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House Building Finance Corporation Limited Institutional Turnaround during 2005 -2007 Presentation Made At: Global House Building Finance Corporation Limited Institutional Turnaround during 2005 -2007 Presentation Made At: Global Conference on Housing Finance in Emerging Markets May 28 -30. 2008 The World Bank, Washington DC by Zaigham Mahmood Rizvi Chairman, HBFC

A brief introduction • The oldest housing finance institution of Pakistan and among oldest A brief introduction • The oldest housing finance institution of Pakistan and among oldest in Asia Pacific Region; • Established as public sector enterprise (PSE) under Government Act in 1952, and operated as a state enterprise for nearly 54 years; • Was corporatized and got the status of public limited company on 26 th July 2007. Now HBFC is up for privatization; • Realising the role of HBFC in low and middle income housing finance, the Government decided in 2003 -2004 to revive the institution; • In January 2005 the stewardship was given to a professional banker from private sector; • Has about 100 offices/outlets in 12 zonal offices under 3 provincial offices to serve the people of Pakistan throughout length and breadth of the country; • Has focus on Small and Medium Housing (SMH) Solutions,

A brief introduction … Continued • Its PAID UP CAPITAL is Rs. 3. 50 A brief introduction … Continued • Its PAID UP CAPITAL is Rs. 3. 50 billion: • Federal Government - 53. 57% • State Bank of Pakistan - 46. 43% • Have, so far, financed over four and half million units for Rs 43 billion. Average loan per client comes to Rs. 95, 000 approx. (Upto 2004 – Avearge Rs. 80, 00/loan) • Presently, outstanding portfolio is of Rs. 19. 6 billion. • Contributed Rs. 13. 8 billion towards National Exchequer 3

HBFC in 2002 - In the light of World Bank Report “Given its legacy HBFC in 2002 - In the light of World Bank Report “Given its legacy as a DFI, attempts to restructure HBFC as a commercially operating housing finance institution are not promising. Rather HBFC might focus on becoming an efficient manager of Government programmes of social housing products, which would still require a major upgrading of its internal corporate environment. ” “Given the low rate of provisioning HBFC may be in situation economically equivalent to bankruptcy. ” These were the observations of World Bank in its 2002 Report, “A Housing Finance System for Pakistan – Issues and Options”, which further said: 4

In World Bank’s Report of 2002 …. 1 • Sinception, solo source of fund In World Bank’s Report of 2002 …. 1 • Sinception, solo source of fund has been State Bank of Pakistan (SBP). New funding was suspended by SBP in 1994, and new credit lines were being rolled over. The rollover was also stopped in 2002 -3, but Corporation was not prepared for seeking market based funding, • HBFC is more an administrative extension of the Government rather than a real financial institution, • Flawed charter, poor governance with administrative and political interference 5

In World Bank’s Report of 2002 …. 2 • It is burdened by a In World Bank’s Report of 2002 …. 2 • It is burdened by a high proportion of bad loans in its portfolio with little hope of recovery. • A vast majority (98%) of credit are overdue for more than 3 years (a very substantial accounts are over 12 years). Recovery prospects are slim or null. State Bank of Pakistan Inspection Report 2005: • 60% of the portfolio is NPL • Another 30% is potential NPL 6

HBFC in 2007 - In IFC/CMHC Report • CMHC reported that, HBFC has the HBFC in 2007 - In IFC/CMHC Report • CMHC reported that, HBFC has the ability to turn around the table. It stated in its report submitted to the Government that: – “HBFC has the potential to succeed as a commercial housing finance company”; – “HBFC has a good understanding of its mission and its environment” • IFC/World Bank group is considering taking equity stake in HBFC 7

HBFC as on January 2005 HBFC as on January 2005

Situation Prior To 2005 • Deteriorated financial health and poor loan accounting system. • Situation Prior To 2005 • Deteriorated financial health and poor loan accounting system. • As a matter of fact, HBFC was running as a loosing concern. • It’s books of accounts were not properly maintained. Its annual accounts were carrying qualification on account of “nonreconciliation” from External Auditors since 1982, for about 24 years. (“Non Reconciliation” issue first surfaced in 1972). • Similarly, there was no concept of cost of fund, financial intermediation cost and cost of lending. • During the year 2004 negative cash flow was to the tune of Rs 2. 5 billion. Had the situation continued for another two years, then by the end of year 2006 HBFC would have been a bankrupt organization.

Situation Prior To 2005…contd. • About Rs 12 billion was in NPLs, and another Situation Prior To 2005…contd. • About Rs 12 billion was in NPLs, and another Rs 6 billion was potential NPLs. Thus, the actual and potential NPLs of Rs 18 billion which was about 80% of total Balance Sheet. • Huge income tax was being paid on income that was not earned. • Issue of un-settled insurance claims from SLIC against 590 pending death cases was causing finance suffering for both HBFC and its customers. • Absence of Systems & Procedures, and lack of comprehensive loan origination, processing and accounting systems (need for software, hardware and computer skills). • Absence of any human resource development program. • Central Bank’s regulation and supervision was suspended in the year 2002 -3 (and was recommenced in 2005 at the request of the new Management).

HBFC’s March Towards Modernization HBFC’s March Towards Modernization

HBFC’s March Towards Modernization 1952 -96 1997 -2000 2001 -2004 2005 … and in HBFC’s March Towards Modernization 1952 -96 1997 -2000 2001 -2004 2005 … and in 2007: House Building Finance Corporation Limited • HBFC did not have a defined business focus. Its real potential for “small & medium housing for low and medium income population” in housing sector of Pakistan was being marginally utilised. • It needed a new vision, mission and business approach in view of commercial banks’ entry into mortgage market since 2001.

Vision and Mission of HBFC Vision: Mission: To be the prime housing finance institution Vision and Mission of HBFC Vision: Mission: To be the prime housing finance institution of the country, providing affordable housing solutions to low and middle income groups of population by encouraging new constructions in Small & Medium Housing (SMH) sector. To be a socially responsible and commercially sustainable housing finance institution. Responding to housing needs of low income groups in a socially responsibility and commercially sustainable manner.

Restructuring and re-organization of HBFC To prepare HBFC for meeting the challenges ahead, the Restructuring and re-organization of HBFC To prepare HBFC for meeting the challenges ahead, the following new divisions and functions have been created. New Divisions: For a focused approach § § § Business Promotion (Pro active Marketing) Servicing of Loans (Recovery) Till 2005, there was no separate function for loan servicing and default management and the function remained the responsibility of Housing Finance Division (is mortgage origination and processing Staff) § Potential NPL § Declared NPL (Special Asset Management) Support Services It Deptt Risk Management New Functions: To meet regulatory requirements and for better systems and control – – – – – ISO Certification. Management Information System (MIS). Treasury Management. Policy & Planning. Risk Management. Balance Sheet Management (Asset & Liability Committee) System and Compliance Expanded outreach Management HRD Program

Reform programmes and wish list for 2005 -2007 Financial Goals: • Clean Balance Sheet Reform programmes and wish list for 2005 -2007 Financial Goals: • Clean Balance Sheet of the sick/NPL portfolio, through aggressive loan recovery of non-performing portfolio. • Enhance paid up capital to Rs. 4. 00 billion through issue of Bonus and Right shares to meet SBP’s Prudential Regulations (Rs. 6. 00 billion by 2008). • Develop a business plan possibly with IFC’s technical support to ensure sustainability and commercial viability of the organization. • Prepare HBFC to raise market based funding to fund enhanced business volume (Securitization, REITs, Bonds, COI’s etc). • Control intermediation cost, and gradually move from cash break-even to accounting profit. • Financial restructuring with the support of Government of Pakistan and State bank of Pakistan. And re-designing of accounting function of the Corporation. • Move towards Corporatization and privatization.

Reform programmes and wish list for 2005 -2007 Operational Efficiency & Market Perception: • Reform programmes and wish list for 2005 -2007 Operational Efficiency & Market Perception: • Enhanced operational efficiency through Manualisation, Computerization, and Human Resource Development. • Elimination of inefficiencies and corruption through internal controls, and redesigning reward structure. • Gradual enhancement of business volume from past average of Rs. 2. 0 billion per year to Rs. 4 billion per year by 2007 (year 2010 – Rs. 15 Bn). • Expansion of HBFC’s presence from 55 to 100 cities of country by the end of year 2007 • Building market perception of HBFC as proactive, efficient and customerfriendly institution. • Develop corporate culture in the entity.

In reform efforts, on board with the Management & Stakeholders In this arduous journey In reform efforts, on board with the Management & Stakeholders In this arduous journey of transforming the sick institution into a vibrant one, the Management took– – the Board on board the stakeholders (GOP, SBP, builders) on board the HBFC team on board 17

Action taken for Recoveries • Strategic Actions Taken by the New Management – Relief Action taken for Recoveries • Strategic Actions Taken by the New Management – Relief Package – 2005 – Incentive Package – 2006 – Incentive Scheme – 2007 • Establishment of Special Assets Management Division. • Conferences with field staff to work out targets and strategies. • Years 2005 to 2007 were declared as the “years of recoveries”. • The efforts have borne fruits, and in about three year a record amount of above Rs. 10 billion has been recovered.

Performing and non-performing portfolio – Comparison of 2004 & 2007 Performing portfolio = 31% Performing and non-performing portfolio – Comparison of 2004 & 2007 Performing portfolio = 31% NPL: Classification was not according to Prudential Regulations 3 Years NPL Rs. 12 Billion Performing portfolio = 57% NPL + PNPL = 43% Potential NPL Rs. 6 Billion 19

Performing and non-performing portfolio – Comparison of 2008 & 2012 Performing portfolio = 76% Performing and non-performing portfolio – Comparison of 2008 & 2012 Performing portfolio = 76% Performing portfolio = 91% 20

Building Market based Liability Book through Commercial Financing Instruments • Issuance of Sukuk (6 Building Market based Liability Book through Commercial Financing Instruments • Issuance of Sukuk (6 -7 years’ tenor, at floating rate) HBFC has already floated Rs 1. 5 billion Sukuk at the end of 2007. During 2008, it intends to raise Rs. 6 billion in two tranches of Rs. 3 billion each. • Securitization of Mortgage Backed Securitization (MBS), globally is a very popular product. Hopefully, HBFC’s proposed securitization will be first MBS in the country. Proposed size of first issue is Rs. 1 billion. • REITs – Real Estate Investment Trusts HBFC has four plots of land at Lahore, Islamabad, Hyderabad and Peshawar. As such HBFC is in an ideal position to float country’s first REIT for financing construction on these plots. • Certificate of Investments (COI) of short tenor 21

Challenges of Computerization on 5 major fronts • Comprehensive software – eight modules tailor-made Challenges of Computerization on 5 major fronts • Comprehensive software – eight modules tailor-made software has been prepared and is under implementation • Provision of hardware – Equipment of workstation at all operational level (i. e. PCs, Printers, Networking HUBs, UPS, scanners etc) • Networking (LAN & WAN) – LAN completed…WAN under progress • IT Training – Continuous IT training programs • Above all - Changing the mind set – Hurdle is crossed “motivation that without computerization and technology we can not move into the future

Comprehensive Software Solution • Tailor-made, state of the art, Oracle based system has been Comprehensive Software Solution • Tailor-made, state of the art, Oracle based system has been developed for the Corporation by Plexus Ltd, and is being implemented. This covers: • Loan Management Modules 1. 2. 3. 4. 5. 6. 7. 8. Customer Management Module Contract Management Module Disbursement Management Module Recovery & Collection Module Settlement Module Claim Settlement Module MIS Management Module Security Management Module • Financial Modules 1. General Ledger Module • Regulatory Reports Management 2. Fixed Asset Module 3. Purchase Module • Features of this system includes the computerized Loan Processing, Accounting, effective Recovery Management, and generation of timely reports and information for decision makers.

Use of Technology • Biometric Attendance System • Video and Audio Conferencing • ID Use of Technology • Biometric Attendance System • Video and Audio Conferencing • ID Verification System (Veri. Sys) of National Database and Registration Authority (NADRA) • Call Center • Data Centre (under development) • Tele-monitoring System (SMS) – Through SMS messaging service, messages are sent to the account-holders on repayments and for other information 24

Pro-active website • HBFC’s proactive and dynamic website (www. hbfc. com. pk) provides: – Pro-active website • HBFC’s proactive and dynamic website (www. hbfc. com. pk) provides: – Online loan application facility (e-Home) – Online accounts and balance verification by customers – Online guide on construction and purchase of real estate – Online mortgage tracking to sale/purchase of mortgaged properties – Loan calculator – Information portal on real estate 25

Manualization and ISO Certification • In the year 1952, the Board of HBFC observed Manualization and ISO Certification • In the year 1952, the Board of HBFC observed that, till such time HBFC had its own policies and procedures, it would follow the Government rules and policies. That “till such time” continued till 2007. • As of 2005, HBFC didn’t have its own service rules, procurement and operational manuals. All these manuals have been prepared and are implemented. • HBFC today is an ISO 9001: 2000 certified organisation. • A Systems Audit department ensures that systems and manuals are being followed. • HBFC today is member of Pakistan Institute of Corporate Governance and is now seeking Corporate Governance Ranking. 26

Renovation of Office Premises • Extensive renovation work is being done in the offices Renovation of Office Premises • Extensive renovation work is being done in the offices to make the work environment conducive, to meet modern day challenges, and to enhance productivity of the work force. • The renovation program is active at HO, Provincial & Zonal offices and at Branches. • Branches are being relocated to commercial areas before renovation. • The following slides show the old and new work culture at HBFC: 27

Head Office - Before Renovation 28 Head Office - Before Renovation 28

--- After Renovation Head Office-Karachi 29 --- After Renovation Head Office-Karachi 29

Expansion of Outreach Program a cost effective and efficient model A. Service Representatives Offices: Expansion of Outreach Program a cost effective and efficient model A. Service Representatives Offices: • Through this innovative outreach programme HBFC has increased its presence from 50 cities to 85 cities by 2007. The future plan is to extend this network to about 150 cities by the year 2010. • These are cost effective and self-sufficient offices with very limited overhead burden on HBFC. B. HBFC on Wheels (MOBILE SERVICE VAN) • To further expand its outreach Mobile Service Vans are being launched. • The Mobile Offices are equipped with online service for loan applications and processing. • Presently 4 Mobile Offices are operational. The number is to be increased to 10 by the end of year 2008. 30

Representative Offices Representation Office 31 Representative Offices Representation Office 31

Mobile Service Vans 32 Mobile Service Vans 32

Hierarchy of HBFC Network Br. Z. O Br. Key H. O. P. C. Z. Hierarchy of HBFC Network Br. Z. O Br. Key H. O. P. C. Z. O. Br. Rep. O Van Z. O Head Office Provincial Chief Zonal Office Branch Office Representative Office Mobile Van Service Administrative Coverage Current Z. O P. C. Br. Planned HO Rep. O HO to P. C. 1: 3 3 1: 4 12 ZO to DO 1: 5 58 1: 4 30 DO to Rep off 1: 3 100 1: 2 90 P. C. to ZO Rep Off 1: 2 2 1: 4 P. C. 2006 2007 0 25 34 Rep. O Z. O 8 2005 Rep. O Van Br. P. C. Van Br. Z. O Br. Van Rep. O 33

New initiative in related business • Social Housing Company (A micro housing development company) New initiative in related business • Social Housing Company (A micro housing development company) • Social Housing Bank (A micro housing finance institution) • Takaful Pakistan (General Insurance) • Family Takaful Pakistan (Life Insurance) 34

Human Resource Management Undertaken a comprehensive Program aiming at short, medium and long tem Human Resource Management Undertaken a comprehensive Program aiming at short, medium and long tem Human Resource Development: • Inducted bare minimum qualified people at entry level (e. g. MBAs, M. Com etc, ) • Initiated Management Trainee Programme, • Initiated career planning programme for future leadership, • Selected inductions at middle and senior level management, • Active Participation in IFC/SBP program to develop training modules in Housing Finance. • Meeting challenge of harmonizing old and new staff (avoiding conflict culture was a challenge) 35

HBFC – product portfolio 36 HBFC – product portfolio 36

Co-Branded Credit Card Askari Master. Card and HBFC • Low and middle income borrowers Co-Branded Credit Card Askari Master. Card and HBFC • Low and middle income borrowers generally face cash constraints for timely repayment of loan and unwillingly go into default • Askari Master. Card has joined hands with HBFC for issuing cobranded credit card for HBFC clients. • The arrangement allows HBFC to facilitate its borrowers by using Askari Master Cards for payment of installment through a “blocked Credit Card facility” up to three monthly installments. • The facility provides 45 days interest free funding to the borrowers, and would be secured by second charge on borrowers’ asstes. • The credit card company will follow their default client in their normal process. 37

Digital Archiving & Disaster Recover Program - 1 • Digital Archiving – Being 54 Digital Archiving & Disaster Recover Program - 1 • Digital Archiving – Being 54 year old HBFC has large storage of collection of memos, Account files, and above all title documents etc. – The manner in which files/documents are being maintained and preserved at HBFC carries a lot of risk in case of any disaster like fire , earthquake etc. – About 1 million pages have been archived out of approximately 5. 4 million, which include Property docs, Loan Files, Personal Files etc. – Archiving stations are functional at H. O. and zonal offices. The programme is being expanded. 38

Digital Archiving & Disaster Recover Program - 2 • Disaster Recover Program – HBFC Digital Archiving & Disaster Recover Program - 2 • Disaster Recover Program – HBFC has started DRP to meet the SBP requirements. – Procedure for off-line back up has been developed and training of the concerned people is being done. – Off-line backups are being taken to a security vault. – In the second phase a secondary Disaster Recovery site will be established for back-up of back-up. • Continuity of operations – These programs will lead to continuity of operations, which is the ultimate goal. 39

Development of a Long-Term Business Plan through IFC’s Technical Support • HBFC had approached Development of a Long-Term Business Plan through IFC’s Technical Support • HBFC had approached IFC in March, 2005 to provide its Advisory Services for development of HBFC’s Business Plan. • Initially IFC did not view HBFCL as a good candidate for its technical service. • However, after a thorough analysis of the progress of HBFC’s Reforms Program, in 2006 IFC decided to support HBFC under its Technical Support programme. • The services of a leading Canadian Mortgage Firm CMHC were engaged by IFC for the purpose. • The “Business Plan” so developed, and approved by the Ministry of Finance, GOP and the Board, is already in execution. 40

Business Growth Model (Asset Side) Cumulative Accounts: Volume: 194. 000 thousand 218 billion 41 Business Growth Model (Asset Side) Cumulative Accounts: Volume: 194. 000 thousand 218 billion 41

Business Growth Model (Liabilities Side) Cumulative: Rs. 164 billion 42 Business Growth Model (Liabilities Side) Cumulative: Rs. 164 billion 42

Raising the Capital by December 2008 S. No Details Status Capital Contribution (Rs. Bln) Raising the Capital by December 2008 S. No Details Status Capital Contribution (Rs. Bln) Paid - up Capital (Rs. Bln) Time Frame 1. Capital as on 30 -Jun-2007 In books 3. 00 30 -06 -07 2. The Board has approved Rights to SBP out of profit of Rs. 529 mn due to SBPs for 2006. Formal letters have been sent to SBP and Mo. F. Their written confirmation is awaited. 0. 50 31 -12 -07 3. The effect of new prudential regulations, disallowing benefit of forced sales value of securities. Additional provisioning required is Rs. 2. 0 bn, to be made in accounts of 2007 (2. 00) 1. 50 31 -12 -07 4. Claims of HBFC regarding MOF to decide the early losses in earthquake, widow settlement of the same remission 1. 78 3. 28 31 -01 -08 5. Debt-equity swap of two over due installments into Go. P equity in HBFC. Mo. F & SBP to decide regarding the said recommendation 3. 20 6. 48 30 -06 -08 6. Pre-IPO Equity offer to IFC (20% of paid up capital) IFC’s expression of interest is under process at Mo. F 1. 34 7. 82 31 -12 -08 43

Divestment of part of GOP/SBP shareholding Divestment of Rs. 3. 0 billion of GOP/SBP, Divestment of part of GOP/SBP shareholding Divestment of Rs. 3. 0 billion of GOP/SBP, holding out of total capital of Rs. 7. 82 billion, to general public and strategic investors at premium of Rs. 15 as follows: Rupees In billion S/No. Particular Book value of shares divested Premium Cash intake for GOP/SBP 1. To general public through listing stock market 1. 00 1. 50 2. To strategic investors – 26% of shareholding 2. 00 3. 00 5. 00 Total: 3. 00 4. 50 7. 50 44

Corporatization & Privatization • HBFC is now a corporate entity since July 26, 2007. Corporatization & Privatization • HBFC is now a corporate entity since July 26, 2007. • It is up for privatization through: – IFC has expressed interest in Pre-IPO equity – Divesting through Stock exchange – Divesting to strategic investors (HBFC is already receiving international interest) 45

Thank You www. hbfc. com. pk zaigham. rizvi@hbfc. com. pk Thank You www. hbfc. com. pk zaigham. rizvi@hbfc. com. pk