Mortgage lending in Pakistan is very limited. Presently, banks provide long-term housing facilities to households in the top income decile and to salaried employees. This excludes most of the population, particularly the 70% who are active in the informal sector. Hence, the Government of Pakistan and the Trustee (PMRC) have entered a Trust Deed for the establishment of a Trust which shall provide partial credit guarantee for low-income housing (Credit Guarantee Scheme) to qualified financial institutions.
Credit Guarantee Scheme is developed to cater the portfolios of conventional as well as Islamic financial institutions.
Conventional Credit Guarantee Scheme Model
The Government of Pakistan and the Trustee have entered a Trust Deed for the establishment of a Trust which shall provide partial credit guarantee for low-income housing (Credit Guarantee Scheme) to qualified financial institutions. The CGS shall partially alleviate the credit risk entailed by providing mortgage facilities to low-income mortgagors, particularly those in the informal sector and will encourage the banks to provide mortgage facilities to this group of mortgagors. The Government has appointed PMRC as the Trustee to manage, operate and administer the Trust.
Islamic Credit Guarantee Scheme Model
The Government of Pakistan in order to promote low cost housing sector created a Credit Guarantee Trust Scheme for Low-Income Housing (Trust), a trust established and existing under the laws of the Islamic Republic of Pakistan, acting through its trustee, Pakistan Mortgage Refinance Company Limited. The Trust shall invest the Funds received from GOP in Shariah compliant avenues such as Sukuk etc. Claim payment for overdue profit/rental amount will be covered under the Guarantee and in addition to it the trust will give provide coverage for the outstanding buyout units as Tabarru.
The overall Islamic Credit Guarantee scheme is based on the concept of Kafalah/Guarantee and Conditional Tabarru’/Gift. Under this Guarantee & Conditional Tabarru’ arrangement where the Trust is providing risk coverage to the qualified IPFIs incurring/classifying loss (of profit/rental & unit financing amount) as per Prudential Regulations in respect of their eligible low-cost housing portfolio. At any point of time, if the facility is settled in full by the customer or regularized through restructuring or the qualified IPFI sells the asset in the market and recovers the loss through proceeds and/or any other source(s), the recovery amount so received shall be returned to the Trust up to the amount of Guarantee & Tabarru’ arrangement paid by the Trust to the qualified IPFI.