(First Draft) BHBFC Bangladesh House Building Finance Corporation Diagnostic Study & Reforms Program Zaigham M. Rizvi May 1, 2008
Section 1
General • House Building Finance Corporation (HBFC) established in 1952 as a specialized housing finance institution. • After independence, entity and its operations continued under Bangladesh House Building Finance Corporation (BHBFC). • Public sector enterprise, wholly owned and operated by Govt. of Bangladesh. • Six member Board comprising of Government Bureaucrats, including Chairman. • Board nominees frequently changed (avg. 2 yrs 4 months) • Board meets once a month
Regulatory Regime • The “Bangladesh House Building Finance Order 1973” – the main constitutive document. • The “Bangladesh House Building Finance Corporation (Loan Regulations) 1996” – regulations on operational guidelines • The “Bangladesh House Building Finance Corporation (General Regulations) 1997” – regulations/directives on general matters
Management • MD appointed by Government • Appointments made “at will” - non compliance of “fit and proper” criteria of the Central Bank • 32 MDs since 1952 – Frequent changes, avg. staff 1. 5 yrs • MDs (and Senior Management) either Bureaucrats or Senior Bankers on deputation from public sector banks
Management (cotd. ) • One Senior Mgmt. position (GM) vacant since long • Lack of professionally qualified senior staff • Management committed, hard working but lack professionalism • Present MD up for change • Some positive signs visible
Recommendations • BHBFC brought under regulatory regime of Bangladesh Bank as a Bank/DFI • Appointment of Independent and professional Board of Directors for fixed tenor – competent in policy, operational, financial and administrative matters • MD and Senior Mgmt. to be hired through open competitive process thus meeting “fit and proper” criteria • Other steps including “Succession Planning”, Appointment of Senior Mgmt. positions especially vacant GM position
Section 2
Loaning Operations • Enjoyed monopoly status sinception • Entry of NBFIs and Banks in Housing Finance a recent phenomenon • Increased competition – BHBFC 78%, others 90 -95% of overall portfolio • Islamic Mortgage Finance gaining momentum - Islamic Bank Bangladesh dominating and growing quickly
Loaning Operations (cotd. ) • Loan Ceiling: – TK 4. 0 mn (raised from TK 2. 5 mn in 2006 -7) – Competitors: No ceiling. High Property prices in Dhaka make BHBFC less attractive • Interest Rates: – BHBFC: 12% Dhaka & Chittagong, 10% others (effective rate 9. 6%) – Competitors: 14. 5% (mostly operating in Dhaka)
Loaning Operations (cotd. ) • Tenors: – BHBFC: 15 -20 years (extendable to 30) – Competitors: 5 -15 years (average 10) • Process efficiency: – BHBFC: Stretches over months (bad market perception) – Competitors: within two weeks
Loaning Operations (cotd. ) • Geographical Spread: – BHBFC: 23 cities including all major cities – Competitors: Business focus only in Dhaka • Loan Admissibility (BHBFC): – Policy on loaning on LTV of 80: 20 – Elaborate guidelines on assessment of property value, approved construction rates (for construction cases), approved price rates (for purchase cases) – Mortgage affordability assessed on rental value of property vs personal monthly income – Surplus floor space rented and rental income added to determine mortgage affordability
Products
Loan Sanctioning Process • Elaborate and lengthy process, involving: – Verification of Title (Law Dept. ) – Assessment of Property Value (Eng. Dept) – Preparation of Loan Dossier (Valuation Report) • File moves 13 steps from receipt of loan application to issuance of Sanction Letter • Official circular states cycle is 15 -20 days, however market perception and general trend is 3 -6 months • Competitors compete on processing efficiency
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