| Abstract | This study on the structure, conduct and performance of the housing finance sector in
Thailand during 1987-1996 had four objectives: (1) to analyze the existing housing finance
sector focusing on its structure, conduct, and performance, (2) to analyze the relationship
between the development of the housing finance sector and the development of housing sector,
(3) to identify the factors which had a positive or negative impact on the development of the
housing finance sector, and ( 4) to formulate recommendations to improve the efficiency of
housing finance sector. The main research instruments were an analysis of secondary data, non-directive interviews with senior officers and executives of financial institutions, housing finance
expe11s and academicians and focused interviews with questionnaires for junior officers of
financial institutions, housing project developers and residents.
Financial institutions that contributed to housing finance consisted of commercial banks,
finance companies, credit foncier companies, life insurance companies, the Government Savings
Bank and the Government Housing Bank. The housing finance sector was dominated by
commercial banks, in particular the five largest domestic commercial banks. Their influence on
the sector and their links with the government, the Bank of Thailand and with other powerful
groups in society and the high barriers to entry (until 1990) resulted in less than perfect
competition in the financial sector.
During the period under study, the structure of fund mobilization changed in four ways:
(1) commercial banks lost market share on public fund mobilization to finance companies which
were prepared to pay higher interest rates for promissory notes than banks were prepared to pay
for deposits; (2) commercial banks also lost market share on credit extension to finance
companies which would finance higher risk investments than commercial banks were prepared
to do; (3) there was a decrease in fund mobilization through deposits and an increase in fund
mobilization through borrowing; (4) funds were increasingly mobilized off-shore.
The study covered project development financing and long-term mortgage lending
Project development financing included financing for land acquisition, land development and
construction. The debt-equity ratio for project financing was around 2:1, but financing terms
were highly discriminate; developers having a good relationship with the financial institution
obtained better financing terms than other developers. Interest rates were based on the minimum
overdraft rate plus 0-5 per cent depending on the type of financial institutions, the cost of fund
and the type of project. The financing terms for individual mortgage loans were not very
discriminate among homebuyers. The interest rates were based on the minimum-lending rate
plus 0-4 per cent depending on the cost of fund. The am011ization period was set at 15-25 years
and the loan-to-value ratio was usually 70 per cent of the assessed collateral value.
Before 1993, it was difficult for housing sector to compete with other economic sectors
due to the longer commitment and the low liquidity of housing finance. The introduction of the
BIS rule which set risk weighting for long-te1m mortgage lending at 50 per cent, allowed
iii commercial banks to double their credit to the housing sector. However, deposits could not
match the demand for credit. The financial institutions bridged this gap by an increase in
borrowings, mainly from foreign sources. The increase in foreign borrowing was made possible
by the establishment of the Bangkok International Banking Facility which allowed licensed
financial institutions to borrow off-shore.
During the period under study, the housing finance sector performed both positively and
negatively. The housing finance sector stimulated a strong development of the housing industry.
It made it possible for developers to produce large numbers of housing and for household to
become homebuyers and homeowners. Between 1987 and 1996, a total of 984,568 housing units
were constructed in the Bangkok Metropolitan Region; around 75 per cent of the units were
developer-built. The cumulative number of long-te1m mortgage borrowers in Thailand increased
from 217,000 borrowers in 1987 to 1,207,600 borrowers in 1996; around 80 per cent of the
borrowers lived in the Bangkok Metropolitan Region.
On the negative side, the facility for off-shore loans resulted in an over-lending by the
housing finance sector. Because of the high liquidity, developers could easily find funding for
their projects resulting in a sharp increase in housing supply, while buyers could easily find
funding for home purchase resulting in large-scale speculation. Under these circumstances, an
oversupply of housing units (more than 300,000 units in 1996) and eventually a housing market
collapse was unavoidable. Because financial institutions had financed many unprofitable and
unmarketable housing projects, the collapse of the housing market led to a collapse of the entire
financial system due to a sharp increase in non-performing loans. The financial crisis which
emerged in 1997, in tum resulted in an economic crisis.
The housing boom in Thailand in turn had a positive impact on the housing finance
sector. Before the boom, housing finance was not a very important part of the activities of the
financial institutions. Only after 1987, the housing finance sector started to develop rapidly. The
high liquidity in the financial sector forced the financial institutions to be more efficient and
more competitive. The staff of financial institutions developed new skills and expertise in
housing finance. The question that can be asked, but cannot yet be answered, is if the housing
boom have resulted in a sustained development of the housing finance sector (in view of the
subsequent financial crisis).
The study ends with a set of recommendations in the light of the findings. It is
recommended that commercial banks and finance companies should concentrate on project
financing, while specialized housing finance institutions should focus on long-te1m mortgage
lending. The government should proceed with the establishment of a secondary mortgage market
and allow insurance companies and the Government Savings Bank to invest in this market. The
government should promote long-term domestic saving by the household sector to reduce
Thailand's reliance on foreign borrowing. The financial sector should develops plans to improve
the quality of the professional staff in financial institutions. While allowing for greater
competition in the financial market, the government and the Bank of Thailand should review and
redefine their roles and responsibilities as supervisors and regulators in view of the changes in
the national and global financial sector. |