The Role of Private Mortgage Institutions in Credit Provision

0

Vincent Okechukwu writes on the need for private mortgage institutions to provide credit for financing housing schemes in Nigeria

Most Nigerians pay at least 80 per cent up front for major purchases, even houses and brand new cars. With this lack of a credit culture, it is not surprising that Nigeria has one of the lowest mortgage loan rates in Africa as a percentage of gross domestic product (GDP). According to The Economist, mortgage loan rate in Nigeria was less than two per cent in 2014, compared to about 25 per cent in South Africa and four per cent in Rwanda. This has extremely negative effects on the retail market; lack of access to credit continues to stunt the purchasing power of the Nigerian consumer which inhibits growth in local production and the economy as a whole.

However, recent changes in the financial sector are aimed at enabling a larger proportion of Nigerians with an easier path to building wealth. The strengthening of primary mortgage banks (PMIs) is a key example and has been supported by other sound credit policies, including the recently launched Vehicle Credit Purchase Scheme. The new trend of providing access to credit instruments for property ownership when they are actually needed (such as at the point of starting a family), rather than waiting until later in life, is slowly becoming the norm and is the right path to lasting prosperity for responsible, working class Nigerians.

The Central Bank of Nigeria (CBN)’s PMI recapitalisation exercise in 2014 resulted in the licensing of 32 private mortgage institutions to operate at a federal or state level, with at least N5 billion and N2.5 billion capitalisation respectively. Since then, the number of PMIs has increased to 36 and the policies of the CBN have expanded from liquidity ratios to increased focus on provision of funding for residential housing. These policies include the exclusion of certain financial activities from the mandate of PMIs, which formerly led to over-development of the commercial real estate to the detriment of residential developments. The tendency of such institutions to favour trading activities that have little to do with mortgage financing, in a bid to make higher profits, have been curbed and this is a step in the right direction for widespread access to affordable mortgages.

PMIs increase private ownership of property through demand and supply side strategies. Individuals gain access to financing through tailored mortgage related accounts, such as savings accounts specifically set up to finance loans. In addition, real estate developers receive access to the mobilized capital, which is regulated by the institutions who determine the percentage of residential development in accordance with current housing needs. As these PMIs are strategically located to provide access to all six geopolitical zones, they are in an ideal position to react appropriately to the needs within their specific zones.

Private and public mortgage funds, such as the National Housing Fund (NHF), are also becoming more popular and are an important way for Nigerians to tap into funding for home ownership. The NHF is operated by the Federal Mortgage Bank of Nigeria (FMBN) and is structured in the form of contribution savings, which is the preferred format for most public and private funding schemes. Salary earners contribute a percentage of earnings on a monthly basis and are then eligible for up to a N15 million loan.

Public-private partnerships (PPPs) also fund similar schemes with low interest rates and longer repayment periods compared to commercial banks. They also tend to provide access to more funds for a broader spectrum of people as investment is sourced from different private sector funds. Growth in these PPP schemes is touted as the future of a healthy mortgage culture as the regulation from the government and access to bulk funding from diverse private sources are key ingredients for price and interest rate stability.

Most housing funds disburse funds to buyers through primary mortgage institutions, so it is important that there are adequate regulations and supervision from the CBN and the FMBN to ensure there are no bottlenecks. The goal is effective operations that link potential home owners to the funding that best suits their needs. This is an on-going process which has already started and requires continued strategic planning to overcome the years of mismanagement that have led to Nigeria’s current dismal property ownership figures.

The last global financial recession showed the world how key financial institutions almost entirely funded the boom in the housing market, and the co-dependence between the two sectors. The Nigerian financial sector must learn from the successes (and the mistakes) of Wall Street, to build a society where every family has access to the credit needed to facilitate home ownership. This is a key first step to wealth creation for working and middle class families; the best way to lift any country out of poverty.

– Okechuwku is a financial expert and property consultant based in Lagos