Webinar Report - Lowering the High Interest Rate Cost of Housing Finance in Africa
Based on a knowledge dissemination partnership on housing finance in Africa, MFW4A and CAHF organized a webinar on June 21, 2018 in order to share the key insights of a report produced by Michael Fuchs on behalf of CAHF. This session provided an overview of measures that might be taken to reduce the interest rate cost of housing across the continent.
The session was moderated by Olivier Vidal, Francophone programme Manager, CAHF and facilitated by the author of the report: Michael Fuchs, consultant for the World Bank and other DFIs in the African financial sector. A discussant, Mfundo Mabaso, Chief Commercial Officer, First National Bank, also shared his experience in terms of mortgage products in Africa and tailored solutions to reduce financing costs. In a first phase, the keynote speaker presented the main determinants of high interest rates in the housing sector in Africa that are:
- High policy interest rates
- High maturity premiums
- High credit risk premiums
- Limited utilization of collateral value
Concerning the high policy interest rates, they are mainly due to shallow financial markets limiting the supply of financing to governments with high levels of debt; hence the scarcity of funding for the private sector (crowding-out effect). In addition, volatile ‘’risk-free’’ government borrowing rate, narrow tax base and macroeconomic instability lead to high interest rate policies in Africa; negatively impacting lending interest rates applied to the private sector, including mortgage and real estate funding applications. In addition, high interest rates in housing sector in Africa are positively correlated with high risk premiums, due to significant operational and overhead costs borne by banks and the fragmentation in African financial systems reducing economies of scale.
The failing financial infrastructure - including limited access to credit bureaus, absence of liquid government security yield curve, and inefficient legal framework - also contributes to this rise in risk premiums and sub-optimal use of guarantees schemes in Africa, compared to other regions including OECD countries. These risk premiums appear to be higher for long-term funding, especially mortgages lending in this context. As solutions to lower interest rates in the housing sector in Africa, Michael Fuchs, the keynote speaker and author of the report recommended:
- Enhancing the macroeconomic framework management to help reducing government borrowing in domestic financial markets and therefore better stimulate private investment, while giving some emphasis to international financial markets for sustainable public debt.
- Improving the efficiency of domestic debt management policies through introduction of a yield curve that will serve as benchmark for institutional investors and other debt issuers.
- Strengthened banking supervision and regulators' initiatives to reduce interest rate spreads, the number of banks in order to consolidate banking sectors, promote credit bureaus and deposit insurance schemes to effectively stimulate the credit market and its competitive environment.
More specifically for housing finance, Michael Fuchs suggested a better channeling of long-term financiers, including institutional investors such as pension funds, into mortgage facilitation schemes and covered bonds in order to attract the interest of specialized institutions in the financial and housing developers’ ecosystems. The long-term financing inflows will therefore have a downward effect on mortgage interest rates, but remains conditional upon institutional reforms that will lead to the development of the aforementioned financial facilities and products.
While arguing for fixed-rate mortgage products, Michael Fuchs also pointed out that mortgage affordability is much more dependent on the maturity of the loans than on the interest rates charged. Mfundo Mabaso's intervention on First National Bank's (FNB) experience in housing finance focused on mortgage insurance products for the low-end of the market in order to make its financing offer more accessible. For example, mortgage products have had their maturity extended for 5 years with the initial fixed rate for low-and modest-income customers to give them more comfort in repayment process. Also discussing the FNB experience in Tanzania and Zambia, he also highlighted the positive effects of partnerships with Development Finance Institutions (DFIs) and pension funds to secure mortgages.
This long-term availability of liquidity then stimulated and made more accessible the bank's financing offer, even in times of liquidity crisis as was the case in Zambia. During the Q & A session, a participant addressed the issue of alternative solutions that banks can benefit from, when collecting information about their potential customers. Michael Fuchs spoke of the emergence of Big Data and other data collected by digital Financial Service Providers (FSPs), thereby presenting the digital channel as a strategic tool increasingly used in the financial industry.
While recognizing the limited use of digital channel to collect and leverage customers’ data in Africa, he also raised concerns about customer data protection - as a public good for regulation purposes, or private competitive advantage for FSPs. Other questions also focused on rental housing opportunities in terms of lower interest rates and how mortgage insurance products can make housing finance costs more accessible in Africa.
For more information and details, the recording and PowerPoint presentation are available on the following link: Recording.