HOUSING FINANCE IN AFRICA

WRITTEN BY

NAME: DARAMOLA, OLUWOLE PHILIP REGISTRATION NUMBER: EDMP07/08/H/2438 YEAR OF STUDY: M.SC. 1

OF DEPARTMENT OF URBAN AND REGIONAL PLANNING OBAFEMI AWOLOWO UNIVERSITY ILE-IFE NIGERIA

AS AN ENTRY IN 2ND PROFESSOR AKIN MABOGUNJE INTERNATIONAL ESSAY COMPETITION FOR URBAN AND REGIONAL PLANNING SCHOOLS

AUGUST 2008

ABSTRACT This essay discusses the prevailing urban demographic flux in Africa and its consequent effect of high unmet housing need that is evident in slum development. It finds in housing finance a pivotal factor for redressing the urban African housing problems but with some impediments that dazzle the vision of housing finance on the continent. These are given in terms of macroeconomic instability; adverse land ownership and titling environment; poor record of housing data and management of housing finance institutions; limited knowledge resources in housing finance; and insufficient availability of long-term housing finance sources. Nevertheless, the essay prioritizes a turnaround for housing finance in emerging urban Africa. In view of this, it makes recommendations on promotion of stable macroeconomic condition; promotion of appropriate framework for effective collaterisation of housing assets; securitisation of real estate; effective funding and management of housing finance sources; updating and dissemination of housing finance information; improved housing finance education and adoption of housing microfinance in Africa. Lastly, the conclusion comes with the optimistic outlook that the desired and deserved befitting accommodation for the residents of emerging urban Africa would be achieved based on the undeniable prospects that are contained in the recommendations.

The relentless outburst of African cities and its consequent problem of housing delivery are evident in slum development in emerging urban Africa. The Africas level of urbanisation grew from 19 percent (53 million) in 1960 to 27 percent (129 million) in 1980. By 2000, it had reached 38 percent (297 million) and it is still growing. Consequently, the average rate of urbanisation in Africa is expected to reach 55 percent (800 million) by 2030 (Mosha, 2001). As it is known, housing is a basic need of human survival, others beings food and clothing. Therefore, housing provision is of paramount importance to cater for the growing teeming population, especially the low- and moderate-income households. Admittedly, almost one billion people in the world (16.7 percent) live in slums, but this rate is minimal when compared to that of Africa. In sub-Saharan Africa, where more than 40 African countries are located, 72 percent of the urban population live in slums. In 1990, there were 101 million slum dwellers in the region, which doubles to 199 million by 2005 and projected double again to a massive 400 million by 2020 (Homeless International, 2007). All these indicate that there is insufficient housing stock to meet the ever-increasing demand for housing in the urban Africa. For example, recent estimates in Ghana show an absolute shortage of 400,000 housing units in the country and to replace this shortfall, annual delivery should be approximately 120,000 units while the supply capacity is 42, 000 units per annum. Thus, 65 percent of the national requirement remains unsatisfied each year (Moss, 2008). In relation to this, the Ghanaian government states that over the next five years, almost 1 million more houses will be needed. With low incomes and no access to housing credit, these families cannot afford to build their own decent homes or even improve what they have (COZAY, 2008). The case is not different in Nigeria, the most populated country of Africa; and the large population means that housing units are at a premium. Coupled with lack of access to credit, this puts decent housing beyond the reach of most Nigerians. It is estimated that
3

Nigeria needs to produce 720, 000 units per annum and only 4.2 percent of the annual requirement could at best be expected from her. In Tanzania, the housing deficit in urban centres is about 1.2 million housing units (Moss, 2008). The past responses to the problem of slums have been based on the belief that provision of improved housing and related services, through slum upgrading and/or slum eradication will, on their own, solve the problem. The growing recognition is manifested in target 11of the Millennium Development Goals (MDGs): By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers. It is noteworthy, however, that solutions based on this slum upgrading are not holistic if they fail to address the main underlying causes of slums, of which finance is the most significant. Without financing options, low- and middle-income households cannot afford to build or purchase homes. Housing finance is a sine qua non to any purposeful housing delivery. It can be likened to the hinges that attach the door of housing policy to the jamb of housing delivery. In other words, housing finance is the backbone of housing policy and the framework of housing programmes; without it housing policy is a wish and housing programmes a mirage. This concept of housing finance can be described as the process of providing, raising or releasing funds into the housing sector in the form of credit, loans or invested capital for the purpose of ensuring accessibility and ownership of affordable and decent accommodation for the people. Perhaps it is safe to say that most fundamental provisions of housing policy are on housing finance and among the major pillars of any housing policy, finance constitutes a fundamental centre-piece. This undeniable fact is asserted in the 1991 National Housing Policy of Nigeria that without a well organised and efficient housing finance system, it is difficult to mobilise substantial resources for channelling fund into the housing sector (Federal Government of Nigeria, 1991).

Nevertheless, despite this indispensability of housing finance, it has received little attention in Africa over the years (Moss, 2008). With the increase in population and the migration of people from rural to urban areas in search for often non-existent greener pastures, it has become more pertinent that African governments find ways of providing housing either directly or through support to others to do so. It is argued that one of the main reasons why finance for housing has received little attention is the large capital that is needed to buy or rent a house (ibid). Therefore, access to credit for housing purposes is a cornerstone in a sustainable housing delivery process. In general, housing finance is from two sources: formal and informal. The formal sector comprises institutions operating within the statutory guideline of a particular country such as mortgage institutions and commercial banks while the informal sources include corporate bodies, personal or family savings, individual moneylenders and voluntary housing movements (Nubi, 2000). All these sources have been utilised in Africa but they have been characterised with little or no success. In particular, housing finance from formal source is usually far limited to the wealthiest segment of the population while the middle- and lowincome groups build their houses incrementally, meaning that construction of a house usually last many years. There are a number of problems associated with housing finance, especially in the formal sector. These include: macroeconomic instability; inadequate institutional, legal and regulatory system and adverse land ownership and titling environment; poor record of public sector housing banks, building societies and other specialist housing lenders; poor management; limited knowledge of housing finance; and a limited availability of long-term housing finance sources (Tomlnison, 2007). Consequently, the experience throughout Africa demonstrates that the majority of urban poor households can only afford to house themselves incrementally. The conditions
5

attached to financing exclude most potential beneficiaries, with some 65 percent of inhabitants not being able to qualify for limited conventional financing and less than 16 percent able to afford a conventional house (ibid.). For instance, in Botswana, few employed people earn sufficiently to qualify for a home loan. This leaves the 17.3 percent of those that are formally employed (281, 915) as the potential market for conventional housing finance. The case is not different in Kenya where less than 10 percent urban households are traditionally qualified for mortgage loans from housing finance institutions, with the majority ruled out by their low incomes (Rust, 2007). From the foregoing, it is incontrovertible that the provision of housing is subject to the performance of macroeconomics within which the various housing finance system is located. In most African countries, macroeconomic instability is evident in volatile interest rates and high inflation rates, among others, which limit the ability of banks to engage in mortgage finance delivery. There is a polarised household income structure and the unemployment levels are high. Therefore, a very thin band of high income earners are the formally employed people who qualify enough to purchase a small house with formal title. The problems of housing finance in relation to an adverse institutional, legal and regulatory environment and the consequent inefficient collaterisation of housing assets are also evident. One of the most serious impediments of housing finance is a confusing multiplicity of land laws, which affect property registration and titling. Titling laws are weak; laws relating to land ownership are unclear. Thus, private lenders are cautious to come in when ownership is easily disputed. The processes of consolidation and nationalisation of land have made access to titled land ownership cumbersome and mainly within the reach of the few rich people. For example, Tanzanias inadequate legal and administrative frameworks, primarily around the legal treatment of land values and land registration, have made most commercial banks extremely reticent about entering into housing finance (Merrill et al,

2005). The African housing debacle is also a consequence of discussing and debating housing and housing finance based on anecdote rather than sound analysis. There are very limited and/or largely outdated data on the dynamics of African housing sector. As a result, priority is not given to building new sets of diagnostic tools to ascertain the real dynamics using qualitative and quantitative analysis. In Nigeria, for instance, Agbola (2004) stated that the most comprehensive national housing needs of the nation was conducted in 1985 and published in 1990 by the Nigerian Institute of Social and Economic Research (NISER). The problematic effects of this is a lack of basis for developing a real, pragmatic housing finance strategy at minimum and a sound empirical basis on which housing actors on the supply side and demand side (and possibly regulatory side) can base future work. In his work on mortgage finance, Professor Mabogunje (in Cities Alliance, 2006: 28) opines that the basic mechanism for financing housing development is through the mortgage finance system. Such a system requires that house owners should have a title to the land on which they build and should be able to mortgage this over many years to raise the funds with which to build or buy the house. It could be established from this assertion that without satisfying the requirement of title to the land, mortgage financing is more of a wish than a deed. For example, in Nigeria, the Land Use Act of 1978 makes it difficult for an effective mortgage finance system to emerge in the country (ibid: 29). In Egypt, there is little to no mortgage financing. The identified obstacles are property registration; the lack of critical legal infrastructure; restriction on extending bank credit to the housing sector; lack of valuation and credit risk information; and complex regulations (Everhart et al, 2006). Effects of poor management and lack of funds are evident in the closure several housing finance institutions in Africa. In Tanzania, similar to many African countries on continent, the Tanzanian Housing Bank was closed in 1995 due to insolvency forcing
7

households to fend for themselves. Uganda also had its building societies and other specialised housing lenders all but destroyed by high inflation, poor management and a lack of funding (Merrill et al, 2005).The Zambian government also once acted as a public-sector developer. However, high levels of subsidization made this form of delivery unsustainable and for a number of years (Gardner, 2007). These African housing finance crises are not recent. They have been confronted before and are still being worked on, but without much success. Despite a wide range of policies and strategies, the results have usually proved disappointing. For such reasons, policy issues in a number of areas need to be redefined. Each country has its own solutions because of its own peculiarity. However, there are some general strategies that most African countries can adopt to ensure effective housing finance system and consequently achieve wholesome urban housing units and environment. If effective housing finance system will be achieved in African countries, the promotion of stable macroeconomic conditions is inevitable. This should aim at stabilizing the macroeconomic climate which promotes confidence in the value of a countrys money and lowering interest rates, especially mortgage rate. In some countries like Ghana, Tanzania, Uganda and Zambia, due to risk management problems of volatility and inflation, the mortgage lending rate is still fairly high which signifies very high spreads (Merrill et al, 2005). The risk elements need to be addressed to encourage the ability of housing and commercial banks to manage a variety of risk factors around lending. The present political and financial reforms in most African countries should aim at stabilize macroeconomic conditions with adequate consideration to radical development of the rural economy. The promotion of institutional, legal and regulatory framework for effective collaterisation of housing assets is also indispensable for effective housing finance. This will be for sound property rights, including the need for a clearly defined right to sell land;

developing clear procedures for regularizing informal tenure; enacting property development law (for example, condominium law); and developing judicial processes to litigate and resolve disputes. It has been said that the commodification of land helps to ensure that registration and title deeds establish unequivocal ownership and facilitate access to mortgage finance (Cities Alliance, 2006). In the same vein, securitisation of real estate should be seen as an alternative source of housing finance. This means conversion of assets into readily tradable financial assets, that is, securities. Securities will open the world of commercial and mortgage properties to the investing and general public. That will allow property to be more actively traded in, with increased turnover, income and investment pull. Hence, securitisation will help to overcome the intrinsic negative perception of property as a poor, inefficient investment medium; benefit all the parties in the real estate finance market: investors, banks, among others; and make home mortgage to become a bond (Nubi, 2000). Effective funding sources should also be achieved to promote financial intermediation by encouraging savings mobilization in order to fund lending via bank deposits. Saving for down payments and loan repayments increases both the assets available to the financial services sector and the demand for more financial services. Additionally, financial markets and intermediaries act as a lubricant in well functioning economies. This enables firms to allocate their resources more effectively and increase their productivity, resulting in greater overall economic growth. Likewise, poor management syndrome of housing finance institutions in Africa should be healed. This could be done through legal provisions that ensure regular auditing and publishing of accounts and repayment of loans as at when due. Housing finance data give financial service providers some insights into access to loans and savings mobilization and provide them with comparable standards for financial services. Therefore, to secure effective housing finance for African countries, there is a need
9

for research on the development of evaluation benchmarks for housing finance institutions and their products; mobilization of resources for housing finance from the capital market, including the use of guarantees; and updating and dissemination of information on housing finance. This will also avoid limitation in knowledge of housing finance and mortgage lending and provide tools to perform risk and credit assessment in environments characterised by informal income and limited collateral. Experience suggests that widespread availability of home mortgages has a positive impact on the quality of housing, infrastructure, and urbanization. This, in turn, encourages medium and long term growth as new construction provides jobs for low and medium income workers. In achieving this, an improved effort to make mortgage finance accessible to all has been found in microfinance for housing. It is an emerging practice that applies key lessons that have been learned from traditional microfinance to conventional housing finance (Daphnis and Ferguson, 2004). It incorporates elements of both housing finance and microfinance; hence it has prospect for achieving effective housing finance system. Housing microfinance encompasses financial services that allow poor clients to finance their housing needs with methodologies adapted from the microfinance revolution. These methodologies rest on the principles that: loans are for relatively small amounts and are based on capacity to repay; repayment periods are relatively short (especially when compared to mortgage lending); loan pricing is expected to cover the real costs of providing the service; loans are not heavily collateralised, if at all; loans tend to finance housing needs incrementally; and if the lender is a microfinance institution, loans for housing can be linked to prior participation in savings (ibid.). It is incontrovertible that the residents of emerging urban Africa deserve a satisfactory accommodation in a wholesome environment, if the continent is to keep pace with the rest of the developing world. Therefore, the consideration of all the aforementioned suggestions

would be a resolution of housing finance crisis in Africa and would go a long way in tackling housing debacle of Africa.

REFERENCES Agbola, T. (2004) Housing Strategies, in Agbola, T. (ed) Readings in Urban and Regional Planning. Lagos: Macmillan Nigeria Publishers Limited. pp 187-256 Cities Alliance (2006) Foundations for Urban Development in Africa: The Legacy of Akin Mabogunje. Washington, DC: The Cities Alliance. COZAY (2008) Poverty and Hunger in Africa in COZAY. An online newsletter accessed on 17th July, 2008 at http://cozay1.blogspot.com/2008/05/housing-porblems-in-africa.html Everhart, S.; Heybey, B.; Carleton, P. (2006) Egypt: Overview of the Housing Sector in Housing Finance International, Jun 2006. Accessed online on17th July, 2008 at http:findarticles.com/plarticles/mi-qa5441/is200606/ai-n21394743/pg/?tag=artBody;col1 Federal Government of Nigeria (1991) National Housing Policy. Lagos: Federal Ministry of Information. Gardner, D. (2007) Zambia Review: Opportunities for FinMark Trust to Support Developments in Housing Finance in Zambia. First Draft Report for FinMark Trust. Homeless International (2007) Affordable housing finance for Africas Urban Poor. Accessed Online on17th July, 2008 at http:www.up.ac.za/dspace/bitstream/2263/2438/1/Nyasulu-Lack2007.pdf Merrill, S; Gardner. D; and Bierman, S. (2005) Mortgage Market Development in Uganda, Zambia and Tanzania, Urban Institute for USAID and United States Treasury Department, Executive Summary, October.
11

Mosha, A.C. (2001): Africas Future in FORUM for Applied Research and Public Policy. Moss, V. (2008) Preview of Housing Finance Systems in Four Different African Countries: South Africa, Nigeria, Ghana and Tanzania. Accessed online on17th July, 2008 at http://www.housingfinance.org/pdfstorage/AfricaPreviewofHousingFinanceSysteminFourDifferentAfricanCountries.pdf Nubi, T. O. (2000) Housing Finance in Nigeria: Need For Re-Engineering. Accessed online on 17th July, 2008 at http://www.housingfinane.org/pdfstorage/Africa_ EFFECTIVE%20MOBLIZATION%20HOUSING%20_%20Nigeria.pdf Porteous, D. (2006) Accessing the Potential of Financial Markets: Connecting low-income Borrowers. Commissioned by KfW for the 2006 KfW Financial Sector Development Symposium, Financing Housing for the Poor: Connecting Low-Income Groups to Markets, November 9 - 10, Berlin. Rust, K. (2007) Housing Finance in Africa: The State of Practice and Issues to Consider. Windhoek: Bank of Namibia / FinMark Trust Forum. Tomlinson, M. R. (2007) A Literature Review on Housing Finance Development in Sub-Saharan Africa. A Paper Commissioned by FinMark Trust in May 2007. Accessed online on17th July, 2008 at http://www.finmark.org.za/documents/2007/MAY/Litreview-HFAfrica.pdf