“All we want from the government is to introduce the directive that regulates mortgage banking.”

Zemedeneh Negatu is currently Chairman of Fairfax Africa Fund, a US-based firm engaged in investment banking and private equity financing in sub-Sahara Africa, including Ethiopia. He is also one of the promoters of the under-establishment Selam Bank which intends to disburse ETB200 billion as mortgage loans to finance 100,000 housing units in its first five years of operations. EBR sat down with Zemedeneh to discuss the endeavors of Selam Bank and the challenges it expects to face.

How did the idea of establishing Selam Bank come about?
In January 2020, a group of friends got together and discussed the idea of establishing a mortgage bank for the simple reason that there is no such dedicated bank in Ethiopia. Unfortunately, about two months later, COVID-19 struck and halted activities around the world. This past January, we regrouped and managed to launch Selam Bank.
But the decision and motivation behind the establishment of the bank is the huge housing demand existing in Ethiopia. Currently, only 3.5Pct of Ethiopians can afford to buy a residence.

When will the bank start operating?
Selam Bank will start its operations within five months. We have set up our offices already.

What percentage of the bank’s operations will be dedicated to mortgage banking?
Initially, 80Pct of Selam Bank’s work will be to provide mortgage banking services while 20Pct will be dedicated to commercial banking packages. But in five years’ time, Selam Bank will be a 100Pct mortgage bank.

What is its authorized capital?
For the moment, the authorized capital of Selam Bank is ETB2 billion. But after two years, we intend to increase it to ETB5 billion.

Have you started selling shares?
After receiving authorization from the National Bank of Ethiopia (NBE), we started selling shares. Currently, we are raising capital from institutional investors only. Once we raise enough capital from institutional investors, we will think about selling shares to the general public. Until now, we haven’t made a definite decision on this.

Do you think it is possible to secure the NBE-mandated minimum requirement of ETB500 million within six months?
We’re okay with the current minimum capital requirement set by NBE to establish a bank. Right now, we only need ETB500 million to launch our bank which is attainable.

Nonetheless, that threshold will rise to ETB5 billion after six months.
This will not be an issue for Selam Bank. We can mobilize enough capital even if NBE raises the current minimum capital requirement to ETB5 billion today.

Do you think it is possible to raise enough capital from institutional investors in a country like Ethiopia where there are very few big corporates?
The number of big corporate and institutional investors might be small but we can collect large outlays from each. The reason we are focusing on institutional investors is that their employees need housing. The big companies in Ethiopia have thousands of employees who need housing. By investing in Selam Bank, these institutions can achieve one of their goals: enabling home ownership for their employees to help them retain talent.

But a single shareholder cannot hold more than 5Pct of the bank’s total shareholdings.
We have to comply with that law of the country. Since Selam Bank is authorized to raise ETB2 billion by NBE, a single shareholder can buy and own ETB100 million in shares. This is a significant enough amount.

What is Selam Bank’s strategy in financing housing?
Selam Bank plans to finance 100,000 housing units over the next five years. Based on the calculation of an average price of ETB2 million for a single residence, the total mortgage loan we intend to disburse amounts to ETB200 billion. This is a significant sum of money, equivalent to 4.5Pct of Ethiopia’s gross domestic product (GDP). However, the amount is actually very small considering the huge requirement for housing. In Addis Ababa alone, the demand is estimated at around 1.9 million.

Do you think it is possible to mobilize such large funds and disburse ETB200 billion in mortgages within such a short period of time for a newly established bank?
Selam Bank’s balance sheet and financing structure was designed optimally so that the bank can finance at least 100,000 mortgages in the next 5 years totaling ETB200 billion. While this figure might seem large, in reality, it’s relatively modest compared to the housing demand in Ethiopia—a country with 117 million people—and where urbanization is increasing by 5Pct annually.

What are the sources of finance for such a huge endeavor?
The first is deposits mobilized from savers. To garner vast deposits, Selam Bank will have branch offices in every regional capital, although its headquarters will be in Addis Ababa. But short-term customer deposits, which commercial banks typically rely on for their lending activities, cannot be the primary source of funding for relatively long-tenured mortgage lending programs. So, Selam Bank intends to raise long-term financing from various sources including bonds and equity offerings as they are more pertinent towards providing affordable mortgages and making millions home owners.

We are going to have a stable, long-standing, and large deposit base. Selam Bank also plans to utilize the long-term bond market in Ethiopia. The secondary bond market is already operating in Ethiopia. Although it’s open to private issuers, only the government is currently issuing bonds. So, we intend to exploit the bond market.

We aim to tap into opportunities offered by the securities exchange expected to be launched next year. We haven’t decided exactly when, but in our five-year plan we plan to raise additional capital through equity offerings.

The other option we are exploring to raise additional funds is partnering with international financial institutions. In fact, we have already finalized negotiations with two international banks. The agreement will allow for both institutions to be investors as well as financers.

Do you have an alternative strategy in case the primary plan fails?
It sounds like a big deal but it has repeatedly been done throughout the world.

Who will be entitled to receive the mortgage loan that will be disbursed by Selam Bank?
The mortgage loan can be disbursed to anyone that has a steady and regular stream of income. But our main target are the middle and lower classes. Employees working at private, governmental, and at other institutions as well as the self-employed will be entitled. As long as we can verify their income, they qualify to access the mortgage loan. The down payment expected from the loanees will only be 15Pct of the total price of the house. Currently, commercial banks require up to 60Pct in down payment to disburse credit for home purchases. Customers are forced to save a large amount of money to qualify for a mortgage loan. This is very difficult for most Ethiopians. But in our case, purchasing a house becomes affordable as Selam Bank requires a reduced down payment and offers a much longer repayment period of up to 30 years. One can pay in five, 10, 20, or 30 years.

So how much will the lending interest rate be?
I would rather not specify the exact rate at this moment. But I can guarantee it will be significantly less than what is demanded by commercial banks today.

Did you select the developers the bank is going to partner with?
We have already identified developers such as BamaCon Engineering PLC. The developers will receive numerous incentives to deliver houses on time and with quality.

Currently, there is no specific legal framework that permits and regulates mortgage banking in Ethiopia. How can you be successful in its absence?
Broad-based and timely financial service sector policy revisions are currently in the works by NBE, including regulations for mortgage banking. Therefore, Selam Bank and others in the sector expect to be regulated under these upcoming regulations.

What kind of support do you expect from NBE?
We just want the government to introduce the directive that permits and regulates mortgage banking in Ethiopia. That’s all we want.

Many buildings commence in Addis Ababa but become stuck owing to foreign currency shortages. How do you plan to solve this problem?
My knowledge is that the government is working to open up the exchange rate regime soon. Within the next two years, it’s going to be market driven. There will be many other reforms in the financial sector. Forex shortages will not be a permanent problem in the Ethiopian economy. EBR

9th Year • Jun 16 – July 15 2021 • No. 99