It may seem untrue for an outsider, but it may actually take over 80 years to own a low cost apartment for almost a million of low-income earning residents of Addis Ababa who have registered to buy low-cost condominium houses constructed by the City’s Administration. This is easy to find out. Just compare the number of condominium houses constructed by the Administration since it embarked on the low-cost housing programme with the individuals picked to own the houses through a lottery system, and use the rate to determine the time it would take to address the rest of the registered people.
Surprisingly, of a million people registered by the administration 16 years ago, less than 200,000 individuals have been lucky enough to get a condominium apartment. With the ever-rising housing demand, it is common to see officials attempt to address the demands of homebuyers by introducing new reforms. Unfortunately, many of their attempts have failed.
From his words, it looks like Prime Minister Abiy Ahmed (PhD) wants to buck the trend. Known for advocating polices directed at boosting delivery of services through economic liberalization, Abiy two weeks ago indicated his intention to open the financial sector for foreigners, particularly those willing to open a mortgage bank, which he believes can play a big role in addressing the growing housing demand.
“The banking sector must be liberalized after some years. But if there are foreign investors willing to open a mortgage bank, they should be allowed. Since there is a critical housing problem, there is no reason to turn our back on mortgage banks interested in investing in Ethiopia,” he said.
His remarks indicate his belief that foreign banks could be instrumental in solving the age-old housing crisis in Ethiopia, which is severe particularly in Addis Ababa. His remarks have received mixed reactions among veterans and insiders in the financial sector.
“Opening the finance sector for foreign mortgage banks is not going to be different from full liberalization because some of the services mortgage banks provide are similar with conventional banks. For instance, they collect deposits like conventional banks. So, if they join the market, they would impact the market share of existing banks,” said Eshetu Fantaye, a Banking Expert and Consultant who conducted different studies on the matter and recently founded a local mortgage bank (Goh) along with other investors.
Ethiopia had mortgage bank for over 40 years up until the Commercial Bank of Ethiopia (CBE) acquired Construction and Business Bank (CBB) in 2017. No mortgage bank went operational since then, though three private mortgage banks are now under formation. The mortgage market in Ethiopia is believed to be very small, roughly accounting for less than three percent of the credit portfolio of commercial banks.
CBE commands 69 percent of the mortgage market, while the rest is shared among private banks, which allot insignificant amount of their aggregate loan to finance homebuyers. Private banks are constrained by the absence of long term funds and the high risk nature of the loan. Currently, the lion’s share of mortgage loan goes to staff members of commercial banks, which use it as a strategy to retain their employees.
The next top beneficiaries are employees of international organizations who get a relatively preferential treatment from regular customers. For bank employees, the interest rate is as low as 7.7 percent, while it reaches as high as 18 percent for regular customers. The same is true for amortization period. While it is from 10 to 15 years in case of regular customers, it is 25 years for bank employees.
Analyzing the existing mortgage market, Hadisu Haba, a banking expert with over four decades of experience says the idea of allowing foreign investors interested in particularly providing such a service is a step in the right direction.
“Mortgage requires long term funding, which existing banks lack in Ethiopia. If foreign banks are willing to capitalize on such gaps, it would be great to give them a license since they can be instrumental in addressing housing demand, at least among middle-income earners,” said Hadisu, who previously served as the President of Construction and Business Bank, Abyssinia and Debub Global banks. “And this won’t have a significant impact on commercial banks since their revenues from mortgage banking services is very small,” he added.
For long, executives of commercial banks and industry insiders have been pleading with the government not to open the sector for foreign competition. They fear the move could dominate the market since foreign banks have a high capital base and a better technology to come up with better products that could grab the attention of customers.
“If foreign banks enter Ethiopia’s market, whether they are mortgage or commercial, they would focus on corporate customers. And since we are not satisfying their needs, it is likely that they would go to the foreign banks, which can provide more loans, foreign currencies and better services,” says Alemu Semaye, Director of Credit Appraisal Department at Nib Bank, one of the biggest private financial institutions in Ethiopia.
“Commercial banks cannot borrow more than 25 percent of their total capital to a single borrower. So if the foreign banks come up with a higher capital, which is very likely due to their stay in the global financial market for decades, it is obvious our large borrowers (exporters, manufacturers and big service providing companies) would go to the foreign banks to get a huge amount of loan,” Alemu added.
Besides the fear of fall in market share, bankers also fear that their skilled employees, even those at the higher management positions, would go to foreign banks. That could ultimately impact their quality of service and have an adverse impact on their efforts to retain staff members. “Such things could happen even if the sector is solely opened to mortgage banks. So it is better to work on local mortgage banks for now and open it to foreigners when they are capitalized,” added Alemu.
Proponents of the liberalization of the financial sector, on the other hand, argue foreign banks could contribute more to the economy, no matter what their impact would be on shareholders of local banks. They also assert that foreign banks could bring efficiency in the financial sector and drastically improve access to finance; this could even lead to a fall in lending rates which could in turn boost the productivity of firms engaged in different areas, including manufacturing, construction and service sectors.
Worku Lemma, who has over 24 years of experience in the banking industry and is currently serving as Advisor to the President of Oromia International Bank, is among those calling for the full liberalization of the financial sector. “It is impossible to bring competence in the banking industry unless the sector is open to foreign banks, which could play a significant role in terms of technology transfer and the development of the financial sector,” he said.
“The same is true for mortgage banking. Since they have the expertise and a pool of financial resources other than deposit, they can have the capacity for long term financing, which is critical for mortgage banking,” Worku added.
Despite the optimistic views about foreign mortgage banks, however, there is doubt over their source of funds. Before being acquired by CBE, Construction and Business Bank, the last financier that was solely providing mortgage finance in Ethiopia used to get its funds from pension contribution, insurance funds, customers’ deposit, direct financial support from the Ministry of Finance and development partners such as the World Bank.
“For local investors willing to invest in mortgage banking, the absence of such financial institutions is a great opportunity. UN Habitat, for instance, is disbursing funds in other countries to help people build homes while its role is limited to undertaking studies in Ethiopia,” says Eshetu.
“If they get such a chance, local mortgage banks could at least help low income generating people. For instance, our company Goh Mortgage Bank, is planning to serve people starting from the upper lower income bracket who pay between 4500 Birr and 7500 Birr housing rent a month,” added the Senior Banker. He stated that even achieving this target could be challenging with the rising price of low-cost apartments and shortage of land to build new houses, especially in Addis Ababa.
There is also doubt on whether foreign mortgage banks could even serve the interest of middle income groups let alone satisfying those earning low amount of salary. Experiences of African countries indicate that they have the tendency to focus on financing the rich. “Foreign mortgage banks bring real estate developers alone, but this could only increase the number of luxury houses, which only the rich could afford to buy,” says Eshetu.
Eshetu also pointed out only a few foreign mortgage banks actually venture into the sector in African countries as most find the market very risky.
“If the government keeps pushing on opening the sector to foreign mortgage banks, it would be Middle-Eastern investors who could take the risk and open such establishments in Ethiopia, since they are unhappy with the banks in the US and Europe, which are paying almost zero interest even though they are depositing billions of dollars,” he concludes.
Even if mortgage financiers solve the challenge faced by homebuyers in accessing finance, it does not mean that the ongoing housing problem would vanish. For that to happen, other constraints, such as inflationary pressure that wreaked havoc on the construction industry and land management problems have to be solved as well.