The history of
Ghana’s housing finance system has been chequered with failed attempts to
establish an efficient mortgage finance system; which is touted as the most
capable and superior financier of housing. The mortgage market in Ghana like
many developing economies is a form of Braudel’s Bell Jar; which according to
Hernando De Soto skews the market to the rich. This market is conceptually set
within an economy of weak institutional property law, which undermines the
intrinsic basis of a mortgage; the guarantee of property as security for a loan
is hugely constrained.
This coupled
with a lack of or inadequate sources of long-term finance, low income levels, high
and increasing inflation rate as well as exchange rate fluctuations, the lack
of refinancing and reliable credit rating mechanisms are symbolic of a risky
lending environment; thus, serving as a disincentive to long term investments. The
composite of these factors has resulted in the current astronomical mortgage
interest rates, averaging 30%. Hence, about 90% of Ghanaians made up of the low
and middle-income earners are excluded from the mortgage market.
The maximum term
of a mortgage in Ghana is 20 years whereas its 30 years and more in most
developed economies. Undoubtedly, a long-term source of funding reduces the interest
rate and monthly mortgage repayments and thus improves affordability. According
to the SSNIT, only 112,522 out a total membership of 1,390,945; representing
approximately 8% are pensioners. Research has also revealed that the majority
of SSNIT members are between the ages of 31-40 years and have worked for less than
16 years. Interestingly, just a hand full of the members in this age group can
afford a mortgage to purchase the least developer built unit of about GH¢30,000.
However, they have about 25-30 years more to work towards retirement.
The
above statistics reveal that the SSNIT has a youthful pension membership which
presents the 2nd tier of the new pension scheme as a possible source
of longer term mortgage finance than hitherto. 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. Similar
provisions in the pension laws in most countries in Southern Africa and Singapore
has engineered what has emerged as pension loans and pension-secured loans for
housing.
Pension
loans are direct loan from the fund,
which is secured by the fund in two ways: over the member’s accrued benefits or
effectively as a mortgage loan in favour of the fund over the property in
question. Pension-secured loans on the other hand enable contributors to secure
housing loans with their accumulated benefits from third party; the pension
fund (or administrator) in this case acts as a guarantor. This allows members
to release the equity in their pension to improve their housing situations.
Why
Pension Loans and Pension-Secured Loans are Feasible: Propositions
Pension funds
having long-term liabilities have long-term investment horizons. It is
therefore a prerequisite in eliminating liquidity risk premium and the
potential maturity gap created by the use of short-term assets in financing
long-term liabilities. This inures pricing benefits to the borrower; for
instance, loans are priced at the prime rate in South Africa (which is 16%
currently in Ghana) relative to traditional mortgages.
Providing an alternative impetus for loan underwriting and pricing,
pension assets enhance the viability of contributors as good borrowers regarding
the 5Cs lending criteria. The
amount and frequency of pension contributions are a readily effective means of
assessing the credit worthiness of a borrower; as the regularity of payments
could serve as a proxy and substitute to character
and capacity. Accumulated pension
contributions are a relatively liquid form of collateral and simultaneously provide live capital towards
mortgaging; unlike the many houses without proper title in Ghana.
Repayment of
pension loans and pension-secured loans is senior-subordinated to mortgage
repayment. This means that the 2nd tier contributions are deducted
before mortgage obligations. Thus, a lender is relatively more secured upon
loan default. Further, the positive co-movement of house values and inflation
makes it a viable investment in very high inflationary economies with little or
no inflation-hedging investment vehicles aside the potential of strong future
cashflow generation where rented out.
With 24.36% equity
in HFC Bank, Cal bank (34.4%) and Ecobank Transnational Incorporated (9.04%),
the Social Secuirty and National Investment Trust (SSNIT) of Ghana is prominent for its role in housing
development and indirect financing of mortgages. Yet, majority of SSNIT members
cannot afford this mortgages because these two roles are disjointed. The
Central Provident Fund of Singapore remains a quintessence; about 81% of the
Singaporean population own an HDB flat, and over 95% of the adult population
are homeowners largely due to pension and pension-secured loan (HDB 2000;
McCarthy, Mitchell and Piggott, 2001).
Although Section
103 (2) of the Pension law of Ghana is clear on the intention of the 2nd
Tier mandatory pension scheme in support of a contributor’s first mortgage, it
is vague on the form in which it should be utilized: pension loan and or pension-secured loan? More so,
the law does not specify the threshold of borrowing and whether it should be
used for a down payment and or repayments.
Pension loans
and pension-secured loans as a possible source of long-term finance will
eliminate liquidity risk and the maturity gap problem which contributes to high
interest rates on mortgages. They present competitive pricing advantages to the
borrower than the current traditional mortgages. This will improve borrowers’
affordability positions and expand mortgage funding opportunities as well as
increases mortgage market participation. It will achieve efficiency by
providing funds to the low and middle-income earners who need it most than
hitherto, but its sustainability is a question of further research.
In conclusion,
in a country where pension benefits are meagre, the value of which has also
been eroded by high inflation, the dilemma is whether making compulsory contributions
to a pension fund is feasible? This is even worsened by the fact that
life-expectancy is dropping rapidly as most contributors may not live to enjoy
retirement benefits. This confirms the findings of previous researchers that
most people forced into a pension fund do not benefit from it. What is the use
even where beneficial to be assured a comfortable pension without a roof over
one’s head today? The National Pensions Regulatory Authority (NPRA) should be
looking at the feasibility of implementing section 103(2).
Kenneth A.
Donkor-Hyiaman
MPhil Planning, Growth
and Regeneration
University of Cambridge
kwakuhyiaman@gmail.com
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