Clarity Connect

Bangladesh faces deep structural constraints in its housing sector—challenges that have only intensified in recent years. Inflation has remained persistently high since 2022, peaking near 10%. Coupled with a fragile financial sector and a tightening fiscal environment, these conditions disproportionately affect middle-income and low-income households. The stability of the finance sector in Bangladesh is also under stress because of the political crisis and its impact on macroeconomic stability. The banking sector is saddled with a 17% non-performing loan ratio (as of November 2024), slowed deposit growth, and weak profitability. These issues make long-term lending, including housing finance, riskier and more expensive reducing access to adequate housing finance for vast majority of the population.

In other countries, support schemes have been successful in incentivizing builders and financial institutions to increase supply of housing and finance. Efforts by government agencies in Bangladesh to develop satellite towns and affordable housing though commendable, have been slow and restricted in scale due to financing and implementation challenges. Meanwhile, the private sector remains largely focused on premium housing markets due to higher margins.

Bangladesh is the eighth most populous country in the world and one of the most vulnerable in the world to natural calamities like cyclones and floods. Without support and development of the housing finance ecosystem, the growing urban and rural housing challenges will further impact inequality and vulnerability, especially for middle-income and low-income households.

Housing quality and supply are constrained across both rural and urban areas, though with distinct challenges.

Rural Housing: ~70% of the total population lives in rural areas and 81% of total housing stock is located in rural Bangladesh. Most rural housing is self-built and self-funded, often with substandard materials that cannot withstand cyclones, floods, or erosion. About 60% of the rural housing stock belong to substandard level. The average household income in rural areas is also significantly lower than in urban areas and so the affordability for housing finance is diminished. An added challenge is the quality of title documents to the house property, and rural houses may not have a ready resale market which adds to the discomfort of the lenders.

Urban Housing: Urban areas, meanwhile, face an acute supply-demand mismatch. While urban populations increases by nearly 2 million people annually, formal housing supply lags far behind—only about 32,000 units are delivered each year. Homeownership in major cities is low (20.6%), and rental housing dominates. According to the International Finance Corporation (IFC), there is a 93% supply gap in urban affordable housing. High land and registration costs, rising prices of construction materials, and inadequate infrastructure all act as deterrents to formal housing development. Vacant public land on city peripheries remains underutilized due to poor infrastructure, compounding the affordability challenge.

Housing finance landscape – greater need for deepening the market.

Mortgage penetration in Bangladesh remains low at <3%, compared to 12% in India, 4.9% in South Asia, and 8.9% in emerging markets. The overall size of the housing loan portfolio stands at BDT 1,200 billion (~$9.9 billion), accounting for only 8.2% of total financial sector loans. Private banks supported by strong deposit base have expanded their housing loan portfolio and had the highest market share at 56% with state owned commercial banks having second largest share at 25%. Current prudential regulations cap banks’ housing finance exposure at 10% of consumer lending portfolios, with a maximum individual loan limit of BDT 20 million. Interest rate caps were only removed in mid-2023, offering some flexibility, yet affordability remains a constraint for middle-income households. Housing finance is also not designated as a priority sector, unlike agriculture or MSME lending. This reduces the incentive for financial institutions to serve the low-income and middle-income market. Key challenges in growth of housing finance include:

• Supply-side constraints include the absence of affordable, long-term local currency funding, institutional gaps, and underdeveloped capital markets. Banks primarily rely on short-term deposits, making long-tenor loans risky.
• Demand-side challenges include declining purchasing power, high inflation, high upfront costs (registration, stamp duties), and limited financial literacy around home loans.

Strategic priorities for enabling housing finance for low- and middle-income households.

Affordable Housing Finance for Urban Households

Affordable housing finance potential is estimated at approximately USD 2 billion annually for financial institutions, including banks, and NBFIs (IFC, 2025).  Multiple institutional and policy reforms have been under discussion yet implementation has not kept pace. These include establishment of apex refinance institution to provide long-term liquidity to banks and NBFIs, designation of affordable housing as a priority sector for lending, expansion of NBFI presence through dedicated housing finance companies (including existing NBFIs). Dhaka & Chattogram dominate the housing loan portfolio across both banks and NBFIs. Commercial Banks dominate with lower interest rates (8%–12%) but with stricter eligibility, and target primarily salaried professionals, HNI. NBFIs cater to mid-income/ informal sectors however, they only contribute less than 10% of the total housing loan portfolio in Bangladesh.

Apart from credit, the supply of affordable real estate requires larger institutional effort. Housing development costs in urban cities are high and rapidly increasing due to high costs of land and construction. National Housing Authority (NHA), Rajdhani Unnayan Kartipakkha (RAJUK), Chittagong Development Authority (CDA), Khulna Development Authority (KDA) and the Real Estate & Housing Association of Bangladesh (REHAB) are working to improve the affordable housing supply. RAJUK has set a goal to build 100,000 affordable flats in the Dhaka metropolitan by 2035 through 56 locations identified for PPP housing projects. However, NHA and RAJUK’s housing and satellite town development projects are progressing slowly and require greater monitoring. Special facility for financing housing loans to the target income segments in addition to targeted subsidies for builders, and home buyers in this segment can incentivize supply of affordable housing units and credit.

Housing Microfinance for Rural Households

While affordable housing finance is more suitable for the urban households, the offering and model of rural housing finance products remains unaddressed. Most rural housing remains self-financed, and households rely on informal savings or credit from relatives. Traditional banks do not serve this segment due to lack of collateral and formal income. However, MFIs with deep rural penetration-over 25,000 branches across the country and strong community trust are key for serving rural households. Housing microfinance loans are usually made on the basis of established membership in MFIs lending program and a sound track record of repayment of previous loans, instead of collateral.

This requires support for MFIs to build housing microfinance portfolios through capacity building in the areas of product, underwriting standards, digitalization, risk management, staff training, client education. In addition, exploring use of technology to minimize operational costs and improve credit assessment and loan monitoring can further support MFIs. However, commercial sources of longer term (three to five year) funding, which constrains MFIs in making the larger ticket, longer tenor loans needed for home construction and renovations without causing asset liability mismatches needs to be addressed. Partnerships and tailored credit arrangements can help increase the uptake of housing microfinance. Bangladesh Bank can also consider allowing MFIs access to low-cost green funds.

As urbanization accelerates and climate risks deepen, the need for resilient, affordable, and inclusive housing finance requires coordinated action across government, financial institutions, and development partners.