Limited house financing facilities hinder construction

It is said that very few banks provide mortgage products to a limited number of customers.

This is attributed to the absence of housing finance banks after the collapse of Tanzania Housing Bank (THB).

But again, lack of long term funding by banks to facilitate provision of mortgage products diminish the process.

Normally mortgage loans are set to amortise over a set period of time, ranging from 20 to 30 years; but in Tanzania, mortgage regulations impose a maximum term of 20 years.

The latest Mortgage Market Update by the Central Bank (BoT) indicates that the country's market for mortgage has been growing steadily as the pace of housing investment picks up.

“Factors attributed to this increase include increased awareness on mortgage loans among borrowers, public awareness campaigns by banks offering mortgage loan product and favourable interest rate environment during the year," part of the report reads.

Echoing the BoT statement, Michael Francis, Chief Marketing Officer of DarProperty, a one stop centre for all real estate deals, listings and information patterning to local real estate and property market says that as of December last year, outstanding mortgage stood at 250bn/-.

“Development of the current market represents an annual growth of 59 percent. Moreover, there are challenges which include the unwelcomed high interest.

I am sure things will change because of the demand in quality housing, with many entering the job market with the prospects of owning quality houses, this will prompt many financial institutions to venture into mortgaging," he says.

As of December last year, 53 banks had been licensed to operate in the country but only 19 provide mortgage products to a limited number of clients.

“In fact these banks have limited capacity to engage in mortgage due to financial constraints which are mainly due to lack of long term funding as banks' deposits are short term while mortgage products are long term,

” Francis says. This apparent funding mismatch limits the ability of banks to actively engage in mortgage financing.

However, it is anticipated that the number of banks will increase even further as more lenders continue to launch their mortgage loan products.

The BoT report also reveals that the market is dominated by four top lenders, who among themselves command about 67 percent of the mortgage market.

Equity Bank commands 20 percent of the mortgage market share, closely followed by Azania Bank, which has the longest presence in the market with about 19 per cent of the market share.

Other institutions include Stanbic Bank and Commercial Bank of Africa with 16 percent and 12 percent of the market share respectively. During the period, the market experienced three new entrants, namely TIB Development Bank, NBC and NMB.

However, in his study titled 'Towards a Successful Mortgage Finance Market in Tanzania' Paul Kibuuka, Managing Partner for Kibuuka Law Chambers is of the opinion that high interest rates, coupled with depreciation of the country's currency, demand for mortgage loans may dampen and a long shadow may be cast over the growth prospects of the market.

The central bank's mortgage update shows that currently interest rates are in the 18 to 21 percent range.

"Nevertheless, the development of a stable and effective mortgage finance market cannot only significantly lead to financial deepening, but also make ownership of suitable housing more affordable through longer amortisation periods and help real estate developers liquidate their unsold housing stock," said Advocate Kibuuka in his review.

According to him, it is therefore crucial to note that the anticipated acceleration of Tanzania’s mortgage finance market is, for the most part, dependent on the strength of the overall economy; the efficacy of the legal system to support registration of properties and enforcement of rights; and the willingness and capacity of mortgage lenders to accept risks and offer mortgage loans.

The government has also made concerted efforts to streamline property registration processes, strengthen the capacity of the judiciary to resolve disputes, and encourage land development by improving titling.

As a matter of fact, proper titling encourages investments in the housing sector. "However," says Kibuuka, "there is still a need for new initiatives and solutions to address, among other things, the hovering interest rates and the rapid depreciation of the shilling that could lead to low demand for mortgage loans, despite the government taking steps towards promoting housing affordability and the increase in the number of banks providing mortgage financing.

" It is said that a favourable interest rate regime and a stable currency will increase uptake of mortgage loans; and therefore, spur housing market growth, encourage savings and increase the overall demand for houses.

But even so, the cost of housing is comparatively higher than income levels. In response to the challenge, Advocate Kibuuka says: “Some government housing subsidies, such as, where applicable, investor guarantees, tax deductions and price controls, could be considered." He adds:

"Be that as it may some studies have found that housing subsidies introduce distortions in mortgage finance markets.

Instead, the government should facilitate the role of the private sector and real estate developers in increasing the supply of houses by further improving land, finance and infrastructure systems."

In his paper, the law expert further says that incidentally, securitisation of mortgage-backed securities, which is one of the key funding mechanisms for mortgage finance, is yet to be adopted in Tanzania. Funding mechanisms currently in use include portfolio lending and liquidity facility.

Portfolio lending entails primary mortgage lenders like banks extending loans directly to borrowers and holding the loans in their own portfolio funded by their short-term deposits.

According to him, besides the legal and regulatory requirements, the economic environment for the development of Tanzania’s mortgage finance market needs to be improved by ensuring long-term loans from a number of competing banks are available, as long as conditions are met.

Also interest rates are charged at market price, valuation of land and property is ethically done, mortgage lenders operate on a market basis, albeit with limited interference from the Bank of Tanzania, which should at this nascent stage of the market, give more attention to developing the market rather than regulating it.

Currently, commercial banks account for the majority of the mortgage lending business in Tanzania. However, he says: "It is challenging for banks, whose major source of mortgage loans is short-term deposits, to operate in an unstable economic environment.

“This is why some industry experts argue that since Tanzania’s mortgage finance market is still young, specialised companies would be better placed to do mortgage lending as they are more determined and committed to tackling the obstacles that hamper the growth of the market and to influencing government policy."

In any case, a stable economic environment, accompanied by a low and steady rate of inflation, can help develop the mortgage finance market in Tanzania.

Confidence in the market will encourage individuals to enter into long-term mortgage commitments. Excerpt from Africa Housing Finance Yearbook 2015 indicates that since average mortgage size is 75m/- yet more than 70 per cent of Tanzanians have incomes of less than 300,000/- a month, and so are unable to access mortgage finance. However, it is said that intervention of the Tanzania Mortgage Refinance Company (TMRC) might have a positive impact on interest rates.

As TMRC member banks can currently borrow from the TMRC at 11.5 per cent and are therefore able to extend mortgage loans to their customers at lower mortgage interest rates than those prevailing in the market.

TMRC offers medium to long term refinancing against a pool of mortgages and assets as security, typically refinancing for 3-10 years doesn’t carry credit/interest risk, hence passing back the benefit via low interest rates.

Therefore, banks are advised to use such facility to supplement their own short term deposits.