Ghana Home Loans to Pioneer Mortgage Securitization: A Step in the Right Direction

The mortgage market in Ghana like many developing economies is a form of Fernand Braudel’s Bell Jar alluded to by De Soto (2000); which makes the market “… a private club, opened only to a privileged few”, referring to the rich in society. Research has shown that about 90% of Ghanaians cannot afford a mortgage to purchase the cheapest developer-built unit. This is largely due to the general low levels of income, high house prices and the high mortgage interest rate regime in Ghana.

High mortgage rates are a function of unfavourable borrowers’ characteristics, unstable macroeconomy and the scarcity of long-term funds in the mortgage market. Hence, from a pricing perspective according to a recent study, all the three determinants of the mortgage rate; the real risk-free rate, inflation premium and the risk premium, are significantly high. Scarcity of long-term capital means the cost of capital, loosely referred to as the real risk-free rate is high. Inflation is high and volatile, which rationally induces investors to prefer short-term investments than long-term investments like mortgage; as a guard against purchasing power losses. Default risk, the probability that borrowers will not be able to pay the principal and interest on a mortgage are substantial; estimated at 95% in 1999 and 11% in 2009 (Gyasi, 2010). Further, the difficulty in converting mortgage loans and collaterals into cash increases liquidity risk, which together with high default risk constitutes the high risk premium regime (about 13% on T-bill rates) for Ghana cedi-denominated mortgages.

The substantial liquidity risk could be attributed to the underdeveloped nature of the capital market and the difficulty with Ghana’s land administration system. Without refinancing mechanisms like a secondary mortgage market, where primary lenders like banks can sell their mortgage loans to enhance their liquidity, borrowers will always have to compensate lenders with a “term” (liquidity) premium for carrying the risk until the maturity of the loan. With a weak land titling and registration system, ownership to property is uncertain; which constrains the basic principle of pledging property as collateral for a loan. This was worsened by hitherto biased mortgage legislation (Mortgage Decree, 1972), which favoured borrowers to the detriment of lenders. The composite ramification manifests in increased length of time in converting collaterals into cash; thus, making mortgage financing very risky, for which reason mortgage rates are commensurately high.

In the absence of an exclusive solution to high mortgage rates in Ghana due to the multi-faceted nature of the problem, efforts to decompose the inherent risk and to deal with each individually are welcome. On this note, Ghana Home Loans Limited’s proposition to securitize their mortgages is a step in the right direction. In this article, I seek to discuss the essence of mortgage securitization in dealing with the scarcity of long-term capital, liquidity risk and how this could effectively reduce mortgage rates; which is necessary to improve affordability and mortgage market participation.   

Securitization is the financial practice of pooling various types of contractual debt, such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations, and selling said securities to various investors. Securities backed by mortgage receivables are called mortgage-backed securities (MBS). The structure of MBS allows the originator, in this case, Ghana Home Loans to sell off the full or part of its mortgage portfolio to a special purpose vehicle (SPV), usually an investment bank which subsequently issues securities on the mortgage receivables to investors with different risk appetites. These securities are then traded on the secondary mortgage market (non-existent in Ghana). The different types include mortgage pay-through securities, mortgage pass-through securities, collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs).

Now, how will securitization reduce liquidity risk? By selling its mortgage portfolio to the SPV, the Ghana Home Loans removes liquidity risk from its balance sheet by matching its assets with liabilities. Liquidity risk is then transferred to the secondary mortgage market (SMM); which is reduced or purged by rigorous trading between investors.  By the existence of the SMM, mortgages originated could be converted into cash within months compared to holding it for 15-20 years as is the case now. Hence, the SMM would enhance liquidity by reducing the length of time for converting mortgage loans into cash for relending. The expectation is that with an active SMM, demand for MBS should increase which would ensure that the price obtained is not substantial low compared with a forced sale.

Why would securitization increase the supply of long-term mortgage funds? Once mortgage loans are liquid via the SMM, more cash (funds) would be released from Ghana Homes Loans’ balance sheet for immediate relending. The SMM is a market where investments with long-term liabilities and assets trade. Hence, this provides an opportunity for better asset-liability matching depending on the structure of securitization adopted; unlike the current situation where mortgage firms mostly banks finance long-term mortgages with short-term deposits. This creates a maturity gap problem which is funded at a high cost to banks and subsequently transferred to borrowers. However, the Ghana Home Loans is not a deposit-taking financial institution; and thus may not be affected by this problem. Therefore, securitization could increase the Ghana Home Loans’ mortgage originations substantially at a lower reinvestment rate to borrowers benefit.

This is possible because, securitization enables a company even with a BB rating but with AAA–rated mortgage receivables to borrow at the lower AAA rates; because the said receivables are far less risky.  In fact, this is the fundamental reason to securitize mortgage loans which can have significant reductions on borrowing costs. Accordingly, Liu, et al., (2009) opine that banks that securitize their assets have lower mortgage interest rates or spreads than depository institutions. This is because the securitization process is touted as a “financial alchemy”; magic resulting from the tranching process. This groups or builds different portfolios called “tranches” with similar risk exposures which are well diversified. Experts assert that, if the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves, less tranches may experience dramatic credit deterioration and loss. The tranching process is therefore everything about securitization, a contributory factor to the global economic crisis and for which reason, the Ghana Home Loans must be circumspect.

In summary, the securitization process is first a risk transfer mechanism for primary lenders via the secondary mortgage market. As a result, new investment opportunities varied by risk appetites are created which suits the investment needs of many investors especially for long-term investors like pension and insurance funds. This would enhance liquidity through competition resulting from the exposure of Ghana Home Loans’ primary mortgage loans to many more investors. Consequently, assets and liabilities could also be better matched which will release more long-term funds for increased mortgage lending at lower mortgage rates.

Notwithstanding these benefits, the feasibility of securitization in any economy may be hindered by many country-specific factors and the type of securitization adopted which are not discussed in this article. It is my hope that extensive dialogue with all stakeholders would reveal the possible bottlenecks and solutions which will point the way forward for mortgage financing in Ghana.

Kenneth A. Donkor-Hyiaman

MPhil Planning Growth and Regeneration

University of Cambridge

United Kingdom

Kwakuhyiaman@gmail.com

Election Petition in Ghana: The Cause of the “Premium” Eurobond Issue?

Concerns over Ghana’s external debt keep increasing as it increased by the US$750 million Eurobond this week. This is what remains after US$250 million outstanding debt was bought back from the original issue of US$1 billion relative to the first Eurobond Issued in 2007 and due to mature in 2017. Although commentators and analysts especially Dr. J.S. Abbey (Executive Director of the Centre for Policy Analysis, - CEPA), described this issue as bad and wrongly “timed¹”, it is yet to penetrate through the Government’s propaganda defense mechanism; as Government functionaries as usual have sought to remain resolute about Government’s opinion of the “great deal” it has executed for Ghana. Contrary to this opinion, it has been argued by some investors that “the opportunity cost loss is at least $100 million on a net present value basis. That's four district hospitals if you want it in social terms." –unnamed investor cited in the Reuters article on myjoyline.

Two main issues have been the matter of critique. First, this Eurobond was issued at a premium to the 2017 instrument (1^st Ghana Eurobond issued in 2007), currently trading at around 6%. Secondly, demand for Ghana’s bond although over-subscribed by $1.2 billion; relatively underperformed compared with Zambia and Nigeria’s issues about a month ago. According to the Deputy Minister of Information, Mr Felix kwakye Ofosu; “ … the over-subscription of the Eurobond demonstrated the level of confidence that the investment community had in Ghana…”. He may be right to some extend if competition between nations for investment is held constant. As stated above, demand for Ghana’s issue UNDERPERFORMED relative to Zambia and Nigeria’s issues. This means that, many more investors at least are willing to invest in Zambia and Nigeria than in Ghana; which I believe the Honourable Minister knows very well; so why the half-truth been told?

Another comment that attracted my attention was made by the Honourable Minister for Finance and Economic Planning, Mr Seth Terkper and Dr. Henry Wempah (Governor of the Bank of Ghana) concerning why the Eurobond was issued at a premium. They explained that contrary to popular assertions of Ghana’s weak fiscal and macroeconomic fundamentals, the determining factors were external; as “It's primarily about the unfavourable general conditions globally". Once again, this is half truth as debunking the “weak fiscal and macroeconomic critique” is unsustainable as the latter factors could influence the probability of default practically. Now, by blaming it on external factors and not “Ghana’s risks”; as Dr. Wempah told the Reuters as reported on myjoyonline raises the question as to what Ghana’s risks are? The Reuters had explicitly attributed the premium to Ghana’s fiscal and current account deficits. Budget deficit surged to 11.8 percent of gross domestic product in 2012, up from 4 percent in 2011, partly as a result of public wage increases. Besides the budget deficit, Ghana's current account shortfall has also expanded, to $4.92 billion or 12.3 percent of GDP, from $2.15 billion in 2007. Public debt increased to 49.4 percent of GDP in 2012, from 40.8 percent in 2011, “higher than peers such as Nigeria” which has a debt-to-GDP ratio of 18.6 percent (ibid.).

In anyway, as concurred earlier, the Finance Minister and the Governor of the Bank of Ghana could be partially right about the attribution of the premium to external factors and not “solely” on internal macroeconomic factors. This is because one of the possible risks that international investors would have had to contend with is currency risk which is substantial in Ghana due to high and volatile inflation and exchange rate regimes. However, this is no problem because the Eurobond is denominated in US dollars, which is a hedge against currency risk relative to Ghana’s macroeconomic instability. 

There are a number of issues not addressed by these two servants of the state with respect to Ghana’s risk factors, which down plays Ghana’ internal environment as the cause of the premium. In this article, I assert that the premium Ghana paid could have resulted from country risk underpinned by political risk and capital market illiquidity. This is discussed by applying the Capital Asset Pricing Theory (CAPM) and other bond pricing considerations from extant literature. CAPM simply enables the estimation of expected return of an investment based on its risk sensitivity relative to the market. Hence, a bond with the same risk sensitivity as the market earns the same return as the market portfolio. At worst, this hypothetical bond should be priced at par; that is, its interest (coupon) should be the same as the prevailing market rate of interests. On the contrary, a bond is traded at a premium when its interest (coupon) is higher than the market interest rate. By CAPM analysis, the bond is riskier than the market portfolio; hence, the higher required return – the risk premium (excess return) above the expected market return to compensate investors for the additional risk they will bear. Could this be because Ghana is rated B by Standard and Poor's, B1 by Moodys and B+ by Fitch, which revised the country's outlook to negative from stable after the government announced a surge in its deficit?

Therefore, trading Ghana’s Eurobond at a premium meant that the issuer (Ghana) is riskier than the market (International); which indeed is directly correlated with the risk of default on the bond. For this reason, the country is expected to pay investors, an interest of 8 percent; which is higher than the 6.5 percent Nigeria had in a similar move and Rwanda's 6.8 percent. Once again, did Nigeria get a lower coupon rate because of it lower debt-GDP ratio? An investment is said to be risky if the issuer is likely to default on the payment of interest and principal. Is Ghana risky? Indeed Ghana is risky and I contend that contrary to the Finance Ministers assertions, these risk considerations could be internal and not primarily external. According to Daniels and VanHoose (2005), “risk premium refers to interest rate differences resulting both from diverging degrees of default risk and from distinctive levels of liquidity”. From the analysis above, the risk premium is a spread, which according to Chrisholm (2002) is “partly determined by the credit rating of the Issuer (i.e. Ghana) and partly by the appetite of the market for the investment in current market circumstances”. This cause and effect attribution supports popular concerns especially by Dr. J.S. Abbey about Ghana’s poor credit rating as a possible decoy.

Deductively, the factors that can cause Ghana to default on the Eurobond are much stronger reasons for the premium payment. Again, Daniels and VanHoose opines that country risk can account for risk premiums on bonds issued by various nations for reasons other than political uncertainty. Country risk interchangeably is political risk; but distinctively, the former encompasses the later. The ongoing election petition is an enviable feat in the annals of democracy in Africa and the world over, as the principles of our common democratic dispensation are tested. Nonetheless, this in addition to Ghana’s history political risk underpinned by blood thirty political upheavals largely through military coup d’états keeps haunting these international investors; although the nation has made promising strides in recent times.

The high probability of political risk is worsened by the hyperbolized colouration and presentation of the petitioners as a group “desiring power by all means”; even through the possible orchestration of civil disturbances. That is to say, a verdict in favour of the incumbent President is likely to result in political disturbances; as recent utterances by some irresponsible politicians seem to perpetuate and guarantee this undesired expectation. Hence, the higher interest required from Ghana in relation to Nigeria and Zambia. Further, country risk can manifest itself in the form of illiquidity; defined as the ease as reflected in the length of time it would take in converting an investment, in this case the Eurobond into cash; and the consequent influence on its price. Hence, a lengthy period means high illiquidity which could reduce the price of the Eurobond if investors attempt to sell it in the secondary market; resulting in capital losses to investors.

High illiquidity could be because fewer investors are willing to take up the extra country risk (Daniels and VanHoose, 2005). This could be the situation Ghana finds itself in expectation of the verdict on the election petition; as there is already a perception of huge political risk. Moreover, it is a great initiative to list the Eurobond on the Ghana Stock Exchange (GSE); but in my opinion, the benefits to the Ghanaian economy could not offset the fact that relative to more vibrant and developed international stock markets like the London Stock Exchange and the New York Stock Exchange beside others, the GSE is relatively illiquid. This was worsened by the underperformance of the GSE in recent times relative to its competitors.

The situation could not even be saved the intent to list on the Scottish Stock Exchange largely due to the internal political risk in Ghana; which may have stay away investors in the short-term and thus reducing possible trading volumes – the oversubscription in relation to that of Nigeria and Zambia. Simply, there is an expectation of supply exceeding demand in the secondary market in the long-run which may result in a price reduction of the Eurobond; hence result in possible capital losses to bearers (investors). Corroborating the above-analysis is the high possibility of credit risk due to Ghana’s high existing external debt. All these concerns work together to confirm the popular observation of the wrong timing of this issue and the subsequent premium paid by Ghana. Does this outcome justify Dr. J.S. Abbey’s earlier caution on the same matter?

Implications of a “Premium” Eurobond for Ghana

Ghana is required to make high interest (coupons) payments to these international investors. The worse part is that, these interests are indexed to the US dollar, the currency of the investment; which averagely keeps appreciating against the Ghana cedi. Hence, Ghana could face a currency risk and would require efficient risk management to reduce losses. In effect, Ghana’s interest payments would increase every time the Ghana cedi depreciates to the dollar; which is likely to be weekly. Hence, our external debt could incessantly increase to worsen our credit rating further. I hope this is not treated ineffectively like the oil price hedging issue that came up recently.

For a country that is at risk of high existing external debts, the Eurobond will only add insult to injury especially when the Government like most African Governments cannot guarantee value for money (vfm) because of corruption. In fact, I have been worried by the sheer fact that like always, the Government keeps borrowing without a clear identification of how it would service these debts like previous debts. This attitude in my opinion is because our Governments have no sense of “investment” in expectation of a quantifiable return; but rather, it raises resources to waste away on political promises and not on actual development needs. So my question to the Government is; what is the “ expected return” from the so-called 157 road projects that would be funded by this debt facility?

Conclusion

In summary, the current election petition exacerbating Ghana’s current default risk profile; which is underscored by high perceptions of country risk evident by a huge political risk and illiquidity of the Eurobond could also have accounted for the premium paid by Ghana on the issuance of its Eurobond. These are internal, country-specific factors in contrast to the explanation given by the Finance Minister and the Governor of the Bank of Ghana. This article is in solidarity with the earlier concerns on Ghana’s deficits and credit rating as possible causes as the premium paid by Ghana given the evidence-based presented above. 

Kenneth A. Donkor-Hyiaman

MPhil Planning Growth and Regeneration

University of Cambridge

United Kingdom

kwakuhyiaman@gmail.com

The Incidence of Rent Tax in Ghana: Landlords or Tenants?

Tax the world over is the major source of revenue to Governments. It is really not a bad thing if tax payers get value for money (vfm) regarding what their taxes are used for, especially in respect of the state’s provision of services to promote the welfare of tax payers. Taxes are therefore one of the means by which the state ensures the welfare of its people; but how can these two roles of the state exist if not a contradiction? Taxes reduce the incomes of tax payers and their standard of living or welfare subsequently; yet it is by these same taxes that Government seeks to promote welfare. This paradox is possibly meaningful if and only if taxes are used in the interest of tax payers. Is this guaranteed in Ghana?

The “spirit of the age” in Ghana in the absence of innovation with regards to the sources from which the Government can raise revenue for its projects is the activation of the “last resort” right; whereby the Government has been criticized to be taxing “everything and anything”; even condoms, bathroom slippers, cutlasses, outboard motors, fishing nets and many others. In a pure technical sense, the Government is efficient in taxing goods for which people have inelastic demand for; in other words, goods for which tax payers cannot do without. Interestingly, these are goods patronized by the very poor people whose welfare the Government seeks to promote. The question that lingers on in my mind is two prompt: does the “type of goods” and the “calibre of people” who consume them matter to the tax masters? It was just six days after the Minority Leader in Parliament had advocated for the enforcement of the Rent Act; merely a political rhetoric in the absence of economic solutions, that the Ghana Revenue Authority (GRA) re-launched the 8% tax on rents; as a way of “reminding landlords and landladies to perform their civic duties”. Rent tax is not a new tax; it is a withholding tax payable on every income that accrues to someone as a result of letting or leasing a property to another person either for residential or commercial purposes. 

Two mutually exclusive outcomes are likely.  In my candid professional opinion, this is a connotative reminder to tenants rather than landlords to buckle their belt for hash economic times; or tenants must accept to connive with landlords to understate or under-report rents. The latter is however is likely but not rational to landlords as they will still lose money to the GRA; so landlords would rather opt for the former. In this article, I seek to conceptually argue that the Rent Tax targeted at landlords will rather be a punishment to tenants, due to the nature of the housing market in Ghana which will affect the transferability and incidence of tax. The Rent Tax will inevitably miss the target, but may not result in policy failure; because after all “Caesar” - the Government will still get its money irrespective of its source. It is this occurrence that will perpetuate the paradox of whether the Rent tax would maximize or jeopardize the welfare of the majority of Ghanaians. On the slight side, I am sure some tenants are happy that landlords are going to pay tax on the huge “arbitrary” rents they “extort” from them; just like some parents vehemently support the taxing of private universities; oblivious of the reality of the consequences to them.

Real estate in any form, commercial, residential, industrial beside others has a derived demand; that is, we demand the structure not per se but the benefits that may accrue to its ownership. To the landlord, rent is the reward for owning real estate whiles a tenant gets the benefit of accommodation or business premise, having paid this remunerative “consideration” under a binding, valid and enforceable contract to the landlord. One point I doubt the tax masters considered was the “transferability” of the Rent Tax; which is directly linked with the incidence of tax. This indeed is determined by the nature of the commodity in question, market conditions and regulation in terms of mechanisms for collection. The underdeveloped nature and the shortage of real estate in Ghana means that tenants have to cough-up high rents lest they lose their accommodation or business premises to the highest bidders. Obviously, tenants have an inelastic demand for their existing accommodations and business premises, as there is none available that is cheaper. In fact, the majority of Ghanaians cannot do without rented accommodation because shelter is a basic necessity; hence, will do anything to keep them – even paying high outrageous rents. This is worsened by the ineffectiveness of the Rent Act which could have accounted for fair determination and records keeping of rents; to facilitate the efficient collection of the Rent Tax.

Now, given this adverse market condition and the fact that most tenancy agreements are not binding, valid and enforceable, landlords potentially stand to gain. First, the lack of an evidence-based (contracts which will contain the rents payable) mean that landlords can underestimate their Rent Tax obligations in connivance with tenants or the latter pays the tax by way of rent increments.  This is possible because the Rent Tax is a withholding tax which requires an intermediary probably tenants to withheld and file subsequently in the absence of an effective formal institution. Hence, the accuracy of the total Rent Tax revenue would depend on the landlord and tenant. Rationally, tenants would rather “aid and abet” landlords in order to pay lower rents by under-reporting their rent payables to the so-called unwarranted task force to be set up; and not act in the interest of the GRA as is expected.  However, since, landlords would still pay some amount in rent tax, no matter how small it is, my best bet is that, landlords would rather opt to increase rents as a way of transferring the full tax to tenants rather than sharing the burden of tax by losing a penny.

How then can the Government guarantee that the Rent Tax would not be transferred to tenants by way of rent increments by landlords? The implication of these adverse composite factors means that tenants would inadvertently bear the incidence of tax given current market conditions. Distinctively, while tenants of residential real estate would bear this tax directly, tenants of commercial real estate would be indirectly affected as they can also transfer it to the ordinary Ghanaian through service-charge or commodity-price inflation. The dynamics would have been different if supply of real estate exceeded demand; thus, making it elastic such that the existence of surpluses would push rents down and even put landlords at the mercy of tenants. In that case, any excessive rent increments could cause tenants to vacate such premises for cheaper ones in the abundance of alternatives. This is however not the case and would not be in the remotest of time if real estate finance and investments are not taken seriously by the state; that is not to say the state should provide them directly.

How could this inevitably hardship be welfare maximizing? Does the tax masters understand the dynamics of this Rent Tax or singing the chorus, they are just taxing “everything and anything” in desperation to raise revenue and waste away on unjustifiable “nepotic” and “cronic” expenditures? Does the Government understand the nature of the market which generates rents and the people who would be affected? This is definitely not welfare maximizing as the poor who normally rent accommodation or business premises would be bearing the brunt of the Rent Tax.

Now, to effectively ensure that landlords who are the targets of this tax; unless tenants are, is not a matter of setting up a task force as the Chief Revenue Officer at GRA, Kwasi Bobie-Ansah has communicated publicly. At best it can only be an unsustainable temporary measure as per the annals of experience in Ghana. We need to go back to the basis; first things first. The Rent Act and the Contract Act are potential tools in this regard. It is indispensable for the nation to look into the ineffectiveness of the Rent Act and set up the necessary mechanisms that will ensure fair rental valuation and the provision of an evidence-based for Rent Tax assessment and collection – which I will address in my next article. Again, attaining a cashless economy is not a panacea to effective Rent tax collection; it is undoubtedly an overly simplistic suggestion without going back to the fundamentals of economic structures. This cannot be left to the whims and caprices of day-dreaming authorities; but requires a holistic approach to tackle market failures consensually with all related institutions.

Kenneth A. Donkor-Hyiaman

MPhil Planning Growth and Regeneration

University of Cambridge

United Kingdom

kwakuhyiaman@gmail.com

The Search for a Competitively Priced Long-Term Sustainable Housing Finance: The New Pension Law (Act 766) in Perspective

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 2^nd 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 2^nd 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 2^nd 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 2^nd 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

The Mortgage Market in Ghana: The Past, Current and Emerging

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 2^nd tier benefits to secure a mortgage for the acquisition of a primary residence?

Kenneth A. Donkor-Hyiaman

University of Cambridge

kwakuhyiaman@gmail.com

Waste Management in Ghana: Aligning Policy Outputs and Outcomes

Contrary to the belief that urbanization is the greatest woe of Africa, it is rather the greatest opportunity for development. The increase in population associated with urbanization is a creator of markets and a stimulant of production of goods and services. It is no surprise that almost every business thinks about the urban centres as preferred locations; and cities across the globe including London and New York attract the best of businesses, people and resources. In the parlance of welfare economics, the upside of urbanization is a positive externality to urban inhabitants – benefits accruing to a third party who is not privy to the contract of its provision. However, for most developing economies especially in Africa, urbanization appears to produce a contrary effect - a lot of negative externalities (social costs) to the populace. Typical among the list of negative externalities is the effect of poor waste management which results in diseases.

In this article, I seek to propose a model that provides a remedy to the poor waste management problem in Ghana, applicable to many developing economies from a business perspective through the application of concepts in welfare economics. The model replaces the monetary charges associated with private waste management services with labour provision in the form of waste separation at home by households as the charge. The proposal is arrived at by modelling the value chain of waste generation, handling and disposal and lubricated via incentives. This paper is delimited to waste management, specifically municipal solid waste (household trash/refuse).

At best, the poor waste management situation in Ghana is analogous to littering – improper disposal of waste. It is normal in Ghana to see people drop waste anywhere anytime. To have a firm grasp on the problem, it is important to understand the value chain of waste management in Ghana and its underlying principles. Typically, household waste is generated in the house and ends up on a community refuse dump; which could be considered usually as a public good. Paul Samuelson, the renown economists is usually credited as the first economist to develop the theory of public goods. In his classic 1954 paper, “The Pure Theory of Public Expenditure”, he defined a public good, or as he called it in the paper a "collective consumption good", as follows: “ ...[goods] which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good...”. In other words, a public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. 

In the rural political economy, dumping refuse at community refuse dump has for most of the time been free – at no monetary cost. It comes at no cost because the whole community manages the refuse dumps – community service is compulsory for all, and the community refuse dump is cleaned by all individuals sometimes in turns. So the real cost is in labour terms and not in monetary terms. Most often, the refuse sites is also owned communally. A problem of this public good is that it is often closely related to the "free-rider" problem, in which people not paying for the good may continue to access it, or the “tragedy of the commons”, where consumption of a shared resource by individuals acting in their individual and immediate self-interest diminishes or even destroys the original resource. Thus, the good which in this case is the refuse dump may be under-produced, overused or degraded. However, the rural community always have a way to punish and to restrict people and households that did not contribute to the management of the public resource from using it, which ensures some efficiency in their use.

The transition from a rural economy into an urban economy has come with increasing difficulty in mobilizing people to provide the same communal service; perhaps linked with the cosmopolitan nature of urban areas and the lack of a communal sense. Hence, public goods such as refuse dumps are usually mismanaged and the free-rider problem and the tragedy of commons prevail. This is normally associated with the lost of free labour from community members; hence, refuse dumps are woefully managed unless the community employs private people and companies to manage it properly. As a solution to the public good problem, privatization and commercialization are normally employed to restrict people and households that do not pay either in labour terms or monetary terms for the management of these refuse dumps. This approach in welfare economics is referred to as the “Coarse Theorem” or “Coarsian Solution”. This is the genesis of the evil.

 Problem Description:  The Gap between Policy Outputs and Outcomes

The privatization and commercialization approach in itself is a policy and its effect of restricting people unwilling to pay from enjoying waste management services is an “output”. However, the ultimate expectation is proper waste management which we will refer to as the “expected outcome”. So the output is a deliverable which facilitates the achievement of the outcome. Very often, there is almost always a gap between outputs and outcomes in policy evaluation. Now the real problem and cause of this gap is class-related and it is the issue of “affordability”. Affordability in my opinion is not merely a monetary issue but also affordability in terms of labour if that can be made an option or an alternative. However, the latter is rarely an option and it is also the case that urban people are so-called busy and may not have the time to contribute labour-wise. It also appears to me that they may feel embarrassed to pay for it labour-wise; hence, making income or monetary affordability the sole problem. Thus, structurally, society is designed to fail. However, we will understand in the next section that labour provision model in exchange for waste management services is a potential solution to the poor waste management problem in Ghana.

In an economy of low-income levels, it should be expected that people would adopted welfare improving strategies to survive including finding ways not to pay for goods and services previous considered as public like refuse dumping. This reveals that the psyche of the people is also very important in the creation of the problem. Very often, the fee charged by the private waste management firms are expensive to the low and middle class; hence leading to their under-consumption of private waste management services. This situation is inefficient and requires government intervention in the realms of welfare economics, but with the adoption of pure market economy principles, intervention has been rare. Nonetheless, there is a cost-free alternative in many developing economies including Ghana because of the lack of proper community monitoring. Although the low and middle class largely cannot afford private waste management services, they cannot also afford to keep the smiling waste in their homes. Thus, the alternative solution is to resort to indiscriminate littering, where people nicodemusly dump refuse in open gutters and at public sites especially at night.

 Incentivization Model: Aligning Waste Management Policy Outputs and Outcomes

With the expected outcome of proper waste management in perspective, a business case could be made to align outputs and outcomes. This is possible through the provision of incentives, subsidies and direct government provision to deal with the affordability problem facing the low and middle class. However, I will focus on the business case as a more efficient approach to dealing with the waste management problem with rippling effects for job creation and employment, which the nation needs badly. In other words, the business approach provides a lot of bending effects towards the achievement of other goods at virtually little cost.

Apart from the fees associated with waste disposal, the acquisition of refuse bins poses a challenge to the low and middle class. To deal with this the business way, fees must be eliminated and refuse bins provided for “free”. This is the easiest way to align the output and outcome but this measure to many people is foolish and threaten business survival. In fact, the obvious question is how do waste management firms pay their staff and remunerate themselves for their services? Quite a genuine question, but the solution is not easily perceptible by the untrained mind.  

Now how can waste management business survive this policy prescription? With the advent of waste recycling and treatment business in Ghana, a lot of the waste could serve as raw materials for many industries particularly in the manufacturing of plastics. All it takes is ensuring proper separation of liquid and solid waste, an exercise that waste management firms employ and pay people to do. Companies could however enjoy this service for free if they attach the waste separation process by households as condition for free waste collection. Thus, households and individuals would pay in-kind and indirectly for waste management services by properly separating their waste for collection by the companies. The cost-benefit analysis is based on the difference between the sum of the fee forgone plus cost of providing rubbish bins and the cost companies incur in separating the waste plus imputed cost of plastic raw materials. The fee forgone (FF) could be broken down into transportation cost (TC), vehicle maintenance cost (VMC) and remuneration (Y). Where the waste separation cost (WSC) plus the imputed cost of purchasing the raw materials (IC) (for say, the production of plastic chairs and tables) exceeds the fee forgone (FF) plus the cost of providing rubbish bins (RBC), then the benefit-cost ratio (BCR) will be greater than one (BCR > 1) indicating viability or profitability and vice versa. Mathematically, this business decision could be represented and modelled as:

                                  Ʃ (WSC +IC / FF+ RBC + TC + VMC + Y) = BCR

Where:

          i.            BCR could take on values ranging from negative to positive.

        ii.            Positive BCR (i.e. BCR > 1) indicates viability and profitability (net gain);

      iii.            Unity BCR (i.e. BCR = 1) indicates break even

      iv.            Negative BCR (i.e. BCR < 1) indicates net loss

Where BCR is less than unity (BCR < 1), another model in which the cost of transportation could be reduced is important. For instance, instead of the waste collection car moving from home to home collecting waste for free, households could be provided with a community waste container in which households could drop their waste for free. After all, in the rural political economy, no one was collecting refuse from households for dumping, individuals executed the exercise. Therefore, the car only makes a trip or two to collect the waste, which from hence assuming that it is well separated becomes raw materials for the production of plastics in particular. Further, cost to waste management firms in the waste collection process could be reduced through government and or community subsidies; perhaps, fuel subsidy and or vehicle maintenance subsidy. Best still, households should provide their own rubbish bins to enhance profitability for waste firms.

Where the Internal Rate of Return (IRR) exceeds the Required Rate of Return (RRR), waste companies could also provide a cash incentive in addition for households that properly separate their waste and generate volumes of particular waste like rubber and plastics. The IRR is the project generated return whiles the RRR is what investors expect from their investments. The later measure is intended to elicit an external effect, whereby individuals would even collect rubbers and plastics from the community in order to increase their waste volume for higher remuneration. Some critics may say that the latter provision could lead to increasing waste generation, but that is erroneous because increasing waste generation comes as marginal cost which per the constrains of affordability would not exact that effect. Rather, it could  make it more attractive for people to collect waste from the community for “free”. This could be a business opportunity for many people, as is the case currently.  In effect, a new efficient public good could be created, through private provision and indirect incentivisation from a business perspective. This public good is the “free” collection of household waste.

Conclusion

Urbanisation is definitely a woe to Africa’s development if not properly managed. Proper waste management within the urban political economy could be achieved from a business approach at little or no monetary cost to households. Through this approach waste management policy outputs could be aligned with outcomes. This could be solve the affordability problem facing the low and middle class who are the main perpetrators of indiscriminate littering in Ghana and in most developing economies at large. In effect, introducing and activating the provision of labour (waste separation at home other than on the refuse dump) as an option for paying for waste management services could solve the poor waste management problem in Ghana whiles creating businesses and employment; which requires innovation. Moreover, although the proposed model is public good, the typical characteristics associated with it including free-riding and the tragedy of commons is intrinsically mitigated by the model.

Kenneth A. Donkor-Hyiaman

University of Cambridge

Department of Land Economy

United Kingdom

kwakuhyiaman@gmail.com