By Ngozi Chukwu
Shelter is ranked as one of the three basic needs of man after food and clothing. The provision of adequate and quality housing units is one of the functions of any government since housing is one of the fundamental needs of every citizen.
Therefore, any government that seeks to be close to its citizens should prioritize it. This is because the availability and non-availability of shelter affects the psyche of people and the economy of any country. The affordability of shelter provides psychological satisfaction, strengthen human dignity, respect, guarantees better health of citizens, generates employment and enhances productivity amongst others.
“Economically, investment in shelter contributes to fixed asset formation, employment and substantial backward and forward integration with the rest of the economy.
Mortgage financing is the de-facto form of housing finance all over the world. It is generally enhanced by availability of long-term funds often linked to the capital markets to aid refinancing and securitization. Low interest rates, regardless of its nature i.e. variable, or fixed, also boosts mortgage financing. All these serve to ensure that loan tenure is elongated, usually spanning a minimum of 20 years. In addition, it is promoted by enabling legislature that confers strong property rights and aid quick foreclosure/eviction among other necessary legal issues. Mortgage financing also thrives where the business environment and operating model aid short loan origination period.
In Nigeria, Mortgage financing is nascent, being in existence for just about 6 decades compared to centuries of practice in America and Europe. At its inception in Nigeria in 1956 as Building Society, it was entirely focused on deposit collection and runs on full government involvement. This was its mode of operation for the first 3 decades until it was restructured in 1989 when FMBN was created as the secondary Mortgage Bank and private sector participation began through the creation of Primary Mortgage Institutions.
When the Mortgage Banking Sub-sector of the Financial Services Industry in Nigeria took off, it was faced with several herculean challenges, among which are lack of long-term funds, fund mismatch (funding long-term with short term deposit), macroeconomic challenges in the form of high and volatile inflation, interest and exchange rates, which resulted in high cost of funds for both lenders and borrowers. The subsector was also adversely affected by slow, expensive and bureaucratic procedures of title registration and transfer, lack of mortgage friendly laws such as foreclosure/eviction laws and lack of strong property rights as well as cumbersome legal and legislative framework for land acquisition. Operations of mortgage financing was also hampered by the non-existent mortgage market infrastructure such as mortgage insurance, mortgage guarantee, mortgage collateral indemnity etc. These challenges seriously hampered the development, scope and reach of housing finance to different categories of Nigerians.
Within the space of about a decade, the subsector had however made remarkable progress in tackling these issues and the sub-sector has undergone significant evolution to keep up with global best practices. This was made possible by the efforts of the Federal Government, through the Central Bank of Nigeria as the external regulatory agency for the Mortgage Banks. Changes and evolution in the sub-sector could also be attributed to the advocacy of the Mortgage Banking Association of Nigerian (MBAN) Secretariat with relevant regulatory agencies and the concerted effort of the MBAN National Executive Council (NEC). The collective efforts of all Mortgage Banks also went a long way in bringing the subsector to its present state.
The first major initiative that transformed the mortgage banking business environment was the Recapitalization of Primary Mortgage Institutions and a change of their status from mortgage financing institutions to full-fledged Mortgage Banks in Year 2011. This served to integrate the up-till-then fragmented environment which consisted of several (about 83) weak, struggling and ineffective mortgage finance institutions to a few (about 33) but stable mortgage banks which were better equipped to deliver on their mandate of providing housing finance to Nigerians.
Next to this was the establishment of NMRC, in 2013. NMRC was established to ameliorate the issues of liquidity, funds mismatch (using short-term deposits for finance long-term assets) and access to long-term funds in the Mortgage Banking Sub-Sector. This was achieved by linking mortgage financing to the capital market, and refinancing loans created by primary mortgage banks. The establishment of NMRC marked a significant change from the deposit-based model of mortgage financing to a secondary market based system.
Further to the recapitalization of PMBs and the successful commencement of the NMRC, the Central Bank of Nigeria introduced a comprehensive review of the reforms within the framework of the National Financial System Strategy (FSS (2020). Consequently, it designed and implemented National Housing Finance Program (NHFP) to improve access of Nigerians to housing finance through the deepening of the mortgage sub-sector.
After the successful takeoff of NMRC, practitioners and regulators alike realized the necessity of deepening the primary mortgage market so as to enable the secondary market, which NMRC represents, to thrive. Until then, only Nigerians in formal employment could access mortgage loans. Both parties therefore went to work on expanding the scope of people eligible for mortgage loans.
This birthed the creation of uniform underwriting standards for different categories of Nigeria, which up till then, were largely excluded from access to housing finance. In collaboration with the Central Bank, MBAN developed underwriting standards for Nigerians in the informal sector (i.e. self-employed and entrepreneurs), Nigerians in Diaspora and for non-interest housing finance for people who possibly for religious reasons may be disinclined from conventional mortgage banking. The development of uniform underwriting standards for different categories of Nigerians significantly boosted financial inclusion in the mortgage banking subsector.
With more people eligible for mortgages, it became imperative to further strengthen funding sources for the Mortgage banks. The sub-sector therefore vigorously explored non-interest sources of funds for housing finance providers. In the same vein, relevant stakeholders embarked on a quest to improve the NHF business model, as a veritable source of housing finance in 2016.
Apart from improving funding sources, stakeholders in the mortgage-banking sub-sector also made significant achievement towards improving mortgage market infrastructures to further aid affordability. In 2017, MBAN and its constituent Mortgage Bank members successfully advocated for the amendment of the Pension Act to enable withdrawals from RSA for down payments on equity contributions. The sub-sector also initiated the Collateral Replacement Indemnity (CRI), to increase Loan-to-value (LTV) of Mortgage facilities from 80% to 95%.
The result of a local study conducted in the Nigerian Housing industry revealed that loss of job is a peculiar risk to obtaining housing finance in Nigeria. In response to this, the mortgage banking sub-sector stakeholders initiated the ‘loss of job insurance’. The scheme is meant to provide an insurance cover for anyone on a mortgage who losses his/her job after consistently repaying their mortgage for at least 6 months. Currently, the scheme covers default for only 6 months, but concerted effort is being made to extend the scope of the insurance.
Still in 2017, the MBAN secretariat commenced the registration of mortgage brokerage firms to lay the foundation for unbundling the mortgage finance value-chain in the near future. Also, as the housing finance operating environment is gradually emerging to become more favourable for mortgage banking businesses, it seemed to attract more participants, especially from the commercial banks and hence generating more intense competition.
Mortgage brokers therefore acts as intermediary between mortgage banks and mortgage finance seekers. Currently, there are nine (9) registered and accredited mortgage brokers in the Nigeria mortgage-banking sub-sector. And the sub-sector is open to accrediting more.
In an effort to further create an enabling environment for mortgage banking and housing finance by reducing the risk borne by mortgage lender and to further deepen the primary mortgage market, the Central Bank of Nigeria initiated the Mortgage Guarantee in 2018 as a key part of the NHFP. Mortgage guarantee is aimed at providing full or partial guarantee to lenders against losses resulting from borrowers default or inability to contribute minimum required equity.
Mortgage Guarantee Companies shall be funded through their paid up capital, debentures/bonds, loans from national and supra-natural government and other bodies and any other source approved by the Central bank of Nigeria.
Within the past 10 years, there has been several reforms and initiatives to deepen mortgage financing in Nigeria, most of which focused on creating an ambient macroeconomic environment for mortgages to thrive. A critical examination of these reforms revealed that two critical areas – legal framework and land administration – are still undermining the sector.
Currently, the Mortgage Banking Sub-sector of the Nigerian Financial Services Industry is comprised of three (3) key players- the Regulators and the Operators/Mortgage Lenders and the Mortgage Brokerage Operators. The sub-sector is primarily regulated by the Central Banks of Nigeria through the Other Financial Institutions Supervision Department (OFISD) while the Securities Exchange Commission provides additional oversight to those institutions that are publicly quoted. The Mortgage Lenders comprise of the 33 Mortgage Banks and a handful of Commercial Banks with Mortgage Portfolio.
Through the Operational Guidelines, CBN thus stipulated new Capitalization requirements of N5 billion and N2.5 billion for Mortgage Banks with National and State Authorization Licences respectively. The objective for permitting the establishment of State Mortgage Banks is to encourage the spread of Mortgage Banks across the Six Geo-Political Zones and further promote the policy of financial inclusion. Prior to this time, the Minimum Capital Requirement in the Sub-Sector was a meager N100 million and there were Eighty-three (83) Primary Mortgage Institutions (PMIs) that were operating in the Mortgage Finance landscape. At the conclusion of the recapitalization exercise, the Mortgage Banking Sub-Sector currently has Thirty-three (33) Mortgage Banks i.e. Ten (10) Mortgage Banks operate with National Licences while Twenty-Three (23) operate with State Licences across 25 States of the Federation and the Federal Capital Territory.
The improved operational efficiency of Mortgage Banks is another noteworthy achievement, which resulted from the issuance of NUBAN Numbers to facilitate online transactions in Mortgage Banking; the linking of Accounts of Mortgage Banks’ Customers into the BVN database which culminated in the seamless integration of the Mortgage Banking Sub-Sector into the wider Financial Services Sector Template. The effect is that customers of mortgage banks can carry out transactions such as transfers from the conventional ATM machines of Commercial Banks. This will ultimately enhance the inclusion of more people into Mortgage Banking on a continuing basis.
In spite of the significant levels of success, we are striving to achieve more milestones to boost the development in the Sub-Sector because mobilizing finance for housing delivery remains crucial to the development of the Country and for sustainable recovery from the present economic recession. A good starting point is to ensure increased access to Mortgages by Nigerians, especially in the Informal Sector, which represents about 70% of the economy, but is largely excluded from formal financial services, as well as the low and middle income earners, who incidentally need housing finance the most.
A well-functioning housing finance system is imperative for a prosperous Nation as it indeed plays an important role in stimulating economic growth and creating the much-needed jobs within an economy. Research has shown that Mortgage Assets constitute the largest financial assets class in the World and in the USA, the Housing Market is worth about USD29 trillion. The Housing Finance Market in Nigeria is capable of growing the GDP of Nigeria to 70-80% of its present size, as Investment in housing construction would accelerate growth in other Sectors in the Value-Chain. Thus increasing the stock of affordable housing would accelerate growth of Nigerian middle class, deepen the Nigerian market and increase aggregate demand in the economy.
The Housing Finance Sector represents a growth reserve for the Nigerian economy as it has immense potentials to boost economic growth. However, its opportunities for growth are embedded in the challenges inherent in the environment as the burgeoning housing deficit could translate to productivity and profit; rapid urbanization creates a continuous demand for housing and by extension finance, high population of the young and Middle Ages guarantees the proliferation of new households whose demands for Housing ensures the sustainability of Sub-Sector.
Also the limited availability of land with clear Titles provides the impetus for investment in and development of innovations, while high cost of raw materials has the potential to foster the development of alternative building technologies. The Sub-Sector has been, and is definitely still in a difficult phase, but those difficulties also hold immense potentials for growth and development.
The long-term goal of housing finance providers is to increase the contribution of Housing Finance to at least 10% of the Nigeria’s GDP as against the current level 0.5% and achieving this feat would require the creation of more resilient Housing Finance Systems. Thus, channeling long-term capital into housing remains a major priority. And as a matter of urgency and importance is the engagement with the Federal Government of Nigeria and the Central Bank of Nigeria on the critical need for Intervention /Matching Fund for the Sub-Sector to stimulate Mortgage Financing for Home Ownership.
It is also pertinent to aggressively follow up with the Government through our Regulatory Agencies and other Stakeholders for improvement in the Enabling Environment through the Review of Land Title/Titling processes, in terms of Cost and Time, which to some extent had hampered the flow of Mortgage Finance and adversely affected financial inclusion.
There is also the need to put in place robust Operational Guidelines/Mortgage Bankers’ Tariff to enhance Profitability of Mortgage Banks especially with respect to Loan Margins, Diaspora Lending, Foreign Exchange (FX) Denominated and Matched Lendings, Loan Loss Provisioning, etc.). We need advocacy for development and implementation of a Mortgage Bankers’ Tariff that would be different from the regular Commercial Banking Tariffs, and Mortgage Banks need to be allowed to develop Housing Microfinance Products and Mortgage-related Consumer and Commercial Loans. The Sub-Sector also needs more engagement with credible Local and International Multi-lateral Agencies in order to intensify development of sustainable Funding Structures for Affordable Housing.
Ultimately, the Sub-Sector is working assiduously to achieve in the very near future, downward reducing interest rates along Single digit once the macroeconomic indices are favourable, such that Mortgage Origination and Underwriting conditions could be reasonably lenient to accommodate the extension of Social Housing Finance to the Lower Income Earners on Economies of Scale, as achieving the feat would increase the rate of Home-ownership in Nigeria at an exponential rate.
Financial Inclusion
As defined by the Central Bank of Nigeria in 2013, Financial Inclusion is a state where financial services are delivered by a range of providers, mostly the private sector, to reach everyone who could use them. More succinctly, it means ‘a financial system that serves as many people as possible in a country’ and provides a situation where eligible members of the economy do not have difficulty in opening bank account; can afford to access credit; and can conveniently, easily and consistently use financial system products and facilities without difficulty.
While concerted efforts have been made by the government and concerned stakeholders in the financial services industry to extend conventional banking services to as many Nigerians as possible, the same cannot be said of the extension of housing finance and mortgage services. Hence, the rate of financial exclusion is rather high in the Mortgage Sub-sector compared to other sub-sectors in the larger financial services Industry in Nigeria.
For Housing Finance and Mortgage Banking, customers are broadly categorized into three in Nigeria, the formal open market sector, the subsidized open market sector and the informal sector. The formal open market sector comprises of middle and high income earners in paid employment either with the government or in the private sector. It also includes a few high net-worth entrepreneurs.
The subsidized sector is a subset of the open market comprised of workers in both the public and private sectors who contribute to and are eligible to access mortgage loans from the National Housing Fund. The formal sector constitutes less than 40% of the working populace eligible to housing; the formal open market sector makes up about 15% while the subsidized open market sector constitute less than 25%.
The informal sector comprises of the segment of the populace who are not engaged in formal occupation but are largely self-employed and entrepreneurs. This sub-group comprises mainly of self-employment activities, which are categorized as the micro, small and medium-sized enterprises (MSMEs). They are referred to as informal sector because activities in this sector are difficult to measure, despite the fact that they are highly dynamic and they contribute substantially to the general growth of the economy.
Over 60% of the working population belongs to the category of the informal sector. From the website of Federal Ministry Budget and National Planning, the informal sector is reported to have great potential as it contributes more than 58% to the country’s economy, therefore denying them access to mortgage has amounted to neglecting a potentially huge market.
Until now, the informal sector has been largely excluded from mortgage and formal housing finance services. Although it is believed that people in this category cannot afford a mortgage, more often than not, even when they are financially capable of taking mortgage loans, they are denied access to them because they do not have proof of the consistency of their financial capability.
Conclusion
Mortgage finance has been widely recognized as the key driving force for housing development in every country. Also, it is popularly believed that the availability of housing provides psychological satisfaction and guarantees better healthcare for citizens of a country.
Hence, housing should be given the first lift in every government fiscal and monetary policy to make funds easily accessible and at a cheaper rate because every activity in the housing sector generates employment that will boost and sustain economic growth. If the mortgage sub-sector in Nigeria must survive and attain its full potential to contribute significantly to the economy the Government must be supportive and have a progressive outlook for the sector.
- Mrs Chukwu, Group Head, Infinity Mortgage Bank, delivered this paper at a FICAN Workshop in Abuja on Tuesday.
