11 months ago

Rethinking Housing Finance

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Water pass garri is a very apt way to describe the housing finance situation in Nigeria. The Managing Director of the Federal Mortgage Bank at a recent industry event mentioned that since inception in 1973 the FMBN has funded 18,935 mortgages at a total cost of N193.4 billion.


To put things in context, Nigeria has a mortgage to GDP ratio of circa 0.6%, which is puny, compared to our regional nephew; Ghana which stands at 2%, and very abysmal when viewed against south Africa with a 31% ratio. Clearly, while the mortgage industry has been around for nearly half a century, it has not shed its nascence.


The obvious question then is; if the mortgage industry is so underdeveloped, how have Nigerians been acquiring homes?


Available data suggests that over 90% of homes in Nigeria are acquired by incremental building. This is analogous to buying a car in parts; one tire today, a carburetor in six months and a pair of seat belts a while later. However, as grossly inefficient as this method of home acquisition is, given the very high interest rates for mortgages, it is by far the more practical, and affordable option open to most Nigerians.

In light of the pittance that the FMBN brings into the housing finance pool, the effective mortgage interest rates in Nigeria which ranges from 15% - 22% will make even soulless loan sharks in more advanced economies drool with longing. So, why isn’t capital flowing, as it should in the direction of the greatest return? Why isn’t the Nigerian mortgage sector awash with patient international capital in pursuit of the clearly higher returns that can be made?


There is a long list of reasons but these three are perhaps most critical. Firstly, the significant foreign exchange risk associated with volatile frontier markets; secondly, the fact that capital is mostly sector agnostic, and so even if it comes into Nigeria, it would probably go into sectors with less risk, and greater asset liquidity; and thirdly, the often ignored fact that in spite of the touted housing deficit figures, the high poverty rate in the country means that there is actually very little effective demand for housing.


Since pulling oneself up by the bootstraps is in reality a rare miracle or a freak accident, how else might we succeed at the more practical matter of attracting capital into the mortgage sector? Apparently, our current macro-economic and policy environment makes it difficult to pull in patient institutional capital. Consequently, it will be useful to explore other avenues for attracting capital that are relatively cheap, and somewhat patient.


One such vein of capital can be diaspora remittances. Most recent data indicates that annual remittances through formal channels amounts to about $25billion. A useful backdrop against which to view this figure is the total mortgage loans generated by FMBN in its nearly half a century of operation; N193billion i.e $0.5billion.


Clearly, given the right policy, and legislative framework, and a conscientious marketing programme, the Nigerian Diaspora can with a tiny fraction (2%) of their annual remittances, equal FMBN’s 50year performanc

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