Enabling Private-Sector Lending for Affordable Housing: HUD/UN Forum with African Countries

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Mobilizing the private sector and domestic financial services industry to invest in affordable housing is a HUD policy priority of global importance. In response to demands from the international community for venues in which to share policy measures, HUD and the United Nations Habitat program recently organized a policy exchange forum called the Africa High-Level Peer Exchange on “Government Enablement of Private Sector Lending for Affordable Housing.”

Secretary Jackson makes remarks at the Overseas Private Investment Corporation and Ghana Home Loans Memorandum of Understanding signing ceremony.

In November 2006, HUD Secretary Alphonso Jackson led a U.S. delegation to Accra, Ghana to host the forum for West African countries. Housing experts from the Ministry of Housing, Ministry of Finance, and the banking industries of eight African countries attended the policy exchange forum. Participating countries included Ghana, Senegal, Nigeria, Benin, Cape Verde, Liberia, Mali, Mozambique, India, Canada, and the United States. In his keynote address, Secretary Jackson stressed the critical importance of public-private partnerships for improving access to affordable housing. He emphasized that a healthy housing market and a society that values home–ownership can be an important source of economic growth. Forum sessions focused on attracting investments by exploring private-sector approaches to affordable housing, the role of public-private partnerships and financial intermediaries, and government regulatory frameworks and incentives.

Private-Sector Approaches to Affordable Housing

Forum participants first explored approaches that the formal domestic financial services industry can use to promote affordable housing. Private-sector housing finance in West Africa has historically been the purview of a select few building societies established in the colonial era and embraced by newly independent governments as vehicles for meeting the housing needs of young nations. The performance of some building societies has been uneven at best. Most institutions have catered to the high end of the market, adopting credit history requirements, charging fees, and setting rates of interest prohibitive to low-income wage earners and those who rely on informal employment. Although some commercial banks have offered mortgages, these are often expensive, short-term, and meet the needs of only a fraction of a rapidly growing population.

In recent years, trends in West Africa have radically altered the playing field of private housing finance institutions, opening the market up to a wider set of players. Decentralization in the subregion, albeit slow, is gradually taking root. Ghana has embarked on a comprehensive land reform policy, and the capital market in Nigeria has grown by leaps and bounds. Similarly, the micro-finance industry has witnessed a four-fold increase in operations. The number of private banks and public-to-private bank conversions has steadily grown, thereby increasing competition.

To meet competition and greater demand, the private banking sector is exploring a number of approaches to housing finance. The preliminary approach is to establish internal operational systems and training that will enable banks to originate and service mortgages. This has proven to be a time-consuming and capital-intensive exercise. Another approach is to secure long-term capital for mortgage lending that will allow banks to move from 5–10 to 15–20 year loans. Most commercial banks in West Africa have an asset-liability mismatch. Their assets are comprised primarily of short-term deposits, while the liabilities that they will incur for mortgage financing are longer-term. Many banks seeking to enter the mortgage market have not fully resolved this problem. Some national branches of multinational banks have secured capital infusions from parent banks, while others seek to attract longer-term money from the domestic capital markets by issuing bond instruments.

Yet another approach banks are taking to enter the mortgage market is to reduce risk. Banks are deeply skeptical about the ability of borrowers to repay loans, especially when dealing with people who do not have collateralized assets, a formal-wage paycheck, and a credit history. Risks incurred by banks can be shared with international finance facilities or governments that offer partial guarantees and risk-sharing mechanisms, such as mortgage insurance that underwrites loans for affordable housing. Risks can also be shared with financial intermediaries who organize and educate borrowers, thus lowering transaction costs that would otherwise be borne by retail banks.

The Role of Public-Private Partnerships and Financial Intermediaries

Secretary Jackson meets the tribal leader of the Ashaiman Tulaku community in Ghana.

The growing demand for housing in West Africa and the limited supply of housing finance from the formal domestic banking sector has generated a wide range of partnerships and financial intermediaries to help fill the gap. The most common intermediary is the extended family and kin-based network. Typically, house construction in the region is self-financed in steps over a period of time. An individual saves his or her own funds, borrows from friends and relatives, and constructs, or has a local builder construct, a foundation and walls. Then the individual saves and borrows more funds, using these to build the roof and finish the interior. Common in rural areas, the stepped self-finance approach is spreading to urban areas and to all levels of income. Another mechanism is the neighborhood association that mobilizes community savings.

Many urban dwellers seek loans for house construction from micro-finance institutions, although they focus on microenterprise and personal loans, rather than mortgage instruments. These borrowers obtain short-term personal loans and use the funds to construct homes. Many are repeat borrowers who start with small loans, pay them back, establish a track record, and then apply for slightly larger loans, all used for housing. Housing micro-finance, as it is sometimes referred to, is a growing phenomenon in West Africa. A particular subset of borrowers builds simple housing with micro-finance loans that are paid back with rent derived from the units.

Another financial intermediary consists of community savings groups, community banks, and cooperatives organized by area residents, frequently women, to gain greater access to credit. These groups have the potential to initiate complex development projects involving land acquisition, service provision, and housing delivery. As a result, they’re able to facilitate working relationships between individual cooperative members and the formal banking sector.

Government Regulatory Frameworks and Incentives

As the number of financial intermediaries grows, the need arises for a policy and regulatory framework to enforce standards and to establish appropriate institutional arrangements.

Secretary Jackson tours the Ashaiman Tulaku community outside Accra, Ghana.

Participating West African governments are taking important steps to support the banking sector and intermediary organizations in their efforts to provide housing finance based on terms that are accessible to low-income households. These governments are developing regulatory frameworks, introducing legislation, and laying the institutional groundwork to form a new enabling role for government. However, the support function of state institutions in housing finance is far from complete, and much remains to be done.

One area of support under consideration by these West African governments is the provision of long-term capital for primary mortgage lenders. Banks are hard pressed to incur the exposure of 20-year mortgages when their primary source of capital is less than 5-year deposits, so governments are contemplating ways of helping banks issue housing bonds. These debt instruments would be purchased by institutional and private investors in the domestic capital markets. The government would support the process by providing a partial guarantee for the bond and regulating the issuance and application of the debt instrument.

Also under consideration is a comprehensive regulatory framework for asset-backed securities, the regulation of nonfinancial institutions, ways of supporting financial intermediaries that help low-income households build and improve housing, and reforms that would allow institutional investors to draw upon long-term capital available from insurance companies and pension funds.

Credit ratings and assessments (personal, sovereign, and sub-sovereign) constitute yet another area that needs government support. A common feature in North American and European banking is an individual credit rating. Private companies that keep records on an individual’s assets, debt, and debt repayment capacity do not exist in most West African countries. Further, most governments and local authorities in West Africa are not, themselves, rated in terms of their assets, liabilities, and debt repayment capacity; those that are often have a poor rating. Companies, such as Standard & Poor’s, are only just beginning to provide sovereign and sub-sovereign credit ratings in Sub-Saharan Africa.

The topic of “government enablement of private-sector lending for affordable housing” is admittedly large and complex. There are a number of important elements and aspects that cannot adequately be discussed in the confines of a three-day peer exchange, and much work remains to be done. More international exchanges, like the one held with West African countries, could expedite the progress being made in the global housing sector.