Housing Finance in Africa

Abstract

Housing finance plays a vital role in the housing delivery value chain. This is due to the fact that finance is needed for both the demand and the supply of housing. On the demand side, the availability of and access to housing finance is a significant determinant in a household’s decision to acquire, build, or rent a house. Similarly, on the supply side, developers need financing to build the mass housing projects that are needed to address the continent’s housing deficit.

3.1 Introduction

Housing finance plays a vital role in the housing delivery value chain. This is due to the fact that finance is needed for both the demand and the supply of housing. On the demand side, the availability of and access to housing finance is a significant determinant in a household’s decision to acquire, build, or rent a house. Similarly, on the supply side, developers need financing to build the mass housing projects that are needed to address the continent’s housing deficit.

Housing finance, being an essential part of financial systems, contributes to the development and deepening of financial markets and has some potential impact on the financial and economic stability of a country. Therefore, it contributes to deepening and broadening the financial sector, increasing financial access, and promoting financial inclusion. However, the development of housing finance on the continent has not kept pace with the backlog in housing demand.

Africa’s rapid urbanization and economic growth have led to an increasing demand for housing finance. The dearth of long-term finance, weak credit markets, an unstable macroeconomic environment, and limited or inexistent housing finance systems are major obstacles to the continent’s housing market development. Moreover, the housing deficit and the lack of adequate housing finance instruments are even more acute for lower-income groups, who by definition are the majority excluded from formal financial systems. Therefore, it is important not only to focus on how to develop housing finance systems, but also to focus on how to leverage financial systems to go “down market” in order to ensure that low-income groups have access to decent housing. There is a general belief that only government-related financing schemes could contribute to serving low-income households. This explains the numerous government-sponsored social housing schemes that have been widespread across the continent (Table 6.3). However, given the magnitude of the housing deficit, initiatives that involve private sector stakeholders are vital in addressing Africa’s housing shortage.

This chapter aims to provide an overview of the housing finance market in Africa, while highlighting its challenges and opportunities. The analysis investigates the underlying fundamentals driving Africa’s housing finance market and is based on primary and secondary information collected during fact-finding missions in selected countries, which is complemented with a thorough literature review. Beyond the analysis of the housing finance market (on both the supply and demand sides), this chapter aims to provide a better understanding of the challenges in financing low-income households and to shed light on what it would take to serve this income segment. It also discusses how the private sector can be “crowded in” so as to ensure increased availability of and access to housing finance services. It is targeted to the myriad of all stakeholders involved in the housing finance market: lenders, policymakers, regulators, developers, and development finance institutions (DFIs), among others.

3.2 An Overview of Africa’s Housing Finance Market

Housing finance markets across Africa have grown in recent years as the number of financial institutions providing housing finance products have increased from the state-owned bank model in the 1980s, to now include private commercial banks. Nonetheless, the depth of the mortgage finance markets across the continent is low with the exception of a few countries such as Morocco, Namibia, and South Africa. This section provides a snapshot of the continent’s housing finance market, details characteristics of housing finance products, and features prospects for developing housing finance markets that cater for the needs of low- and middle-income households.

3.2.1 A Nascent Housing Finance Market

The landscape of the African housing finance system is quite diverse. It involves both public and private entities offering different types of products geared toward responding to the unmet housing finance needs.

State-owned housing finance institutions have dominated housing finance in many African countries. The state housing bank model is widespread across the continent from Cameroon to Gabon in Central Africa, Ethiopia to Rwanda in East Africa, Algeria to Tunisia in North Africa, Lesotho to Namibia in Southern Africa, and Burkina Faso to Senegal in West Africa. During the 1980s, most of these banks, which largely relied on public budgets for financial support, collapsed in the economic downturn. Moreover, the fact that most of these state housing banks were not deposit-taking financial institutions created a severe asset-liability mismatch. A lax credit risk policy, poor corporate governance, and weak operational teams have also precipitated the failure of many state-run housing banks, resulting in government bailouts.

Although these banks were created with the goal of expanding the housing finance market, they have had the unintended consequence of distorting the market in some cases (Beck et al. 2011). Interest rate ceilings, credit quotas, and a lengthy foreclosure process have had the effect of further restricting lending toward low- and moderate-income households. Consequently, the continent’s housing finance market is small and primarily caters to the needs of upper-middle- and high-income households, to the detriment of low- and middle-income families.

With the exception of South Africa, Namibia, Morocco, and Tunisia, housing finance markets in the continent are small and underdeveloped compared with those of other emerging economies, as reflected by the outstanding mortgage loans to GDP (Fig. 3.1). In Nigeria, Cameroon, Egypt, Côte d’Ivoire, Ghana, Tanzania, and Burkina Faso, housing finance amounts to less than 1 percent of GDP, which is dwarfed in comparison with Chile, Costa Rica, Malaysia, and Thailand, where outstanding mortgage loans to GDP varies between 15 and 36 percent (Fig. 3.2).

Fig. 3.1

Africa’s underdeveloped mortgage market (Source: Hofinet)

Fig. 3.2

Size of residential mortgage market (most recent data available) (Source: World Bank, Hofinet, authors’ calculations)

Governments in many countries are beginning to adopt policies that encourage private lending while maintaining a level playing field for all lenders. In recent years, state interventions have been opened to private lenders in South Africa, Côte d’Ivoire, Morocco, Egypt, and Algeria, among others. In South Africa, the Finance-Linked Individual Subsidy Program (FLISP), a government partnership with the private sector to make housing finance accessible and affordable to low-income households, is accessible to all mortgage lenders. In Morocco, both public and private mortgage lenders also have access to Fonds de Garantie pour Populations à Revenus Irréguliers Modestes (FOGARIM), a credit-enhancement program that facilitates lending to low-income and informal-sector workers.

The financial liberalization of government assistance in many countries has partially contributed to growing the housing finance market over the past years. In South Africa, the mortgage market grew by 10.3 percent from R 124.38 billion (US$8.2 billion) in 2013 to R 137.19 billion (US$9.1 billion) in 2014. However, the number of mortgage loans approved in the affordable housing segment grew by only 4.5 percent during the same period. In Kenya, the value of outstanding mortgage loan assets has steadily increased since 2012 when the central bank started collecting data on residential mortgages. The value of outstanding mortgage loans in Kenya increased from K Sh 119.6 billion (US$1.2 billion) in December 2012 to K Sh 164 billion (US$1.6 billion) in 2014, representing a growth of K Sh 44.4 billion (US$438.7 million) or 37 percent.

In the West African Economic and Monetary Union (WAEMU) countries—Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Sénégal, and Togo—the size of the housing finance market has also grown considerably over the last decades. Annual lending volumes in WAEMU increased from an average of CFAF 80 billion (US$160 million) between 2005 and 2011 to CFAF 203.7 billion (US$407.4 million) in 2013, which is a reflection of better credit conditions and improving housing market dynamics in the region (Fig. 3.3). In Morocco, the total amount of outstanding mortgage loans increased from US$15.99 billion to US$19.64 billion between 2011 and 2013. In Nigeria, the size of the mortgage market has grown from N54 billion (US$342 million) in 2006 to an estimated N224 billion (US$1.42 billion) in 2011. Figure 3.3 provides the evolution of housing loans in selected francophone African countries.

Fig. 3.3

Evolution of housing loans in selected francophone African countries, 2005–2013 (Source: BCEAO; for Cameroon, from one leading financial institution only.)

Notwithstanding the appreciable growth in housing finance, bank lending toward the sector has been very conservative. For the most part, beneficiaries of housing loans in Africa are wealthy individuals.

In South Africa, for instance, the number of mortgage loans approved within the affordable housing segment between 2013 and 2014 dropped significantly, by 20.4 percent, with an estimated 9 of every 10 mortgage loan applications being denied. Likewise, in Angola, the formal banking sector accounts for less than 2 percent of housing loans, with banks rejecting an estimated 82 percent of housing loan applications. As of October 2014, just 8960 mortgage accounts existed in the country. In Cameroon, the leading mortgage institution, which is undergoing restructuring, approved a paltry 262 housing loans in 2014 to serve an urban population of 12 million. In Kenya, a country of 45 million people, just 60,479 mortgage loans were outstanding between December 2012 and December 2014.

Similarly, less than 2 percent of the populations in Botswana, Malawi, Tanzania, and Zambia use mortgages to acquire their houses. In Nigeria, the housing finance market has not fared any better. Mortgage loans account for less than 1 percent of the loan portfolio of commercial banks. Only about 5 percent, or 685,000 of the 13.7 million housing units in Nigeria are financed using mortgages, owing to the fact that Nigeria’s Federal Mortgage Bank (FMBN) has failed to meet expectations: as of August 2012, only about 13,000 mortgages had been provided for a total of 3.8 million eligible contributors to the National Housing Fund managed by FMBN. Today, Nigeria’s mortgage deficit is estimated at N20–30 trillion (US$100–151 billion), according to the Mortgage Bankers’ Association of Nigeria.

The figures in the WAEMU subregion have been disappointing as well. In 2013, WAEMU banks approved a meager 15,328 housing loans to serve a total population of 105 million, of which 36.3 million live in urban areas. The percentage of housing loans approved in the WAEMU region varies from a low of 0.7 percent in Guinea-Bissau to a high of 50.1 percent in Sénégal (Table 3.1).

Table 3.1 Housing loans in WAEMU, 2013

If this dismal housing finance trend continues, it is obvious that the continent’s housing crisis will explode in the coming years. From the foregoing discussion, it is clear that mortgage finance alone will not deliver housing to the vast majority of African households. With an average annual income of US$470 for each person, many African households cannot afford the cost of a mortgage. Recognizing the high level of informal employment in urban Africa, housing microfinance (HMF) promises to be a viable alternative to mortgage finance.

3.2.2 An Emerging Housing Micofinance Market

Microfinance institutions (MFIs) continue to play a vital role in Africa’s financial landscape. The demand for HMF is strong. It is estimated that between 15 and 40 percent of microfinance loans are diverted toward housing purposes (Kihato 2013; HfH 2011). During our fact-finding missions across the continent, MFIs indicated a strong interest in developing specific housing finance products. In Cameroon, for instance, about 600 MFIs operate in the economy with average annual deposits of CFAF 500 billion (US$848.76 million). In Kenya, MFIs also play an important role in the financial sector. Between 2012 and 2013, Kenya’s microfinance sector registered strong growth of 27.8 percent, as the total assets of microfinance banks increased from K Sh 32.4 billion (US$333.85 million) to K Sh 41.4 billion (US$426.58 million). In 2013, the gross loan portfolio of African MFIs reporting to the Microfinance Information Exchange (MIX) stood at over US$7 billion, with an average loan balance per borrower of US$478. These small loan amounts can be crucial in financing income-generating activities for low-income families. This strong market growth is being driven by improvements in market infrastructure, stronger governance, and an improving regulatory environment on the continent.

As the microfinance industry matures, product diversification becomes increasingly important to satisfy diverse client needs. HMF is one such product that needs to be expanded. HMF is well suited to the incremental housing development approach that is characteristic of Africa’s housing market. It is reported that the great majority of houses on the continent are self-built. They account for over 70 percent of new housing supply in most countries. HMF consists of financial services and loans to low-income households for home construction, home improvements, home expansion, and land acquisition. A characteristic feature of HMF loans is their short maturity, usually ranging from three months to three years (Table 3.2). However, interest rates are high, sometimes above 30 percent on borrowed capital. In some countries, interest rates are capped by usury laws.

Table 3.2 Key features of housing microfinance loans

On the basis of evidence from Latin America and other regions, MFIs that add HMF to their suite of products could (1) increase their scale of operations and profitability, (2) reduce client dropout rates and decrease the overall risk portfolio, as housing loans tend to outperform other loans, (3) provide additional repayment incentives and resources to proven clients, and (4) gain access to affordable government funds that have been earmarked for housing (Goldberg and Motta 2003). Table 3.3 provides a sample of HMF products in selected African countries.

Table 3.3 Selected HMF products available in Africa

Despite the growing demand and promise of HMF, this financial product is relatively new in Africa compared with market developments in South-East Asia and Latin America. Although still at a limited scale, HMF is sporadically offered in Angola, Cameroon, Côte d’Ivoire, Ghana, Kenya, Nigeria, Tanzania, and Uganda, among others. Main product development constraints identified by stakeholders during our on-the-ground interviews include (1) limited in-house capacity to develop products and manage risks, (2) lack of a dedicated pool of capital to fund housing loans, and (3) lack of quantifiable data on market demand.

Savings and credit cooperatives (SACCOs) also play an active role in Africa’s finance market and have two distinct strengths. First, these are community-based entities with deep outreach among informal-sector households in particular, and lower-income groups in general. Second, these institutions are large savings collectors, typically organized as networks of local institutions, with stable internal resource bases, usually consisting of thousands of depositors. Such networks are particularly strong in Mali (Nyesigiso and Kafo Jiginew credit union networks), Burkina Faso (Caisses Populaires), Rwanda (Banques Populaires), Kenya (Kenya Union of Savings and Credit Cooperatives—KUSCCO), and Cameroon (Cameroon Cooperative Credit Union League—CamCCUL). Box 3.1 provides some details on the KUSCCO Housing Fund.

Box 3.1 KUSCCO Housing Fund

The KUSCCO Ltd., the umbrella organization of all savings and credit cooperatives in Kenya, was founded in 1973. Today, KUSCCO counts over 3000 SACCOs as members, with total deposits of K Sh 6.2 billion (US$63.63 million) as of June 2015. In 1996, the KUSCCO Housing Fund was created with a mandate to mobilize funds from member cooperatives in order to finance mortgages, equity release, construction, and land purchase loans.

The fund provides housing loans ranging from US$5,000 to US$77,778 to low- and middle-income SACCO members, with loan repayment periods of up to 15 years. This compares with member cooperatives, which extend housing credits only for up to US$10,000, with a five-year repayment timeline.

In order to qualify for a loan, applicants need to meet a handful of criteria: (1) pay a membership fee of US$17 upon admission to the fund; (2) save continually for at least six months prior to obtaining a loan, with a minimum monthly saving of US$56; and (3) have a title deed on a property. Although KUSCCO’s housing loans are exclusively funded through short-term savings deposits, their interest rates are fixed at 14 percent, on a declining loan balance, throughout the repayment period. The majority of borrowers, most of whom are employed in the informal sector, repay their loans on time. As of December 2014, over 5,000 housing loans had been granted by KUSCCO, with a fairly good performance—the nonperforming loan rate is below 5 percent, which is comparable with that of other products offered by the institution.

Source: Author based on information obtained from KUSCCO during fact-finding mission in Kenya, October 2014.

3.2.3 Contractual Savings for Housing Schemes in Africa

A contractual savings for housing (CSH) plan is a contractual agreement between a financial institution and a customer that grants the customer the right to obtain a preferential mortgage after a minimal saving period. CSH has been successfully used in Europe, with the “open” French Compte Épargne Logement, or Plan Épargne Logement, and the “closed” German Bauspar system being the most prominent. In a closed system, housing loans are funded exclusively with savings pooled together by the institution under the CSH scheme, whereas in an open system, a lender is permitted to access other funding sources (such as capital markets) if the inflow of savings is not enough to meet loan demands. Housing savings loans are often restricted for housing investments. Depending on the contractual agreement, these loans can be used for land acquisition, housing construction, home improvement, or to purchase a new home. There have been increasing interest and use of housing savings contracts in Asian countries such as India, Indonesia, and China.

Mobilizing private savings for housing purposes has several benefits for lenders, customers, and the government. From a lender’s perspective, this helps to mitigate credit risks in an environment characterized by information asymmetries (see Chap. 1). To a large extent, CSH minimizes credit risk, as subscribers demonstrate their ability to make timely payments by saving a portion of their income throughout an extended period of time. As a result, lending to a CSH subscriber is often less risky than lending to other borrowers. Studies have shown default rates under contractual savings schemes are usually low (Lea and Renaud 1995; Taffin 1998; United Nations 2005). In Addis Ababa, Ethiopia, for example, there have been zero nonperforming loans (NPLs) under the CSH plan as of November 2014, according to Commercial Bank of Ethiopia (CBE) officials. Given the substantial down payments made by subscribers through their contracted savings, the loan-to-value (LTV) ratio is often significantly lower, which reduces the probability of defaults and delinquency. Households also find CSH products attractive, especially in a low-interest-rate environment, where the premiums accorded to induce savings are not eroded by high inflation rates. Moreover, the accumulation of savings and the prospects of a comparative lower interest rate on housing loans is attractive to households, particularly low- and middle-income families. Contractual savings programs can also help governments mobilize long-term financing dedicated for housing construction and increase access to financial service for youth and low-income individuals.

In Africa, countries that have adopted variants of CSH schemes include Cameroon, Côte d’Ivoire, Ethiopia, Nigeria, Tunisia, and Morocco. For illustrative purposes, the discussion that follows will investigate some of the schemes developed in some of these countries.

In Nigeria, potential borrowers are required to save for a minimum of six months before they can access a loan from the National Housing Fund. In Morocco, the government introduced provisions to encourage long-term savings in its 2011 Finance Law, which provides tax exemptions on savings plans for housing. In Morocco, banks are permitted to administer contractual savings plans, while in other countries such as Tunisia only specialized financial institutions are responsible for managing the scheme. In Morocco, subscribers are required to pay an initial deposit of at least DH 500 (US$50) upon opening a housing savings account. During the savings phase, subscribers are required to contribute a minimum of DH 3000 (US$300) annually, while the cumulative amount that can be contributed under the scheme by law cannot exceed DH 400,000 (US$40,000). At the end of the required savings period, a subscriber can obtain a loan of at least three times the cumulative regular savings amount. The interest rate charged on these loans is 50 basis points lower than the interest rate applied to housing loans with the same characteristics. In order to benefit from the tax exemptions provided by law, a subscriber must also provide a certificate issued by tax officials stating that they do not own any home.

Neighboring Tunisia operates a semi-open CSH system that most sub-Saharan Africa countries have replicated with varying degrees of success. In Tunisia, the CSH system is dominated by Banque de l’Habitat (BH), a specialized housing institution, which operates two housing schemes: a conventional housing savings plan, or Plan Epargne Logement (PEL) classique and the El Jedid housing savings plan, or PEL El Jedid (El Jedid). Subscribers to BH’s PEL plan—which is open to first-time home buyers only—have the option of saving at least TD 54 (US$28) and a maximum of TD 500 (US$258) per month, which is remunerated at 3.5 percent per year net of taxes. Depending on their needs and resources, subscribers can select from a four-, five-, or six-year savings plan, after which they are entitled to a housing loan to (1) purchase a new home from an approved real estate developer, (2) construct a new home, or (3) extend the first housing to the tune of at least a third of the existing living space. PEL loans have a repayment term of up to 25 years, and the interest rate is equivalent to the average money market rate plus 2.5 percent. If the loan amount is insufficient to meet the home cost, customers can obtain additional credit of between US$4,463 and US$42,250 (corresponding to their savings plan) with a repayment period of up to 25 years, and a fixed interest rate plus 0.75 percent, which is currently 5.75 percent. The El Jedid savings plan entitles subscribers to a housing loan, which can be used to (1) purchase a new home from an approved developer, (2) purchase land for residential use, (3) buy a resale home, (4) construct a new home, and (5) refurbish or extend an existing home. Under this plan, subscribers are required to save a minimum of US$54 to a maximum of US$1,298 per month.

In Ethiopia, the government launched a housing savings plan with two main objectives: provide housing for low- and middle-income families, and promote a culture of savings among Ethiopians. Unlike the Tunisian housing savings plan, subscribers to Ethiopia’s CSH scheme can only purchase a house constructed under the government’s Integrated Urban Housing Development Program (IUHDP). Subscribers who default on savings for six months become ineligible to participate in this program. In order to increase home affordability for target groups, the government supplies the required land and bulk infrastructure for free, as well as the requisite technical assistance (house designs, construction supervision, and project management). Proceeds from the sale of government bonds and the deposits mobilized under the CSH scheme are the primary sources of finance for the housing project. IUHDP consists of three main housing saving schemes—10/90, 20/80, and 40/60—all managed by the state-owned CBE. Table 3.4 shows the minimum monthly income requirements for participating in the various CSH plans.

Table 3.4 Monthly income threshold for housing saving plan in Ethiopia, as of November 2014

The 10/90 plan targets low-income households earning under Br 1200 (US$60) a month (Table 3.5). The 10/90 plan requires individuals to save 10 percent of the home price over a consecutive period of three years. Subscribers are required to save at least Br 187 (US$10) per month, which is remunerated at 6 percent (5 percent base rate plus 1 percent savings premium). After the three-year saving period, savers are granted a loan from the CBE for the remaining 90 percent at an interest rate of 8.5 percent—compared with over 18 percent at other financial institutions—and a 25-year repayment period. These 10/90 homes are cross-subsidized by the other CSH schemes.

Table 3.5 House prices in Ethiopia under the government-housing program, as of December 2014

The 20/80 plan, in contrast, targets lower-middle and middle-middle-income households. The 20/80 subscribers are required to save 20 percent of the total house price over a consecutive period of up to seven years, after which they are eligible for a loan amounting to 80 percent of the house cost. This loan, which carries an interest rate of 9.5 percent, has to be repaid over 20 years.

According to the CBE, 862,216 Addis Ababa residents opened CSH accounts for the 10/90 and 20/80 housing programs during the registration window, which was closed in June 2013. The savings of CSH subscribers will be used as down payment, while financing for the remaining total housing cost will be provided by the CBE.

Unlike the 10/90 and 20/80 plans, the 40/60 plan is a partnership between the CBE and the Addis Ababa Housing Development Enterprise. Subscribers under the 40/60 plan are required to save at least 40 percent of the total housing cost over five years before they are eligible for a CBE loan to cover the remaining house value, at an interest rate of 7.5 percent, with a 17-year repayment period. Over the course of five years, subscribers are requested to save on a monthly basis at least Br 1,033 (US$51) for a one-bedroom house, Br 1,575 (US$78) for a two-bedroom house, and a minimum of Br 2,453 (US$122) for a three-bedroom home. However, the CBE encourages subscribers who have the ability to contribute more to do so, or better still, to pay the total housing costs up front. In return, housing allocations will be prioritized on the basis of the amount contributed per subscriber, unlike the 10/90 and 20/80 housing savings plans under which home transfers or allocations are conducted through random draws. As of November 2014, 20,000 subscribers had paid the full house costs under the 40/60 plan, of which 8,000 were Ethiopians living abroad. These individuals will be given priority in the housing allocation process.

Building houses through housing cooperatives is another saving scheme supported by the Ethiopian government, as long as the cooperative has at least 24 members. Housing cooperatives can be organized at workplaces, by residency area, or by the Ethiopian diaspora community. Under the housing cooperative saving scheme, houses can be constructed either by the government-owned Housing Development Enterprise—at a cost of Br 210,000 (US$10,173) for a one-bedroom home, Br 280,000 (US$13,563) for a two-bedroom home, and Br 385,000 (US$18,650) for a three-bedroom home—or by a contractor of the cooperative’s choosing. Cooperative members are expected to save the estimated full cost of the housing project: 50 percent at the time of registration, and the remaining 50 percent when they are granted the construction license. Land for the construction of cooperative houses is provided for free by the government. In addition, if the government Housing Development Enterprise is contracted to construct cooperative housing developments, taxes on construction materials are also waived.

Despite the numerous advantages of CSH schemes, there are also some drawbacks. The principal limitation of the Ethiopian CSH system, for instance, is the likelihood of an increase in home prices as a result of rising construction costs. Consequently, savers would be required to increase the minimum savings amount, which may be unaffordable for many households. Another limitation of the Ethiopian CSH scheme, given the slow pace of construction, is the long queue of subscribers waiting for their turn to be allocated a house. As of December 2013, over 900,000 people had registered for the CSH plan and were in the housing queue. Opening the construction process to private and foreign investors through public-private partnerships will help reduce the construction backlog under the government-coordinated housing program (see more in Chap. 5).

Liquidity and interest rate risks are other challenges that may affect the viability of CSH systems. Under a closed contractual savings system, liquidity risk may arise when new savings and existing loan repayments are insufficient to fund loan demands from subscribers who have completed the savings phase. Interest rate risk is also predominant in a closed system where rates on savings and loans are fixed, irrespective of changing market conditions. In many African countries where the interest rate environment is volatile, a fixed interest rate may not be optimal.

Inasmuch as contractual savings plans contribute to plugging the housing finance deficit, it remains that a big chunk of the housing finance needs is unmet. In response to that need, some efforts geared toward tapping into the bond markets have been made.

3.2.4 The Emergence of Housing Bonds

Housing bonds are another approach used by some governments and institutions to raise funds for affordable housing development projects. Kenya provides a good example of how financial institutions and property developers can raise funds through housing bonds. Shelter Afrique, the Nairobi-based pan-Africa housing finance institution, has successfully issued five housing bonds between 2005 and 2014, with amounts varying from K Sh 500 million (US$5.2 million) to K Sh 5 billion (US$51.62 million). The tenors of these issues have ranged between three and five years, with coupon rates of between 12.5 and 12.75 percent. Kenya’s favorable regulatory environment has precipitated the growth of this asset class.

Given its mandate to facilitate access to financial services through effective regulation and innovation, Kenya’s Capital Markets Authority (CMA) approved Housing Finance’s (HF) issue and listing of a seven-year, K Sh 10 billion (US$103.24 million) housing bond. The first tranche of this bond, which was issued in October 2010, was oversubscribed by 41 percent. During its second tranche issued in October 2012, HF raised K Sh 5.2 billion (US$53.68 million), which represented an oversubscription of 76 percent above its K Sh 2.9 billion (US$29.94 million) target. The ability of these institutions to raise funds in domestic capital markets enables them to offer local currency lending to their clients under better terms.

Box 3.2 Morocco Looks to Covered Bonds to Support Housing Finance

Based on the success story of the European covered bond industry, in the second half of 2010 the Moroccan Ministry of Economy and Finance launched a project for establishing a legal and regulatory framework for covered bonds with the main objectives of (1) allowing banks to offer mortgage loans at affordable rates; (2) reducing banks’ maturity mismatch and interest rate risks; and (3) providing institutional investors, notably insurance companies and pension funds, with a new class of long-term, high-quality private debt to reduce their term gaps. Covered bonds also have a positive collateral impact in promoting sound loan origination, given that the loans that are eligible as cover assets must meet high-quality eligibility criteria on an ongoing basis.

Morocco’s covered bond project was part of a broader financial sector reform supported by the World Bank. It has benefited during its different stages from specific technical assistance funded by the First Initiative trust fund. This technical assistance allowed the mobilizing of high-level experts to assess the prerequisites and rationales for introducing covered bonds in Morocco and to comment on the draft law. The most significant characteristics of the Moroccan covered bonds draft law may be summarized as follows:

• Issuance structure. Bonds will be issued directly by banks, which is the most common structure internationally, as it seemed the simplest and most appropriate to the nature of the bonds as senior bonds and the ongoing flows between the cover pool assets and the other bank assets.

• Issuer and supervisory system. On the basis of international benchmarks, the issuers will be banks that have received a specific license granted by the Central Bank on the basis of their capacities and the specific covered bond management system put in place. The draft law provides for specific supervision of the covered bonds activity by the Central Bank, monitoring of the cover pool by an independent comptroller, and implementation of specific prudential regulations on the cover pool (internal audit, risk management, liquidity obligations, etc.).

• Eligible assets. Eligible assets for mortgage-covered bonds are primary mortgage loans with an LTV ratio of less than 80 percent for residential loans and 60 percent for commercial loans. Eligible assets for public-covered bonds are loans to local governments that meet certain financial conditions and loans to public corporations guaranteed by the government. The inclusion of public-covered bonds is aimed at allowing a new class of assets for investors and is expected to gain importance in the medium to long term, thanks notably to the regionalization process currently ongoing in Morocco.

• Cover pool. The law provides that the bank has the ongoing obligation to maintain sufficient eligible assets in the cover pool to allow coverage of issued covered bonds both in stocks and in flows. To this end, the Central Bank enacts specific and prudent valuation techniques for the cover pool assets. Any asset that loses quality criteria or is prepaid must be replaced by other eligible assets. There is also a minimum legal over-collateralization of at least 5 percent that can be set to a higher level in the regulatory framework, by using substitute high-quality assets listed in the law, notably government bonds. Specifically for mortgage-covered bonds, mortgage commercial loans cannot exceed a small percentage of the cover pool (10 percent).

• Customer deposits protection. In Morocco, the risk of depositors was not deemed to be a major issue in an emerging market. Yet, it was judged prudent to include in the law the provision that the issuance is limited to a share of the issuer’s total assets to be set in the regulatory framework (at present, 20 percent) and more stringent limits can be set by the Central Bank, notably in the case of banks with a specific risk profile.

• Bankruptcy remoteness. The law states that a specific cover pool manager will be designated in case of bankruptcy and given sufficient power and tools to continue the management of the cover pool or to transfer it to another bank. It is also important to underline that the law explicitly enacts the principle of asset continuation in case of bankruptcy.

It is important to note that prerequisites for implementing covered bonds are the existence of a comprehensive financial infrastructure and of a strong financial supervisory framework, especially in the banking sector (the central bank). Establishing the covered bonds legal framework is a long and complex process that has to be managed efficiently. It is important to this end to follow a structured process involving all market participants and to benefit from international experience and expertise.

Source: Based on Al Aissami and Talby 2013.

However, not all housing bond issues have been successful. In 2014, Home Afrika, the only listed property developer in Kenya, had to seek more expensive commercial loans from banks after its maiden bond issuance failed to raise the minimum required amount of K Sh 500 million (US$5.2 million). Despite offering investors an attractive return of 13.5 percent, a 2.63 percent premium over similar government paper, Home Afrika’s attempt to raise K Sh 900 million (US$9.29 million) through corporate bonds was unsuccessful. Given the oversubscription of government and corporate bonds in the past, liquidity in the market was certainly not the issue. Home Afrika’s bond flop can be attributed to the institution’s weak performance and declining profitability. The failed launch of Home Afrika’s bond sales should serve as a note of caution to institutions eager to float housing bonds in the market. Success will be restricted to those that are well respected, credible, and well managed; have a healthy balance sheet; and can fulfill all stringent requirements to be listed on the capital market and still offer attractive returns. This situation mirrors the one in the corporate bond market, which is not developed enough to solve the housing finance issues. There is a serious need to mobilize and channel long-term financing toward institutions involved with housing finance. In so doing, given the shallowness of capital markets, some intermediary financial schemes have been developed to make the link between primary mortgage banks and the bond market.

3.2.5 Mortgage Liquidity Facilities to Support Market Development

A mortgage liquidity facility (MLF) is a specialized financial institution that provides long-term funds to mortgage lenders. MLFs play a vital role in building domestic capital markets, especially in developing countries where mortgage markets are still small. MLFs serve as intermediaries between primary mortgage banks and the bond market. They have the capability and financial strength to raise medium- and long-term funds in capital markets through the issuance of securities such as bonds. Due to their healthy balance sheets, MLFs can raise more funds under favorable conditions than mortgage banks can provide if acting alone. Table 3.6 summarizes the key benefits of MLFs to governments, lenders, and homebuyers.

Table 3.6 Benefits of mortgage liquidity facilities for key stakeholders

Seizing this opportunity, several African countries have established MLFs in order to address the lack of long-term capital for mortgage financing. Egypt, Nigeria, Tanzania, and WAEMU member states have all created mortgage refinancing companies in a bid to increase mortgage affordability, reduce the cost of funds, and promote the development of secondary mortgage markets (Box 3.3). Proceeds from the sale of bond securities issued by these facilities are channeled to member mortgage lenders, often at lower interest rates and longer tenor. In Tanzania, for instance, the establishment of the Tanzania Mortgage Refinance Company (TMRC) in 2010 has been critical in promoting the growth of mortgage finance. The TMRC catalyzed the entry of new banks into the mortgage financing market. Following the creation of the TMRC, the number of banks offering mortgages has increased from three 3 in 2010 when TMRC was created to 19 as of December 2014.

Box 3.3 Mortgage Refinancing Companies as a Tool for Achieving Policy Objectives

Example 1: Nigeria Mortgage Refinancing Company—Increasing access to long-term funds

The Nigeria Mortgage Refinancing Company (NMRC) was launched in January 2014 with the dual objective of providing long-term funds to mortgage lenders and creating a new high-quality asset class for long-term investors such as pension funds and insurance companies. An initial loan of US$250 million was negotiated under the World Bank’s concessionary lending window, the International Development Association (IDA), to help achieve these objectives.

Shareholders of the NMRC include the Nigerian government and the Nigerian Sovereign Investment Agency (i.e., the Nigerian sovereign wealth fund), and DFIs (such as the IFC and Shelter Afrique), as well as various primary mortgage banks and commercial banks in Nigeria. As of February 2014, the NMRC has raised N7.05 billion (US$35.45 million) in Tier 1 capital from its shareholders. In addition to the US$250 million IDA debt, the NMRC is expected to raise capital in the bond market. Government-guaranteed bonds in the amount of N50 billion (US$251.45 million) will be issued to institutional investors, with an overall target of N10 billion (US$50.3 million) to be issued in the medium term.

At the time of creating the NMRC, the government also initiated a parallel process to simplify land titling and reduce land registration cost. To date, 18 of the 36 Nigerian states have joined the scheme to fast-track land registration procedures and reduce associated costs. The Lagos state government, for example, has reduced land charges from a high of 15 percent to 3 percent. The NMRC is also promoting legislative reforms to standardize mortgage and foreclosure laws. Twenty-one of Nigeria’s 36 states have signed onto these standardize foreclosure laws, which will ensure the timely resolution of mortgage disputes and create an efficient foreclosure process as states have agreed to an arbitration process, thereby eliminating lengthy judicial processes. The NMRC plans to refinance 400,000 mortgage loans in the next five years.

Example 2: Caisse Regional de Refinancement Hypothecaire-UEMOA—Promoting a Regional Mortgage Market

The West Africa regional mortgage refinance fund, known in French as Caisse Regional de Refinancement Hypothecaire-UEMOA (CRRH-UEMOA), was created in 2012 with the West African Development Bank, ECOWAS Bank for Investment and Development, Shelter Afrique, and 48 regional commercial banks as shareholders. As of June 2014, CRRH-UEMOA’s capital stood at CFAF 5.632 billion (US$9.63 million).

As of February 2014, CRRH-UEMOA had mobilized CFAF 51.9 billion (US$88.85 million) through the issuance of 10-year tax-free bonds for the benefit of 23 commercial banks in seven WAEMU countries, at an average rate of 6 percent. Bond proceeds will be used to refinance fixed-rate mortgages up to CFAF 100 million (US$171,176). The impact of CRRH-UEMOA is already visible as longer-maturity loans—with a tenor of 15–20 years, and lower interest rates—are now being offered in a number of countries.

On the basis of its mandate to deepen regional financial markets and contribute to standardizing mortgage loan portfolios, documentation, and risk management, CRRH-UEMOA plans to gradually extend the maturity of future bond issuance in order to strengthen its capacity to finance low- and moderate-income housing. The listing of CRRH-UEMOA securities in the regional stock market (BRVM) serves a dual purpose of increasing the liquidity of its bonds and debt securities while deepening regional financial markets.

Source: Based on company documents and interviews with stakeholders.

Besides deepening financial markets and mobilizing long-term resources for housing, MLFs can act as a means to promote standardization in the market. Before refinancing the mortgage portfolios of banks, MLFs ensure lending banks adhere to a list of best practice standards including harmonizing mortgage documentation, processes, LTV limits, and so on. Such practices can go a long way to improve market transparency, which is presently a challenge in the continent’s housing market. Through mortgage refinancing and bond floatation, MLFs serve a dual purpose of supporting the growth of the mortgage market, while at the same time developing domestic capital markets.

The discussions above provide a snapshot of Africa’s housing finance landscape. The subsequent sections further examine the issues hindering the development of housing finance on the continent, and explore ways to expand access to housing finance.

3.2.5.1 Expanding Access to Housing Finance

Mainstream financial institutions have generally shied away from offering housing loans or mortgages to low and lower middle-income groups. In contrast, institutions that focus on these groups, such as financial cooperatives, often do not have the capacity to offer long-term, low-cost housing loans. Overall, the issue underlying the exclusion of a large part of the African population from housing finance revolves around risk. Housing finance transactions involving low- and irregular-income groups are considered risky. This prevents the conventional financial system from going down market. As a result, over 50 percent of African households do not have access to housing finance products that meet their needs. Expanding access to housing finance while going down market thus requires reducing the risk of housing finance transactions.

Most government support in sub-Saharan African countries is done through the supply side: provision of serviced land (e.g., sites and services; see Chap. 4), construction of social housing, the sale or rent of housing at below-market rates, and, in some cases, the free provision of housing units, as in South Africa. Many countries have initiated programs to provide affordable housing and its financing, sometimes through very ambitious programs that are often difficult to achieve such as Ethiopia’s IUHDP, or more realistic ones (such as the ongoing program of 10,000 units and 50,000 individual plots in Cameroon, which is handicapped by the lack of developer and consumer finance). It is also noted that around presidential elections, political leaders in different countries put their ingenuity to work to devise very ambitious special housing programs, which most of time do not deliver and fade away like most of the electoral promises (see Table 6.3). In sharp contrast to the situation in many countries in Latin America or Asia, in most parts of sub-Saharan Africa there is hardly any demand subsidy system supported by governments. The absence of or limited number of credit-linked demand subsidies means that resources from the financial sector are not leveraged. The impact of government spending would be multiplied if it was combined with private resources.

These forms of government assistance have an economic or opportunity cost, whose magnitude cannot be clearly assessed, as the costs are associated with the provision of free or cheap land, or below-market interest rates that do not explicitly appear in public budgets. The cost-efficiency of such government interventions needs to be considered in policy analyses. Lately, we have seen several attempts combining governments and private sector efforts to reduce risk in housing finance transactions in order to ensure the housing finance system goes down market to include those in need. Some of those schemes are discussed in the following subsections.

3.2.5.2 Intermediate Housing Loans: A Top-Down Approach

Over the last few years, much consideration has been given to the concept of intermediate housing loans. These loans, also known as “micro-mortgages,” are smaller than regular mortgages, but larger than microcredits and have longer maturities. Such products have started emerging in Africa, with some financial institutions broadening their product offerings to cater for the housing needs of the poor and of middle-income households. These are clear efforts, made to ensure that financial institutions go down market. On the one hand, they can do so following a “top-down” approach wherein appropriate incentive mechanisms are put in place in the financial system’s legal and regulatory framework to bring mainstream financial institutions to cater to the poor and to middle-income households. This is the case of South Africa’s Financial Sector Charter signed in 2003, which aims to expand housing finance to low- and moderate-income South African households.¹ The FLISP was designed in accordance with that charter in 2012. The FLISP enables qualifying households to acquire a first-time home by providing a one-off subsidy amount between R 10,000 and R 87,000 (US$917 and US$7980), depending on the individual’s monthly income. This amount is paid directly to the bank after the borrower has secured mortgage finance. The program’s objective is to enable first-time homeownership opportunities to South African citizens earning between R 3501 and R 15,000 (US$321–1376) per month. However, there has been slow progress in the implementation of the FLISP. This is largely due to the shortage of housing supply, as well as the high level of indebtedness and the poor credit of potential FLISP applicants. South Africa’s Department of Human Settlements cited overdue procurement procedures, lack of financial resources, and inadequate capacity as other major obstacles to the FLISP program. As of June 2014, just 3,522 mortgage loans had been granted to individuals earning less than R 15,000 (US$1,376) per month, according to the National Credit Regulator.

3.2.5.3 Intermediate Housing Loans: A Bottom-Up Approach

“Bottom-up” approaches, in contrast, have mostly been led by community-based organizations or MFIs expanding their product range to be able to cater for the poor and for low-income groups. This is the case of Kenya’s National Cooperative Housing Union (NACHU), Capitec Bank in South Africa, which offers unsecured housing loans up to US$25,000, and Cameroon’s La Régionale d’Epargne et de Crédit, which provides unsecured loans to salaried customers with maturities of up to five years at conditions close to traditional mortgages—that is, much cheaper than microcredit. The approach used by the Community Organizations Development Institute (CODI) in Thailand is a good example from which African community-based schemes could learn (see Box 3.4).

Box 3.4 Example of CODI in Thailand

CODI is a government body created in 2000 to support the development of community organizations to deal with various social problems such as affordable housing, particularly among urban slum dwellers. CODI organizes communities through the successive stages of their development: the identification of individual members, the formation of cooperatives, the registration of the land, the setting up of community funds which will be the recipient of below-market-rate CODI loans, and, finally, technical assistance in the design and execution of housing developments. CODI provides long-term loans to cooperatives, after cooperatives have saved at least 10 percent of the total project. In 2007, the Government Housing Bank (GHB) agreed to finance certain projects from CODI, thus allowing slum dwellers to access funding from a financial institution. In return, CODI placed a fixed deposit of B 100 million (about US$2.8 million) with the GHB as a guarantee to cover possible losses from default repayment. Moreover, since the loans to CODI carry a below-market interest rate at 4 percent, CODI deposited part of its capital in low-interest-bearing accounts with the GHB. CODI also receives annual subsidies from the government. Since inception, CODI has sponsored the construction of over 100,000 houses in 300 cities.

Source: Author; based on company documents.

3.2.5.4 Integrated Partnerships

Banque de l’Habitat du Sénégal (BHS) has a very innovative and successful scheme based on an integrated tripartite partnership between housing cooperatives, developers, and the BHS that has been established to help close the housing finance gap. In fact, BHS has formed strategic partnerships with housing cooperatives, which are represented by the National Union of Housing Cooperatives (UNACOOP-Habitat), wherein member savings are deposited at BHS, in return for preferred-rate loans (7 percent compared with 8–10 percent at commercial banks and up to 14 percent at MFIs). The BHS prequalifies cooperative members for future loans and helps arrange “wholesale” agreements between the cooperatives and land or housing developers, including price discounts. BHS offers loans for the purchase or construction of new units, as well as for the purchase of the land by the cooperatives, the repayment being secured by the accumulated savings of cooperative members. In order to encourage this partnership, the government provides the cooperatives with (1) free land as well as priority access to land developments based on public-private partnerships, (2) annual tax exemptions on profits, and (3) a reduction in registration charges for land plots (1 percent instead of 10 percent).

3.2.5.4.1 3.2.5.5 Innovative Solutions to Increase Access to Housing Finance

Expanding access to housing finance for low- and middle-income households requires innovative solutions in cutting transaction and information costs, reducing risk of the low-income housing market segment, and the provision of technical assistance. Some additional innovative housing finance models that have been designed to increase access to housing finance for low- and middle-income families are discussed below.

3.2.5.4.2 A) Combining HMF with Technical Assistance

In order to help minimize risk and maximize the impact of housing investments, most lenders have identified the need to combine finance with housing support services (HSS). HSS includes construction technical assistance, capacity building, training, architectural designs, among others. In Kenya, for instance, the NACHU’s staff and consultants are the primary HSS providers to NACHU member cooperatives. The housing cooperatives that are affiliated with NACHU use the organization almost exclusively to address their housing needs, relying on NACHU for various technical support services as sourcing them elsewhere is substantially costly and thus unaffordable (Houston 2010). LafargeHolcim’s affordable housing program in 16 countries, 6 of which are in Africa—Algeria, Cameroon, Kenya, Morocco, Nigeria, and Zambia—provides an illustrative example of HSS. In 2012, LafargeHolcim, a cement manufacturer, launched a program for affordable housing in emerging economies. The objective of this program is to contribute in improving the housing conditions of 2 million people by 2020, while building new markets for LafargeHolcim.

LafargeHolcim works in partnership with MFIs, NGOs, and building material retailers to assess market needs and identify opportunities in affordable housing. This is an integrated solution approach, which puts the borrower together with building material retailers, MFIs, and NGOs that could provide technical assistance. It partners with MFIs to grant housing loans of an average of US$2,500 with a term of two to three years. Participating MFIs benefit from LafargeHolcim’s market assessment surveys, which help them assess the size of HMF markets and better understand client needs (Box 3.5).

Box 3.5 Key Findings of the 2014 LafargeHolcim Survey in Cameroon

One such survey conducted by LafargeHolcim in Cameroon enabled a financial institution to have a better grasp of its housing loan applicants, including their needs and expectations. Key findings from this 2014 survey included the following:

• The monthly income of loan applicants ranges between CFAF 200,000 and CFAF 400,000 (US$340–680) with an estimated monthly savings of CFAF 120,000 (US$204); the age of applicants varied between 25 and 45 years.

• Some 28 percent of housing loan applicants identified interest rates as the main factor influencing their selection of a financial institution. Other key selection criteria include the reputation of the financial institution (17 percent), the quality of service (16 percent), and the proximity of the financial institution (13 percent).

• Credit applicants were mainly interested in medium- to long-term loans: 1–5 years (27 percent), 5–10 years (32 percent), and 10–15 years (16 percent).

• Some 86 percent of credit applicants intended to use the loan for home construction, while the remaining 14 percent intended to use the loan for home improvements.

• Some 76 percent of loan applicants are interested in receiving free technical assistance services such as bills of quantities (22 percent), advice on type of building materials (20 percent), advice on building material use (14 percent), and design specifications (13 percent).

• There is a strong preference for two bedrooms (BR)/1 living room (LR)/1 kitchen (KT)/1 bathroom (BA) and 3 BR/1 LR/1 KT/2 BA bungalows or duplexes, on a land size ranging from 150 m² to 400 m².

Source: Author; based on information obtained during fact-finding mission in October 2014.

In addition to market surveys, LafargeHolcim has developed a toolkit to train MFI loan officers on construction basics, as well as provide them with an IT tool to facilitate the processing of housing loan applications. This has contributed to building and strengthening staff capacity in LafargeHolcim’s partner MFIs. Plus, borrowers are provided with free architectural designs and construction technical assistants who help loan applicants prepare bills of quantities. Some 70 percent of the loan amount is disbursed directly to LafargeHolcim’s network of building material retailers, which helps to prevent leakages and ensure the loan is used for housing construction purposes.

Although it is still early to see the impact of LafargeHolcim’s value-added approach on the HMF portfolio performance of partner MFIs, evidence from CEMEX’s Patrimonio Hoy in Mexico shows that direct payment mechanisms can be an important safeguard against risks associated with clients’ willingness to pay (Box 3.6).

Box 3.6 From Cement Sales to Integrated Solutions: Cemex Patrimonio Hoy, Mexico

CEMEX, a multinational Mexican-based cement producer, retains a close relationship with customers by thoroughly assessing needs and supplying holistic solutions through its subsidiary Patrimonio Hoy. CEMEX has been working with integral housing solutions and affordable building materials for more than 16 years and has refined its business model for cement sales through Patrimonio Hoy. The overall goal of Patrimonio Hoy is to offer a market-based solution to the housing needs of low-income families in urban marginalized areas in order to improve their quality of life and empower them. For CEMEX Patrimonio Hoy, the initial learning curve was steep. CEMEX knew that about 30–40 percent of bagged cement was consumed in the low-income segment, but CEMEX didn’t know how people built, what their problems were, and so on. To acknowledge this, CEMEX made an internal Declaration of Ignorance.

To gain knowledge and get the model right, CEMEX launched an extensive hands-on market study in Guadalajara and was open to disregarding traditional business approaches and considering new ways to reach low-income customers. The key insight was that to build a 10 m² house, families on average spend four to five years on construction due to significant market failures, including (1) lack of access to credit and/or financing; (2) lack of competency (people are self-builders but lack construction knowledge and often get cheated); and (3) lack of storage opportunities, which leads to long building time.

As a result of these findings, CEMEX decided to rethink its customer relations by launching Patrimonio Hoy—an inclusive business, which offers integral housing solutions, covering not only construction, but also financing, expert advice, and the like. To ensure the development of valuable costumer relations, customers enter into a microlending model, where families sign up without any requirement beyond personal identification. The customer is responsible for committing to a 70-week project and remitting a modest weekly installment of US$21, which is held as credit toward future building material. The model functions as a saving and credit scheme where customers can choose between a schedule with multiple deliveries of building materials, depending on their needs and the desired timeline for building the construction.

Patrimonio Hoy retains a membership fee from each weekly remittance, which covers services and guaranties. Patrimonio Hoy, for example, provides an architect to plan and organize in situ with participants and all family members. In addition, the cost of materials is held fixed over the course of work, protecting customers from price fluctuations and other macroeconomic instability. Patrimonio Hoy also offers customers the option to take a break from material delivery, if customers run into periods of inconsistent employment or wish to delay construction.

By adding value to the customer relations, Patrimonio Hoy sells complete enabling solutions, which include financing, technical assistance, guarantees through fixed prices, and all kind of building and finishing materials. By using this model, the Patrimonio Hoy venture has provided affordable home improvement solutions to more than 425,000 families (equaling more than 2 million people) in Latin America and supported the construction of more than 3 million square meters of space. More than US$280 million has been granted in credits, with a repayment rate of 99 percent.

Source: GIZ 2014.

3.2.5.4.3 B) Mortgage Guarantee Programs

Guarantee schemes aimed at incentivizing lenders to serve the poor and low-income groups are rarely used successfully in sub-Saharan Africa, given the small size of housing loan portfolios and the lack of the reliable data required to adequately price risks. Ghana, Kenya, and South Africa have developed a product called Collateral Replacement Indemnity (CRI), which has had a moderate impact in increasing access to housing finance. The Home Loan Guarantee Company (HLGC), a nonprofit company in South Africa, launched the CRI product 25 years ago to replace the need for down payments. CRI enables potential loan borrowers to have an LTV of up to 100 percent. This product is often targeted to low- and moderate-income households. Through this product, the HLGC has enabled over 300,000 low-income South Africans to become homeowners. The HLGC has facilitated over R 40 billion (US$3.2 billion) in home loans to lower-income South Africans to date. An attempt in Mali to launch an LTV-based mortgage insurance has not been successful, at least for now. In Burkina Faso, a guarantee fund had also been developed for medium-term housing loans extended by Caisses Populaires du Burkina. However, this pilot project was never scaled up. In Nigeria, a state-backed guarantee scheme aimed at fostering more lending to lower-income groups is in the process of being created.

One of the major reasons why traditional lenders do not venture into the moderate to lower end of the housing finance market is the predominance of informal employment, a risk category they have failed to accurately assess. Creditworthy customers in this segment are ignored by mainstream financial institutions but may not find adequate products in the microfinance channel, which largely explains the “no man’s land” between the two types of financial institutions. The capacity to serve informal income earners with loans larger than microcredits should be a powerful driver of significantly broadening the coverage of housing finance systems. Safely lending to the low- and informal-income segment is possible, as demonstrated in Morocco. Doing so requires conventional financial institutions to go the extra mile and learn how to better assess the creditworthiness of this population and not simply use the standard underwriting processes that clearly do not fit the purpose of pushing housing finance down market.

In Morocco, the government has developed an innovative and successful guarantee scheme, Fonds de Garantie pour les Populations à Revenus Irréguliers ou Modestes (FOGARIM), which encourages banks to finance informal- and low-income households by securing their loans against credit risk. This guarantee covers 70 percent of the mortgage loan, and up to 80 percent for loans under the Villes Sans Bidonvilles (VSB) program (see Chap. 5). Loans can be made available for up to 100 percent of the LTV or 80 percent in the case of VSB. The premium charges are fixed at between 0.25 percent and 0.5 percent annually, depending on the LTV (for LTVs less than 50 percent) and up to 0.65 percent (for LTVs above 90 percent). In addition to being a first-time homebuyer, borrowers must have life insurance and the house needs to be secured with a mortgage. Over 115,000 loans, or about 20 percent of all mortgages in Morocco, have been serviced under this scheme since its creation in 2004. The success of this program has been largely due to the strong political will and effort of the government in favor of implementing a housing policy.

India provides valuable examples of how two housing finance companies (HFCs)—Dewan Housing Finance Corporation and GRUH Finance Limited—are catering to the housing finance needs of the underserved low- and lower-middle-income households. GRUH, for instance, extends loans of between US$1,500 and US$15,000 for up to 20 years. These loans are secured both by mortgages and by personal guarantees, with LTVs not exceeding 65 percent. Borrowers are existing customers with a multiyear savings history. GRUH has a good knowledge of typical incomes generated by various trades in specific areas. It has developed an internal scoring model on which interest rate scales are based. The credit performance of GRUH portfolio is outstanding: the NPL rate fell to 0.32 percent in fiscal year 2013. In the wake of the market-deepening efforts initiated in 2008, new lenders have entered the informal population segment as they see the demonstrated lucrativeness of this housing market segment.

It is clear from these examples that know-your-customer principles are of particular importance in the low-income housing finance segment. It is recommended that borrowers must have built a credit record with their lenders, who need to have the ability to assess the cash flows of their customers over time, especially for undocumented income streams.

3.2.5.4.4 3.2.5.6 Financing Rental Housing

Affordable rental housing has significant potential in expanding access to housing to low-income families. However, this housing tenure option has been overlooked and neglected in many national housing policies across the continent. In Tunisia, for instance, the government has targeted a homeownership rate of 80 percent as a key part of its housing policy. In many African cities, a vast number of African households are currently tenants. Therefore, it is imperative for governments to adopt policies that could help develop and regulate rental housing. In Johannesburg, 42 percent of households are tenants compared with 63 percent in Cairo, while in Nairobi, 80 percent of dwellers are tenants. In Lagos, 60–65 percent of business professionals are tenants due to the high home prices and the lack of affordable mortgage products, according to Residential Auctions Company, a real estate research company in Nigeria. This trend is also prevalent across informal settlements in many African countries. In some cities, a majority of slum dwellers live in rented accommodations. In Dakar, an estimated 25.5 percent of slum dwellers are tenants, compared with 91.5 percent in Nairobi (Peppercorn and Taffin 2013).

The masked reality is that there remains a large segment of African households that cannot afford to buy a house, even one that is heavily subsidized. For many households, renting is a cheaper alternative to homeownership. Unlike in developed countries, rental housing is not yet an important component of national housing policies in Africa. Some obstacles to the growth in Africa’s rental housing market include a high cultural bias in favor of homeownership, weak or nonexistent legal frameworks, and the lack of equity options to support rental property projects. As discussed in Chap. 5, part of the solution to the housing crisis has to come from mentality and behavioral changes to reflect the fact that not everyone can be a homeowner. Some people will have to settle for flats, implying some densification of construction. The economics of rental markets have already been well chronicled in other studies. Peppercorn and Taffin (2013) and UN-Habitat’s “A Policy Guide to Rental Housing in Developing Countries” contain relevant proposals on how to increase the supply of affordable rental stocks in emerging markets.

The development of an affordable rental market in Africa largely depends on the commitment of governments to create an enabling environment in terms of regulation, taxation, and the necessary legal framework. Laws are needed that clearly outline tenant rights and obligations, as well as provide effective legal protection to landlords. Improved legal frameworks are currently in place or are being drafted in countries such as Egypt, Tunisia, Morocco, and South Africa. Prior rental legislation in Egypt froze rental values and enforced the renewal of contracts between tenants and landlords, with apartments sometimes passing down through generations (Egypt Independent 2012). In 2012, over 4 million rental units in Egypt were vacant, an unintended consequence of rent controls, which further strangled growth in rental housing stocks. The Egyptian government is currently revising its rental framework to address these obstacles. In 2014, Morocco took measures that significantly improved its legal framework. The revised rental law outlined the obligations of tenants and landlords, and clearly defined conditions for lease renewals and termination. An 8 percent rent increase every three years was also enshrined in the new legislation. This improved legal environment has attracted new investments to the rental market.

On the financial front, regulators need to create an enabling environment that ensures financial institutions can raise long-term funds from financiers at an affordable cost. Balanced landlord-tenant relationships are critical to attract capital in this important segment, while ensuring tenure security to families. Rental frameworks are however not widespread, and sometimes are very constraining. South Africa’s 1999 Rental Housing Act provides a rare example of a relatively investor-friendly framework. In developed countries, the government provides tax incentives and grants to improve the quality and quantity of private rental stocks. The Low Income Housing Tax Credit (LIHTC) program in the United States is one example of methods used by governments to attract private capital for rental housing targeted to low-income households. The Caisse des Dépôts model (see Chap. 1) can also be a source of long-term funding for rental housing.

Most important, a real estate investment trust (REIT) can be a novel investment vehicle for channeling resources from the capital market to rental investments in Africa. Given the fact that capital markets on the continent are in their infancy, this instrument can be realistically envisioned only in the medium to long term, to allow time for African capital markets to mature. A REIT is a special purpose vehicle (SPV), company that invests in both residential and commercial real estate. REITs can also invest in mortgages and mortgage-backed securities. As an investment vehicle, REITs enable investors to own equity stakes in the assets it owns in a way similar to owning shares in any other company open to the general trading public. Shareholders receive rental income in the form of dividends from property assets and also benefit from the growth of these assets overtime. Being traded on the local stock exchange also makes this asset very liquid. Fideicomiso Hipotecario, or FHipo, the first mortgage REIT in Latin America, established in November 2014, is a case in point. FHipo’s initial public offering on the Mexican Stock Exchange raised more than US$633 million, with U.S. investors accounting for about 60 percent of this amount.

Residential REITs have proven successful in many countries. However, so far there are none in Africa, owing certainly to the shallowness of the capital markets, low risk-adjusted investment returns, the lack of large-scale residential assets, and the lack of adequate legal and regulatory frameworks. Nevertheless, Kenya, Nigeria, Rwanda, and South Africa have all adopted REIT frameworks, the usual first step in institutionalizing this investment vehicle. However, only South Africa has taken the next step to actually create one. Morocco is reportedly crafting a REIT framework; however, this legislation is intended to support commercial real estate for the time being.

Facilitating the expansion of this new asset class in line with global best practices would attract international investors to Africa’s affordable rental and housing market. Moreover, doing so will provide an avenue for both individual and institutional investors to invest in Africa’s housing market. A good starting point will be for governments to adopt legislative changes that will facilitate the development of capital markets and authorize the creation and successful rollout of REITs for affordable housing. These changes would include income tax deductions; a generous depreciation allowance, especially for newly constructed buildings; permitting a portion of rental income losses to be transferred to other assets for tax purposes; or reductions in capital gain taxes, all methods that could be used to increase the rate of return on investment (Oxley et al. 2010). Moreover, conditional subsidies and grants can also be provided to private developers for the construction of affordable rental housing. On the demand side, governments should also support a favorable regulatory environment, not just for landlords, but also for tenants, and provide rebates or voucher programs to increase demand from low-income households.

DFIs, in partnership with the private sector, should consider pioneering the development of an affordable housing REIT in order to provide long-term equity and debt financing for housing. However, DFIs should take the lead role in structuring, coordinating, and financing this groundbreaking venture. An example of a possible REIT is displayed in Fig. 3.4, whereby DFIs such as the African Development Bank (AfDB), IFC, Shelter Afrique, and other institutional investors—such as pension funds, regional banks, and insurance companies—could be anchor sponsors on this project. DFIs’ early involvement in structuring such a project is expected to instill confidence among potential financiers, especially international investors.

Fig. 3.4

An illustrative REIT structure for affordable housing projects (Source: Author.)

On the basis of its investment criteria, a REIT vehicle can make investments in numerous affordable housing projects. Initially, the REIT could focus on financing new and existing properties, and gradually expand to purchasing affordable mortgages backed by real estate assets. Initiatives such as the US$300 million IFC-CITIC investment platform to develop affordable housing projects ranging in size from 2,000 to 8,000 units should make it possible to build a REIT portfolio across the continent that can yield a risk-adjusted return of at least 6 percent or slightly higher. The portfolio of this company could consist primarily of affordable housing projects; say, 70 percent for instance, with upper-income housing, investment in land acquisition, and commercial real estate accounting for the remaining 30 percent. Rental yields in Africa are quite high compared with those in other emerging markets. Table 3.7 provides a comparative overview of rental yields in selected emerging markets. Such a mixed portfolio holding would provide comfort to investors on the quality, viability, and sustainability of an affordable housing REIT in the long term.

Table 3.7 Rental yields in selected emerging markets

The tax-neutral structure of this SPV will be an added benefit, as all net rental income will be passed along to shareholders, thereby avoiding the problem of double taxation. Moreover, each investment project should be financed through its own unique SPV. Doing so will help mitigate risks by ring-fencing each project from other REIT-backed investments.

Eventually, the shares of such a REIT should be listed on local exchanges in countries where REIT legislation has been adopted, in line with global best practices. Cross-border listings will increase liquidity in the trading of shares, reduce the cost of capital, and expand sources of capital for Africa’s affordable housing market.

3.3 Conclusion

In this chapter, we attempted to provide a succinct description of the housing finance market in Africa. In order to draw a more complete, continent-wide picture, we used regional and country examples to illustrate the depth of the housing finance market. We also looked at critical components in the housing value chain, including the often-neglected rental housing finance market.

Given the continent’s shallow mortgage market, it is obvious that a viable alternative for a majority of African families, particularly poor and low-middle-income households, is to use products such as HMF and contractual housing saving schemes. These alternative products can play an important complementary role to the mortgage market. Other promising initiatives in increasing access to finance for consumers and developers were also showcased. However, our analysis has demonstrated that some sort of creativity and ingenuity is needed to circumvent the risk problem, if one is determined to push the housing finance frontier and extend access to those in need. This then requires actions and measures within the housing finance system geared toward devising and promoting innovative business models that deal with the associated risks. Initiatives geared toward derisking housing finance should be facilitated and supported by governments, which could cover some of the risk and help reduce the risk of transactions. Better still, governments can work together with private investors to develop some credit-enhancement facilities. We provided policy considerations for developing the continent’s housing finance market and expanding private lending for housing.

Designing and implementing institutional, legal, and regulatory frameworks to promote affordable housing finance is critical for making potential housing demand effective. In this regard, the design and implementation of subsidy programs, mechanisms for increasing access to long-term funding, and the strengthening of prudential frameworks present opportunities for expanding access to affordable housing finance for low- and middle-income families, including informal-income households. Following are some specific policy measures and initiatives. It is important to note that, given that specific housing finance policies should be local, each country is call for to develop an actionable affordable housing policy that suits the need of its population.

Strengthening safeguards including prudential frameworks without stifling innovations for affordable housing finance is critical to the health and stability of the financial system and economy. Governments and regulators, with the support of development partners, should develop and implement prudent lending standards, particularly for low-income households. This effort should include financial awareness programs, consumer protection and advisory services to borrowers, frameworks for asset-liability mismatches, and mandatory stress tests, particularly for adjustable-rate mortgages and housing loans. Model frameworks include the National Foundation for Financial Literacy, housed at the Central Bank of Morocco, and South Africa’s National Credit Act, which includes provisions to limit over-indebtedness, provide debt counseling, and establish both a national credit regulator and a consumer tribunal. Promoting housing finance inclusion through financial literacy campaigns and consumer protection is a key prerequisite for the stability and sustainability of a well-functioning housing finance market.

In the long term, standardizing mortgage underwriting practices and procedures is key for developing secondary mortgage markets. However, in the short term, particularly in the low-income housing market, customizing underwriting requirements to the specificities of this market segment is crucial. Key prudential lending criteria for low-income households should include developing the capacity of lenders to assess undocumented income such as requiring prior savings history. Once the income level is ascertained, lenders should assess the disposable income of low- and low-middle-income borrowers rather than simply applying standard debt-to-income ratios. Moreover, loan-to-value ratios (because of prior savings requirements) and debt-to-income ratios (to cushion against income stream fluctuations) should be lower than average.

Noncollateralized lending, which should only be done to accommodate households that lack full title to property, should only be considered in the case where a long-term relationship exists with customers, as well as an established cash flow and credit history. Nonetheless, alternative guarantees such as personal guarantees or savings placed in an escrow account should be sought during the life of the loan, as well as some form of tenure security. This is the method adopted in the community-based lending approach in the popular savings and loan sector in Mexico, where unsecured lending for housing with maturities of up to 10 years is supported by the second-tier government refinancing entity, Sociedad Hipotecaria Federal.

In addition, loan profiles could be adjusted to reflect the irregular income streams of low-income households. The HFC of Kenya provides an illustrative example. Under its “cyclical mortgage,” repayments are set on pre-agreed cycles—quarterly, biannually, or yearly. However, this product primarily targets self-employed borrowers whose employment is at least partially formal, as it requires audited accounts and three-year cash flow projections. Another approach developing in some sub-Saharan African countries is the opening of social security schemes to nonsalaried households, such as Kenya’s Mbao pension plan, and in Côte d’Ivoire, where both private-and public-sector pension organizations are in the process of offering protection on a voluntary basis. Such approaches can have an indirect but important impact on the opportunities for informal households to access housing finance. One can expect this development to foster the progressive integration of informal-sector households into the formal financial system. It can also contribute in improving the access of informal households to housing finance in the various functions that pension funds can fulfill such as building a savings and credit record, and providing collateral or direct lending.

Supporting the development of necessary housing market infrastructure is another important initiative. One condition for a successful housing finance market is the existence of a credit bureau with a comprehensive credit profile on potential borrowers. Credit bureaus provide lenders with the information needed to ascertain borrowers’ repayment capacity. It is imperative for governments and development partners to build and strengthen credit information registries so as to overcome one of the major barriers in the low-income housing market. The IFC, through its Africa Credit Bureau Program, is already working with numerous governments and the private sector to develop their credit information sharing and reporting systems. This program provides advisory services to market stakeholders such as central banks, creditors, lenders, consumers, and banking associations on effective and efficient ways of building credit registries. Supporting such initiatives should also promote responsible lending and reduce credit losses.

Furthermore, there is a need for a formal appraisal of residential mortgages in many countries so as to help address transactional inefficiencies. Information gathered from a consolidated housing database, as described below, is a crucial part of any valuation system. This will require well-trained and qualified valuators to ensure properties are accurately valued on the price that could be obtained in the market. There is a need for accepted standards of property valuation in many countries, which should be based on sound principles and best practices.

Strengthening institutions, including the legal and regulatory framework, is critical for a more efficient housing market, as well as for the development of a secondary mortgage market. This could include strengthening the legal infrastructure by building the capacity of the judiciary system to fairly and efficiently handle mortgage foreclosure cases or adopting legislative reforms that permit nonjudicial foreclosures, as in Ethiopia, where the central bank is tasked with administering the foreclosure process and reviewing mortgage contracts.

Promoting credit-linked subsidy programs that leverage private savings with strong monitoring and evaluation systems is another important initiative. Developing segment-specific products is important for expanding access to housing finance to various income groups. One such product could include a housing-linked contract savings scheme, as in Ethiopia and some European countries. This product should primarily target economically active poor households that may be able to afford a mortgage or a housing loan to purchase or construct a house but do not have access to finance. Once customers attain a minimum savings threshold, they become eligible for a mortgage or housing loan to be provided by the financial institution. This savings would provide a basis for assessing the borrowers’ repayment capacity and could also serve as collateral for the housing loan. Similar to the Ethiopian model, eligibility criteria for the subsidy amount should be designed on a progressive scale. Doing so would enable the government to maximize the effectiveness of its subsidy programs, while attracting private capital into the underserved housing market. Subsidies could also be done through real estate tax deductions, land grants, and infrastructure provision.

Expanding the range of innovative low-cost HMF products and services would improve access to finance for low-income and informal-earning households. HMF is critical for expanding access and providing viable services to low- and moderate-income families. As evident in many African and Latin American countries, this form of microlending has enabled many poor households to incrementally build, improve, and expand their houses. Meeting this unmet demand for HMF should be accompanied by prudential lending policies and procedures. Similar to a savings-for-housing scheme, clients with no preexisting savings or lending history should be required to show a minimum period of savings—12 months, for instance. In the absence of documented evidence of income, this mandatory period of savings can be used as an income proxy and to ascertain the creditworthiness of clients. This eligibility criterion can also serve as an income proxy for informal-sector workers, as well as a risk management tool.

Supporting the provision of construction technical assistance and housing support services is important, given its crucial role in successful HMF lending aimed at low-income families. Construction technical assistance is compatible with the practice of self-construction, which accounts for over 70 percent of new housing supply in most African countries. This technical assistance could include training self-help builders on construction techniques, building capacity in MFIs, preparing layout drawings, optimizing bills of quantities, supervising construction sites, and providing access to lower-cost building materials. The provision of construction technical assistance will ensure a minimum level of quality and safety for houses financed by MFIs, while also promoting customer loyalty. Successful models include LafargeHolcim’s partnership, CEMEX discussed above, and the WAT Human Settlement Trust in Tanzania. The construction technical assistance pilot programs of Habitat for Humanity provide other practical approaches also.

Deepening, broadening, and scaling up this innovative product to sustainability will require expanding access to long-term credit and diversifying the investor base for HMF lenders. In South Africa, for instance, through the National Housing Finance Corporation and Rural Housing Loan Fund, the government provides wholesale finance to specialist housing microlenders for on-lending to low-income households. It is recommended that commercial banks partner with MFIs to enable the continuous and dependable flow of finance for lenders. Doing so can open new markets to mainstream banks, while providing MFIs with the resources and expertise required for housing finance. These linkages could include servicing arrangements, information exchange, or ownership relationships. The Mutuelle Communautaire de Croissance (MC2), a microfinance network established by Afriland First Bank in Cameroon, provides an illustrative model of the MFI-Bank linkage. MC2 relies on Afriland for funding and also mobilizes savings at the base of the pyramid for Afriland. Afriland manages or supports the internal control and regulatory reporting, and accounting and provides capacity building for MC2’s staff. In India, notable examples are the self-help group and bank linkage models and the nonbanking financial company–MFI partnership. The tripartite partnership arranged by the BHS is another successful strand of this model. This successful and sustainable MFI-bank partnership can be useful in overcoming the challenges traditionally faced by the financial sector in serving low-income families.

Partnerships between commercial banks and MFIs can be another important initiative. It is proposed that MFIs that pass a rigorous due diligence enter into a servicing arrangement with commercial banks. Under this arrangement, the MFI, for a servicing fee, will originate housing loans and undertake monitoring and collection functions for the bank. The bank, in turn, provides funding to the MFI to originate some or all of their housing loans to existing customers, with the bank holding the housing loans originated on its balance sheet. In order to mitigate the credit risk borne by the bank, the MFI needs to share the risk of default by providing a first-loss guarantee up to a specified level. For instance, 20 percent of the housing portfolio originated by MFIs could be provided in the form of cash collateral to the funding bank as a first-loss guarantee to cover each loan default. This will ensure a high quality of origination, as the MFI will have some skin in the game. In order to incentivize banks to lend to MFI clients, some form of guarantee is imperative. An intermediary, such as a government housing agency, a guarantee fund, or a DFI, should provide second-loss guarantees to the bank. The second-loss guarantee should cover the principal and interest payment defaults up to an agreed-upon threshold, after the first-loss guarantee is depleted. After the second-loss guarantee is exhausted, it is proposed that the funding bank begin the process of taking possession of the acquired property through sales or other outlets. Under this proposed structure, the role of DFIs and other market facilitators should include supporting market studies, conducting product design and pilots, providing capacity building to the MFI and bank staff, promoting partnerships between MFIs and banks, and incentivizing financial institutions to serve low-income families, as well as generating and disseminating knowledge products and industry best practices.

Supporting the development of risk mitigation instruments such as guarantee or insurance mechanisms is vital to increase the effective demand and supply of housing for the poor. In order to increase the appetite of lenders to extend access to housing finance to irregular- and low-income families, it is imperative for governments and development partners to promote innovations that primarily target low-income groups. Feasibility studies are a necessary prerequisite for the development and implementation of such risk mitigation instruments.

Designing and implementing an effective household targeting system is vital for the efficient channeling of resources to the poor. Developing data collection strategies should be the starting point in designing these systems. A consumer survey, such as data collected in a census, is one approach that could be used in collecting data and developing a concrete understanding of households. An adequate information management system, such as a national database, is crucial for avoiding duplication, tracking beneficiaries, and controlling fraud. Equally important is the institutional arrangement (centralized vs. decentralized system) selected for implementing the household targeting systems. However, institutional roles should be tailored to country needs and the available institutional capacity. Last, strong instruments for monitoring and evaluating targeting systems, such as random checks and verification of information provided, are crucial for ensuring transparency and preventing leakages. Best practices from Latin America, such as Chile’s Ficha CAS system, Colombia’s SISBEN system, and Costa Rica’s SIPO system, can be used to design strategies and outline procedures for household targeting systems in Africa.

Developing a consolidated housing market database is vital for supporting the sector’s development and overcoming informational inefficiencies. Governments, with the support of development partners, should facilitate the construction of national information systems to collect the housing data necessary for a well-designed and targeted housing policy. This real estate information portal should contain information on housing demand and supply, and the housing finance market. Data collected should include information on housing and rental stocks, land value estimates, the housing price index, the construction cost index, property information, and other relevant data. Data collated from public agencies, relevant government ministries, financial institutions, and real estate developers would be valuable for time series analyses of country data, trends analysis, and policy setting. DFIs have a critical role to play in supporting this market development activity. Institutions such as the AfDB and the World Bank Group could engage in capacity-building activities, advocacy campaigns, and provide incentives to market actors to collect data. DFIs can also partner with NGOs such as the Centre for Affordable Housing Finance in Africa (CAHF) and the Housing Finance Information Network to develop a continent-wide web portal with standardized indicators, which will facilitate cross-country comparisons of housing programs, policies, laws, and regulations in a central location.