The mortgage
market in Ghana traces its roots to the First Ghana Building Society (FGBS) in
1956 under the Building Society Ordinance, 1955 (Act 30) and the Mortgages
Decree, 1972 (NRCD 96). This coincides with the pre-financial liberalization
era (1957-1987) and the 1959-1964 housing policy, during which period mortgage
lending largely by the FGBS was financed heavily by short-term deposits and
direct government soft loans. In line with the state’s new role as a
facilitator and regulator under the 1970-1971 housing policy, the defunct Bank
for Housing and Construction (BHC) was established to provide concessionary
construction finance and credit to homebuyers.
By granting
housing loans of ¢223,895,588 (US$994,075) to only 363 mortgagors between 1974
and 1988, the BHC failed to make the expected impact like the SSB (now SG-SSB),
Ghana Commercial Bank, Barclays and Standard Chartered Banks; whose mortgage
lending activities were also short-lived. The global economic decline in the
1970’s, characterized by high inflation levels, high default rates, and
interest rate control policy of the state in the 1970s to1980s and the poor
savings culture of Ghanaians constrained the ability of the FGBS and banks to
raise funds for mortgage financing on a sustained basis.
The
post-financial liberalization era from the 1987s and the World Bank Urban II
project witnessed the first failed attempt to establish a two-tier integrated
housing finance system. The World Bank and Social Security and National
Investment Trust’s (SSNIT) contributed US$8.2 million and US$16.2 million
respectively as start-up capital. The Home Finance Company, now HFC Bank was to
operate as secondary lender but ended up us a primary lender; naturally
monopolizing the market over a decade.
As the achilles heels
of both the pre-liberalization and early post-liberalization periods,
macroeconomic volatility as measured by large and erratic movements in
inflation and real exchange rates has distorted price signals and has
heightened the perceived risk of default and credit loss and increased risk
premiums. This is evident by the wide disparity between the Bank of Ghana
policy rate (16%) and average mortgage interest rate (30%) as at 2013. This is
interlinked with the weak legal and regulatory environment, low income levels,
the lack of refinancing opportunities and reliable credit rating activities.
This makes
mortgage lending unattractive and expensive; only for the few rich to benefit
in today’s market as well. Hedging against these risks however, the mortgage
market is unofficially dollarized; altogether serving as a disincentive to long
term investments. The mortgage market as a result is typically long-term
capital scarce leading to most banks resorting to short-term cheaper deposits
in funding long.
Mortgage market
shares of major participants as at 2008 stood at 30.03% (HFC Bank), 27.02%
(Ghana Home Loans), 24.96% (Barclays Banks), 11.81% (Fidelity Bank). With an
average maximum term of 20 years, current mortgage rates of Ghana
Cedi-denominated and US dollar-denominated mortgages have averaged
astronomically at 30% and 13% (fixed) respectively. The mortgage portfolios of
the two major players, Ghana Home Loans and HFC Bank stood US$65 million and
US$ 7.57 million in 2011 respectively, contributing to mortgage-to-GDP ratio of
about 0.5%. This is a significant underperformance compared with
mortgage-to-GDP ratios of 85% and 77% in the UK and USA respectively.
The highest
average annual household income in Ghana which tallies with the Greater Accra
Region where the mortgage market is concentrated is GH¢335.60 or US$299.64
(GLSS 5). Lacking effective demand due to low income levels, affordability has
suffered as about 90% of
Ghanaians cannot afford a mortgage to purchase the least developer built unit
according to previous research. In detail,
Asare
Akuffo and HFC Bank further estimate that, only 5-8% of Ghanaians can afford a
house from their own resource; about 60% need financial assistance; 35% are not
capable of owning or building a house in their lifetime. Between 12% and 15% comprising mainly top civil
servants and staff of financial institutions have access to mortgage loans. For
this reason, about 60% of the market participants are resident non-Ghanaians or
non-resident Ghanaians.
Housing finance
systems are interdependently linked by property right, macroeconomic and policy
transmission mechanisms that should reflect both improvements and deterioration
of related variables. Hence, improvement in the property right regime evidenced
by the Land Administration Project; the assurance
of greater certainty of foreclosure and enforceability of defaulting mortgages
by the Home Mortgage Finance Law, 2008 (Act, 770); and the relative stability
of the macroeconomy should attract long-term funds at competitive pricing.
However, the picture remains below expectation with only marginal reductions in
interest rates.
The lack of or
inadequacy of long-term funds and high financing costs appears to have caused a
structural lag in the mortgage market. This may be attributed to the poor outlook of borrowers’
characteristics in relation to and summed up in the five Cs lending criteria:
character, capacity, collateral, condition and capital. The dead weight and
counterfactual is incremental housing; which accounts for nearly 80% of housing
acquisition in Ghana, but inefficient and costly.
The
possibilities of bending state’s roles in housing finance are many and are
always associated with their setting in the wider finance capital markets, economic
policies and institutions which can promote low and middle-income price-access
to long-term sustainable housing finance. In this vein, primary lending of
pension and insurance funds as practiced in Southern Africa, Singapore and
Mexico is a potential. This is because of its common characteristics with the
mortgage market: huge long-term assets and liabilities and pricing advantages.
The foregoing
raises a number of points of interest, including how housing finance systems
should be conceptualized in the wider economy; how they should incorporate
processes which improve housing affordability, and how they might be adapted in
evolutionary ways to improve low and middle-income access. Therefore, does the
national pension fund possess this potential, now that section 103(2) of the
National Pension Law (Act 766) allows a member to use that member’s 2nd
tier benefits to secure a mortgage for the acquisition of a primary residence?
Kenneth A. Donkor-Hyiaman
University of Cambridge
kwakuhyiaman@gmail.com
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