Overcoming Barriers in Mortgage Lending: The World Bank Group's Strategic Approach in South Asia’s Emerging Markets

“My dream is very simple—owning a tiny apartment. It doesn’t have to be extravagant or luxurious, but with basic amenities that I can call home,” says Sakib Ahmed, a 31-year-old from Dhaka, Bangladesh.  

Access to affordable housing is a crucial element in fostering positive development outcomes. It plays a significant role in alleviating poverty at the individual level, supports the wider growth of the financial system, and helps propel economic growth on a national scale. A stable and secure home is not just a foundation for improved health and educational outcomes; it is also a catalyst for poverty reduction and wealth creation for individuals and families. Moreover, it contributes to enhanced employment opportunities, economic advancement, and societal stability for countries.

The reality in Bangladesh’s rapidly growing urban areas is that housing is in short supply and mortgage finance—the loans most people need for such investments—is hard to obtain. Over the past two decades, the population has nearly doubled, necessitating the construction of approximately 250,000 new houses annually to overcome the current deficit and meet future demand. In cities like Dhaka, approximately 80 percent of residents will spend their entire lives renting, with affordable mortgage finance out of reach for most low and middle-income earners.

The situation is even more dire for 40-year-old Abid Jan from neighboring Pakistan. Pakistan is one of the most difficult countries in the world to find a home loan. Jan faced significant challenges after purchasing an empty piece of land in Peshawar. He was unable to find a bank that would lend him the money to construct a home and was eventually forced to sell the land at a loss.

“I checked with a few local banks for a loan but some of them denied me while others had complex conditions and very high interest rates,” says Jan.

Addressing Challenges and Expanding Opportunities in Mortgage Financing

Despite significant demand for home financing and the large share of the financial sector that housing finance represents in developed markets, many banks in developing markets limit mortgage lending. This reluctance stems from various factors, including the perceived risk, legal intricacies of mortgage finance, the absence of affordable long-term local currency funding, and limited institutional capacity.

The World Bank Group has been working to strategically broaden the scope of housing finance markets by integrating upstream engagement, investments, and consultative services. The International Finance Corporation (IFC), along with instruments like the International Development Association’s Private Sector Window (IDA PSW), play a pivotal role in the establishment and fortification of mortgage refinancing firms within emerging economies.

Catalyzing Affordable Homeownership in Pakistan

In Pakistan, the government is working to develop an affordable housing market. They are addressing the critical gap in affordable housing and are easing some regulations governing mortgages, making it easier for low-income families to secure home loans.

IFC, with support from the IDA PSW, is bolstering these efforts. An investment in the Pakistan Mortgage Refinance Company Limited (PMRC) is helping to increase the overall availability of mortgage financing for homeowners and spurring the development of low-cost houses across the country. The investment is also allowing primary mortgage lenders to offer new mortgages in frontier and traditionally underserved areas, such as Baluchistan, Khyber Pakhtunkhwa, and Federally Administered Tribal Areas (FATA). By spurring private sector participation in mortgage finance, IFC and the IDA PSW are effectively creating a new market and model to promote competitiveness, growth, and inclusion in the country.

Fostering a Housing Mortgage Market in Bangladesh

Two IFC investments—also backed by the IDA PSW—are addressing the critical demand for home loans among Bangladesh’s low and middle-income groups. These investments are paving the way for the infusion of new long-term local currency capital into the financial sector by attracting new investors.

The first-ever housing bond in the country is helping BRAC Bank to grow its affordable housing finance program. BRAC Bank was established in 2001 with the goal of improving access to finance for those traditionally left out of the market. The investment stands to accomplish quite a bit. It will help thousands of low and middle-income urban and rural families by expanding mortgage finance and making loans for housing more affordable. It is also expected to create thousands of new jobs in construction and related industries. And importantly, it will help deepen the country's long-term bond market, which remains underdeveloped.

A developed debt capital market is a prerequisite for the development of the housing mortgage market. Another IFC investment, again with the support of the IDA PSW, in a bond issued by DBH Finance will be utilized to provide housing loans to the lowest-income households. This initiative will not only make desperately needed mortgage finance available to those earning less than $900 per month, but it will also help develop a track record of housing sector-dedicated bond issuances. Together with the bond issuance by BRAC Bank, these will help set bond pricing benchmarks and demonstrate the business case for affordable housing finance in local currency and viable tenors that can promote inclusiveness.

By broadening the scope of long-term local currency housing finance, loans become more accessible to typically underserved populations, including women and micro, small, and medium enterprises (MSMEs). It also harnesses the urbanization process to drive economic development. These initiatives demonstrate how appropriate public investments can effectively attract private funding, even in less mature financial markets.