Reviving mortgage financing
On December 2014, a newly found trading company called Ziway Share company shocked Ethiopia with a whopping offer 350,000 birr (USD 12,000 at current exchange rate) for one square meter of land in the heart of Merkato, the busiest commercial district in Ethiopia. Experts compared this price to most expensive real estate holdings in Manhattan, New York, one of the most expensive places on the face of the earth.
This particular plot, 449 square meters altogether, was projected to cost 138 million birr (USD 4.8 million) igniting a heated debate about the future of the real estate market in Addis Ababa and the surrounding. Such offers are no more shocking for Merkato or other business districts in the capital, however.
Yet again, on the far southern part of the city lives Abdullah Ali (name changed), in his late 60s, who is every bit grateful for his G+1 apartment house he owns in the modest residential area around Saris. At current market price, an apartment-house like Abdullah’s goes for a little over two million birr (USD 69,000). By comparison, some of the swanky apartment units currently under development in the posh neighborhoods of Bole and Sar bet are priced at 6 or 7 times more (USD 400 thousand), affordable only to the most affluent members of the society.
Built in the late 1980s, housing units in the Abdullah’s neighborhood were financed by the now defunct Construction and Business Bank (CBB) of Ethiopia with financial guarantee from the World Bank. In a manner of speaking, Abdullah and his peers are the last of the beneficiaries from the now collapsing mortgage banking services in Ethiopia. He is among the long list of government and private sector employees who earned average and slightly above average wages and salaries at the time and who were able to tap into the housing market. Today, this is an unthinkable feat. The average salaried employee these days has no option except exploring the house-rent market.
“Every day, I wonder how I could have fared in this difficult house-rent market,” Abdullah said to The Reporter. With his family size, a monthly rent expense of 10,000 (USD 450), far more than the average salary in Ethiopia’s employment sector, would have been mandatory to Abdullah, according to him. Back in the day, Abdullah was a government employee earning a monthly salary of 870 birr, fairly livable income at the time, and qualified to take out a housing mortgage in order of 39,000 birr (USD 1,344).
“It was a 20-year mortgage loan at 4 percent interest rate. The overall cost of the construction of the house went as high 44,000, given cost escalation and other adjustment,” Abdullah remembers. At the end of the day, his monthly restructured mortgage payment was 280 birr, which was deductible from his salary.
“In hindsight, it was astonishing that I sometime struggled to meet my monthly payments,” he says, adding that evolution of the market prices in Ethiopia in the past three decades had been too unreal. “I also recall that I had to scramble to come up with the 2000 birr down payment for the house,” he told The Reporter.
For all intents and purposes, Abdullah is among the privileged few to own a valued real estate property in Addis Ababa, today. “It is baffling to see how fast housing as a commodity is becoming inaccessible in urban Ethiopia. I can’t imagine what our children had to go through to secure a modest living quarter this country,” he exclaims.
As a matter of fact, Abdullah is advantaged to have the backing of a functioning mortgage system to make his dreams come to true. Sadly, since then, the vibrant CBB and its predecessors have all met their eventual demise. The last of Ethiopia’s mortgage industry got swallowed up into the belly of the mammoth Commercial Bank of Ethiopia (CBE) in December, 2015.
Market based solution to Ethiopia’s housing problems, however, remained quite precarious since even before the dissolution and eventual merger of the CBB and CBE. Long before that, since the coming to power of the ruling party EPRDF in early 1990s, CBB was compelled to venture into universal banking model, abandoning its traditional mortgage banking role.
Most banking and economic experts agree that mortgage banking services in Ethiopia has either died together with CBB or by the time CBB was made to shift its model to universal banking. A young VP at one of the up and coming private banks in Ethiopia, who insists on remaining anonymous, does not agree with this assessment. Citing the recent emergence of mortgage loans at a handful of private banks in Ethiopia, the young banker argues that there is adequate potential in the banking sector to service housing and other mortgage loans.
“Especially housing and car mortgage loans are on the rise in the private banking industry currently; however, just like any other credit-demanding sector it has to be attractive enough for many banks to embrace the product more widely,” he states.
Well, one private bank under formation certainly thinks that the existing banking industry is seriously under serving the housing and construction sector in Ethiopia.
The investment prospectus circulating among selected bankers and real estate investors, selling the idea of the first private mortgage bank—Goh Betoch (housing) Bank— maintains that the existing banking sector is allocating only 10 percent of its overall credit services to the growing construction sector and even lesser to the housing subsector. “This shows a huge deficit in financing for the housing subsector in Ethiopia. And hence, a dedicated housing bank could go far in narrowing down this financing gap,” the document argues.
Spearheaded by an ex-banking regulator and vice governor of the National Bank of Ethiopia (NBE), Getahun Nana, the new share company under formation seeks to join the banking sector with a capital of one billion birr, planning to have at least 50 percent of it (500 million) paid before holding its first general assembly meeting. The organizing committee also features a prominent real estate personality—Gebreyesus Igata of Gift Real Estate Plc— and other former banks presidents like Fasika Kebede, Amerga Kassa and Araya Gebregziabher.
The young banker, actually questions the wisdom of pursuing sectoral banking in Ethiopia financial system at this time. According to him, most of the banks in Ethiopia has embraced universal banking model for over two decades for a reason; and that is because it affords them the advantage to finance a host of clients and projects from various industries without being restricted to one sector or the other. If you look at the market in general, it is marked by large and unsatisfied demand for credit, he says, adding that, “it is the banks which has the advantage to look into most profitable sectors and clients”.
Yared Hailemeskel, managing director of YHM Consulting, agrees with this assessment, somehow. According to him, the Ethiopian credit market is overwhelmingly lenders market. “Charging an exuberant interest rate of 18 percent and above for a loan, financiers in Ethiopia really hold all the cards since shortage of credit is very high,” Yared argues. Even when you look at the limited financing commitment that some of the banks are making to the housing sector recently, it is all too clear that their target is not the return offered by the long-term mortgage loans but the potential clientele like the diaspora community and the foreign currency gains associated with that. “Thanks to the NBE’s faulty policies, foreign currency trade has emerged as one of the most lucrative businesses in the sector,” Yared argues, and this artificial currency demand can be eliminated by correcting the relevant policies.
As far as the young banker is concerned, it is not a matter of choice that banks focus on maximizing return in the credit market. “To begin with, fund mobilization is getting tougher by the day in the Ethiopian financial sector; if you look at deposit mobilization efforts of some of the newer banks and some of the oldest industry leaders, you see that the industry is scrambling for limited amount of funds in the economy,” he argues at length. As fund mobilization gets tougher, it stands to reason that financing decision has to consider better return for those funds. “Not to mention the 27 percent obligation imposed on banks to invest their hand-earned loanable funds on 3 percent bearing NBE paper,” he states.
To promote more specialized banking products and serve most essential economic sectors like the housing and construction sectors, the banker argues, banks need to be adequately liquid and the economy better integrate with the financial system.
Although the young banker questions the sustainability of a sectoral (housing) banking in the current financial environment, organizers of GoH appear to be quite confident with their chosen banking model. According to the prospectus, GoH is expected to return profit as early as its first year of operation, something highly unusual with the private banking industry in Ethiopia. Better yet, GoH maintain that given the huge backlog of unsatisfied demand for housing in urban Ethiopia which is currently estimated to be around 1 million; and the potential impact of the growing population number and the need to renew existing housing stock in all major urban centers of the country, provision of finance for the housing sector is the most sound business model any new entrant can have at this time.
That is why the profit projection of the GoH, foresees a 6, 17 and 31 percent profit for its shareholders in the first, second and fifth year of operation. “At this rate, the bank ensures its shareholders that they can recover their initial investment within a time period not exceeding 5 year,” the prospectus argues.
Meanwhile, Costentinos Berhe (PhD), a seasoned economist and commentator, has a different perspective with regard to the housing sector and the evolution of the mortgage industry in Ethiopia. As far as he is concerned, housing loan are becoming increasingly unattractive to financial institutions in Ethiopia because the majority of salaried and middle class employees, who are potential clients to real estate companies and their financiers, are falling down the cracks with regard to their income levels and the purchasing power they have at their disposal.
“If you consider the government as a major employer in the country, over the years, it has refused to make appropriate adjustments to the income levels of its employees commensurate with the fall in purchasing power caused by the constant depreciation of the birr and the associated inflation in the commodities market,” he told The Reporter. It is the wage structure of the Ethiopian economy which is at fault, according to Costentinos, since the loss in the purchasing power over decades has finally created a class of salaried employees who can no-longer afford to either sustain their living expenses or make long term investments on commodities like housing or cars, even with mortgage services available to them.
“Mortgage alone cannot create the demand for houses; demand also includes ability to buy not only willingness,” he argues, asserting that the potential to buy is no longer there. Costentinos goes on to cite his personal experience as young employee back in the 1970s and how he was able to take out a car mortgage with only 500 birr monthly income.
For Constentinos, this mismatch is perhaps the result of constant depreciation of the Ethiopian birr and the refusal of the government to maintain purchasing power of the employees. “The sharp devaluation and consistent slow depreciation over years has ended up in weakening the birr and there by the purchasing power of those living at a fixed income,” he argues.
“We are now a unique nation which pays its senior ministers something like USD 300 as monthly salary,” this is bound to catch up with us, and we have a new class of urban poor living in fixed salary and wages, who might not be able to afford essential living expenses even with function mortgage system.
Yared also shares the sentiment that the housing market has become too expensive to an entire class of people living in the urban settings, these days. And part of that is explained by the exaggerated price attached to land, he believes. “Most of the real estate development that is taking place right now is being conducted on plots leased by the administration of Arkebe Oqubay (PhD), back when he was Mayor of the city,” he argues. Currently, the fact that, there is no new land provision is makes housing development very expensive. Abdullah as well is conceived that the faulty land pricing system is behind the existing exaggerated value of real state.
Costentinos, on the other hand, did not downplay the importance of reforming the banking sector and may be introducing some competition in the form of foreign banks. “The expertise and capital of foreign banks is instrumental to encourage banks to look into important banking products like mortgages,” he concludes.