Most Nigerians pay at least 80% up front for major purchases, even for 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 GDP.
According to The Economist, it was less than 2% in 2014, compared to about 25% in South Africa and 4% 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’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 ₦5 billion and ₦2.5 billion capitalisation respectively. Since then, the number of PMIs has increased to 36 and the policies of the Central Bank have expanded from liquidity ratios to increased focus on the 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 mobilised 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, 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 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 ₦15 million loan.
Public-private partnerships 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 Central Bank and the Federal Mortgage Bank 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.
