Reviving Mortgage Banking, the Bumpy Road Ahead

A new hope was dawn when two banks named Goh and Selam recently begun selling shares with the aim to finance specifically housing demand. Ethiopia’s housing gap is an accumulation from generations, with over 400,000 new demand annually matched by less than 100,000 supply, government schemes and private developers teamed up.  Now, Goh and Selam revived the demand of millions of house seekers, promising to deliver hundreds of thousands of houses in few years. Goh will provide loans for the house buyers, while Selam both the developer and buyer.

However, the mortgage model both Goh and Selam came up with, proved faulty even after Thehay Real-estate, where banks who extended loans, the developer and the house buyers who are already living in the houses ended at court. the absence of legal framework to keep the same housing title deed as collateral for the financer, property for the developer and buyer at the same time, is most likely to place Goh and Selam in a deadlock. The financing model of the banks, where they plan to extend way more credits than their capital, also poses a fragile banking survival method. But all these problems could be insignificant, if only the central bank have time to introduce special indicatives for such banks willing to specialize in mortgage. EBR evaluates the pros and cons of engaging in mortgage banking amidst absence of legal frameworks both from bank and housing regulators sides.

Ever since the now defunct Construction and Business Bank changed its model from mortgage to universal banking two decades ago, lack of finance has been one of the major obstacles in the housing sector. Although some commercial banks are engaged in mortgage financing, housing loans currently constitute less than 10Pct of total credit disbursed by the banking sector. This has severely diminished the opportunity to secure a home loan, especially for the middle class and low-income households.

Resultantly, the unsatisfied demand for housing has kept climbing, especially in urban areas like Addis Ababa. The backlog of demand for housing is estimated to surpass one million, with an additional 400,000 units of new demand created annually. However, the annual housing supply through the government’s condo scheme and private developers is less than 100,000 units per year, according to the Ministry of Urban Development and Construction.

The subsidized condominium project implemented by the government has failed to address society’s housing demand. On the other hand, close to 80Pct of real estate developers target the higher class, even while over 92Pct of Addis Ababa’s residents are low-income families, according to studies. “Most homes built by the private sector target the diaspora and upper classes. This leaves the lower and middle classes vulnerable” argues Abebe Dinku (PhD), Head of the Civil Engineering Department at Addis Ababa University. “There needs to be a policy that addresses the needs of middle- and low-income citizens.”

To satisfy the mounting demand for housing loans, Goh Betoch and Selam banks—both under establishment—are trying to revive the dying mortgage banking service in Ethiopia.  Set up by top financial gurus including Getahun Nana, former vice governor of the central bank, Goh Betoch Bank plans to disburse up to ETB7 billion in mortgage loans during the fifth year of its operations.

The subscribed capital of Goh, expected to start operating in two months’ time, is ETB1.2 billion while its paid-up capital has currently reached ETB540 million. “The buyer of the house must save 15 to 20Pct of the house price as down payment into the bank’s account,” Mulugeta Asmare, appointee president of Goh, explains. “Then Goh provides the remaining amount at lower lending interest rates and payback periods extending up to 30 years.”

On the other hand, Selam Bank—under formation by heavyweight investors from a range of sectors—plans to finance 100,000 housing units in the next five years by disbursing mortgage loans amounting to ETB200 billion in its first five years. Selam requires 15Pct in down payment while the payback period spreads to 30 years.

“Initially, 80Pct of Selam Bank’s operations will be to provide mortgage banking services while 20Pct will be dedicated to universal banking services,” says Zemedeneh Negatu, one of the promoters of the bank. “But after five years, it will be a 100Pct mortgage bank.”

Muluneh Aboyeh, Risk and Compliance Vice President of the Commercial Bank of Ethiopia (CBE), says the arrival of these new banks is a step forward towards solving the growing housing crisis across the country. “CBE has been providing loans to the government for the condominium housing project but wasn’t able to provide similar offerings to the private sector aside from the bank’s premium customers.”

Although the moves by Goh and Selam are admirable, experts warn the road ahead will not be as simple as portrayed. Abdulmenan Mohammed, Financial Analyst based in London, is one of the experts questioning the feasibility of the two, as well as their choice to operate under the current financial system as a mortgage bank.

“The existing huge demand for housing is not sufficient enough to focus on mortgage banking and succeed. Mobilizing adequate funds to finance the housing sector is not a simple task that only requires attracting as many depositors as possible,” argues Abdulmenan. “Since it involves long-term mortgage lending, these banks need to find long term sources of funds.”

As can be easily gathered from the performance of current banks, mobilizing funds is a difficult task that takes time and requires abundant resources. The primary source of funds for commercial banks operating in Ethiopia is deposits. In 2019/20 alone, the 16 private and two public banks operating in Ethiopia mobilized ETB142 billion, according to the annual report of the National Bank of Ethiopia (NBE). Total deposits in the banking system have now surpassed ETB1trillion.

Other sources of funds available to banks come in the form of interest from loans and by borrowing themselves. Total resources mobilized through interest collections was ETB183.3 billion last fiscal year. Funds raised through borrowing remained insignificant.

Mobilizing such amounts, however, doesn’t come easy. Banks’ major costs pertain to the interest paid to depositors. Since NBE raised the minimum interest rate financial institutions pay on savings and time deposits to 7Pct In October 2017, it has been showing marginal increments. At the end of the fiscal year, the weighted average saving and time deposit rates increased to 8Pct.

To compensate for the additional expense brought on by rising interest payments, banks have in turn been lifting the lending interest rates they charge. The maximum lending rate in the banking system jumped from 18Pct last year to its current 24Pct, which is above the 20.6Pct inflation rate.

Few banks, currently providing mortgage loans, charge reasonable rates. For instance, the Cooperative Bank of Oromia offered 7Pct—the lowest in the industry—when the Primary Labor Union of Ethiopian Airlines openly invited all Ethiopian commercial banks to bid mortgage packages to its members in February 2021.

The promotors of Goh and Selam banks also promise reasonable interest rates when they commence disbursing in the near future. “I would rather not specify the exact rate at this moment,” says Zemedeneh. “But, I can guarantee it will be significantly less than what is asked by commercial banks today.”

However, Abdulmenan says this is a hard to keep promise as inflation is rapidly increasing. “High price increments are expected to continue for at least the coming few years,” he anticipates. “This will force banks to increase their lending rates to counter inflation.”

Owing to inflation, average prices of a unit of housing developed by real estate companies has almost doubled in the last five years. It is currently ETB20,000 per square meter in Addis Ababa. Inflation has also forced banks like CBE, which has been charging lesser rates in the industry, to change its lending policy. As a result, a few months ago CBE’s average lending rates increased from 8.63 to 9.8Pct.

Mulugeta says inflation will not be a problem. “We will ensure the price of houses we finance is not inflated by the developer without valid reasons. We will make and use our own evaluations to make this happen.”

To amass huge funds, banks also have to expand their branch outreach, which requires huge investment. In the last fiscal year alone, banks opened 947 new branches to raise the total number of branches to 6,511 from 5,564 a year ago. CBE with 247 new branches in 2019/20, followed by Abyssinia Bank with 226, and Awash Bank with 58 branches are the top expansive banks in this regard.

Zemedeneh says Selam Bank plans to pursue a massive branch expansion strategy to attract deposits. “To garner large deposits, Selam Bank will have branch offices in every regional capital.”

However, the large portion of financial resources mobilized by banks is not suited for long-term lending. More than 90Pct of deposits are in accounts which allow withdrawals at any time. In the last fiscal year, out of the total deposits mobilized by banks, 56.6Pct and 34.2Pct were in saving and demand deposit accounts, respectively, while time deposits constitute only 9.2Pct.

Correspondingly, significant portions of loans disbursed by banks are short-term and their share of long-term loans remains small. During 2019/20, banks disbursed ETB271.2 billion in fresh loans with ETB121.2 billion (44.7Pct) provided by the 16 private banks and the remainder by the two parastatals. Out of the total fresh loans disbursed last year, only ETB11.4 billion—9.4Pct of the total—was disbursed to the housing and construction sub-sector.

Zemedeneh aggress with the fact that saving and demand deposits cannot be the primary source of funding for longer-tenured mortgage lending. “Selam Bank intends to raise longer-term financing from various sources including bonds and equity offerings since they are more pertinent in availing affordable mortgages and making millions home owners. The other option we are exploring to raise more money is to partner with international financial institutions.”

The reason sub-sectors like housing and construction are lent small amounts is that long-term loans, including housing loans that can span up to 30 years at fixed interest rates, entails significant risk, according to Abdulmenan. “For banks, loans are assets with risk. So, more deposits means more exposure to risks, especially credit risk.”

To protect depositors and banks, as well as promote the stability and efficiency of the financial system, NBE requires all banks maintain a minimum capital to a risk-weighted assets ratio (Capital Adequacy Ratio) of 8Pct at all times. “Since it is difficult for banks that provide long-term loans to maintain the stated ratio, NBE must introduce special laws to regulate newly establishing specialized mortgage banks in Ethiopia,” argues Abdulmenan. “Besides Capital Adequacy Ratio, other important areas that need special regulations are a provision for doubtful loans, foreclosure, formation of credit records for housing borrowers (credit history), borrowers’ protection, and information provision.”

Zemedeneh concurs with Abdulmenan. “The new mortgage banks cannot operate with the existing banking laws that were crafted mainly to regulate banks that follow the universal banking model,” he explains. “Broad-based and timely financial services 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 new regulations.”

However, Frezer Ayalew, Director of the Banking Supervision Directorate at NBE, says the central bank has no intention of introducing a directive concerning mortgage banks soon. “There are no banks providing specialized services in Ethiopia. Any bank licensed in Ethiopia operates under existing banking laws.”