A new breed of legal support

Towards a Successful Mortgage Finance Market in Tanzania

2016-11-29 09:56:14

By Paul Kibuuka

THE primary objective of a mortgage finance system, also known as the housing finance industry in Tanzania, is to channel funds from savers to borrowers, so that real estate developers have the capital to build and owners have the credit to buy suitable housing.

During the last 54 years, Tanzania has undergone rapid population growth and urbanization, resulting in cities, towns and municipalities with high levels of income inequality and inadequate housing.

As the country’s urban population continues to increase, the World Bank has underscored the urgent need to improve access to finance for affordable and adequate housing supply. This emphasis came against a backdrop of a new US$60m financing provided to Tanzania by the World Bank Group’s International Development Association (IDA) for funding affordable housing.

One of the key ways of raising housing finance is the use of a mortgage. According to the Banking and Financial Institutions (Mortgage Finance) Regulations 2011, a mortgage is a loan granted to a borrower for the purpose of acquiring, improving or constructing a residential house and is secured by the acquired, improved or constructed residential house. A mortgage instrument also serves as an alternative source of investment for Tanzania’s pension funds, whose liabilities are considered long-term.

Normally, mortgage loans are set to amortize 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 Bank of Tanzania’s Mortgage Market Update released on 31 December 2013 shows interest rates are in the 18 to 21 percent range. With such high interest rates, coupled with a depreciating Tanzanian shilling, demand for mortgage loans may dampen and a long shadow may be cast over the growth prospects of the market.

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 amortization periods and help real estate developers liquidate their unsold housing stock.

It is 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.

Cognizant of this, the government of Tanzania, through the Ministry of Lands, Housing and Human Settlements, initiated the Housing Finance Project (HFP) to support a lively mortgage finance market; and actually, enacted the Mortgage Finance (Special Provisions) Act 2008 in an effort to streamline the use of land as collateral for mortgage loans. Notably, the HFP is aligned with the Tanzania Development Vision 2025, which highlights the importance of access to finance, affordable housing and capital market development.

Other initiatives by the government have included the passing of the Unit Titles Act 2008 that introduced the condominium law governing sectional properties; the establishment of the Tanzania Mortgage Refinance Company (TMRC) in 2010 to provide medium to long-term liquidity for its shareholder-banks to extend amortizing mortgage loans to individuals; and the promulgation of the Banking and Financial Institutions (Mortgage Finance) Regulations, 2011. 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, 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.

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. Consequently, a robust mortgage finance market will widen and deepen Tanzania’s financial system and bring enormous benefits to the economy through creation of jobs in the construction and allied sectors.

But even so, the cost of housing is comparatively higher than income levels. That's why the government supported the creation of, the TMRC to enable participating banks to offer amortizing mortgage loans to individuals and, the Housing Microfinance Fund aimed at assisting lower-income individuals to access conventional, quality housing.

Perhaps as a means to achieve this goal, some government housing subsidies, such as, where applicable, investor guarantees, tax deductions and price controls, could be considered. 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.

Incidentally, securitization 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.

On the other hand, a mortgage liquidity facility compliments the portfolio lending done by banks. Basically, the facility allows TMRC-member banks to borrow from the TMRC against a pool of mortgages as security, giving such banks an additional means to supplement their short-term deposits. Considering the difficulty faced by banks in accessing long-term funds, a liquidity facility is a better mechanism for using the mortgage loans as collaterals.

All of the above funding mechanisms aim at channelling funds from savers to borrowers and require the right legal and regulatory framework to support the registration, enforcement and final pledging and sale of mortgage loans. In reality, an efficient, comprehensive and definite real estate registry system is a critical requirement for the development of a sound primary mortgage market in Tanzania. A key law for regulating the activities of real estate and mortgage brokers and safeguarding the rights of mortgagors from any unpleasant market practices is long overdue.

With regard to the growth of the secondary mortgage market, a detailed securitization law which exempts the entire process of turning mortgages into tradable securities from the effects of stamp duty or other transfer taxes, bank secrecy laws and regulations should be enacted. Additionally, regulations are needed by the Capital Markets and Securities Authority (CMSA) on the disclosure and listing of residential mortgage-backed securities, especially as far as information about the mortgage pool is concerned. The need for any amendments to the CMSA Act and the Banking and Financial Institutions Act (Mortgage Finance) Regulations should be investigated in an effort to meet international best practice concerning securitization of mortgages.

Besides the legal and regulatory requirements, the economic environment for the development of Tanzania’s mortgage finance market needs to be improved by ensuring that (a) long-term loans from a number of competing banks are available, as long as conditions are met (b) interest rates are charged at market price (c) valuation of land and properties is ethically done (d) 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.

Presently, commercial banks account for the majority of the mortgage lending business in Tanzania. However, 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, specialized 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.

As noted in this article, a number of economic, legal, regulatory and institutional requirements are needed to address the issues and challenges in developing Tanzania’s mortgage finance market and to ensure its accelerated success. Ultimately, however, Tanzania should focus first on getting its primary mortgage market fully developed prior to establishing the securitization of mortgages, which would compliment an efficient primary market.

Paul Kibuuka is the Managing Partner of Isidora & Company Advocates. Email: Twitter: @isidoralaw

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