistan Research Services Research Manager

Sanzar Kakar: Chairman Afghanistan Holding Group - Mortgage Expert

Ahmad Y. Bassam: Managing Partner Afghanistan Holding Group -Mortgage Expert
Graham Burnside: Board Member IFC and Chairman of Tods Murray International Mortgage Expert
Omar Shaikh: Board Member IFC and Chartered Accountant International Mortgage Expert
Nadeem Haq: Executive Management IFC International Mortgage Expert

Asiyah Sharifi, Esq: Managing Partner Afghanistan Legal Services Legal Expert
Natasha Latif: Law Clerk Afghanistan Legal Services Legal Expert

Richard Li Research Consultant Technical Editor

Jim Stokes- Vice President Digital Globe - Information Systems and Remote Sensing Expert
Dr. Jason T. Knowles- Senior Geospatial Analyst at Digital Globe - Geospatial Analytics Expert

Ryan Paterson Chief Operating Officer IST Research Remote Monitoring and Crowdsourcing Expert
Abdullah Rahmanyar Software Engineer IST Research Manager of Software Development
Ryan Fischbach Senior Software Developer IST Research Lead Software Developer

Field Supervisors Asst. Prof. Juma Khan- Kabul Education University

Eng. Wahida Mustafa Asst. Prof. Sher Zaman Hamidi- Nangarhar
Mohammad Qais Popal University
Raes Khan Associate. Prof. Omar Jawad - Nangarhar University
Sayed Ratib Husaini Asst. Prof. Ehsanullah- Nangarhar University
Bashir Barnaas Asst. Prof. Mohammad Nasir- Nangarhar University
Field Researchers Asst. Prof. Basir Ahmad- Herat University
Dr. Murtaza Mehran- Professor Kabul Education Asst. Prof. Sayed Amiri - Herat University
University Asst.Prof. Mohammad Qasim Amini- Herat
Asst.Prof. Ezatullah Marefat- Kabul Education University
University Asst. Prof. Mohammad Zubair Aziz- Herat University
Asst.Prof. Malek Khan Ayaar- Kabul Education Asst. Prof. Surgal- Balkh University
University Asst. Prof. Shekiba Faqiri- Balkh University
Asst. Prof. Shujah Shujah- Kabul Education Asst. Prof. Shahla- Balkh University
University Asst. Prof. Qudratullah Nazari- Kandahar University
Asst. Prof. Lal Mohammad - Kabul Education Asst. Prof. Farooq Hakimi - Kandahar University
University Asst. Prof. Sefatullah Sahil- Kandahar University
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