Q: Prior to the COVID-19 pandemic, how efficient are mortgage banks in Nigeria in addressing housing deficit
Well, I will respond to the issue of efficiency from two angles; first the efficiency of mortgage banks in their operations and second, their efficiency in responding to the housing deficit. The latter is significantly a function of the former. With respect to the efficiency of the mortgage banks, the last the efficiency of Mortgage Banks was assessed (quantitatively and qualitatively) was in 2012. As at then, efficiency was pegged at about 33% – 40% on average, based on the quantitative assessment. However, the perceived efficiency by qualitative assessment was around 10%.
With respect to efficiency of Mortgage Banks in responding to the housing deficit, I think an acceptable measure of efficiency would be contribution to GDP or rate of home ownership. It is no news that mortgage contribution to GDP has been less than 1% for a couple of years running. However, according to Centre for Affordable Housing Finance (CAHF), rate of homeownership in Nigeria was about 25% in 2016. And I believe that that the rate would have increased a bit since then as a result of programs targeted at increasing home ownership such as MyownHome program as well as the extension of formal mortgages to high networth individuals in the informal sector through the Underwriting standards for the informal sector.
There have been several initiatives and reforms undertaken by the Federal government through the Central Bank of Nigeria (CBN) to tackle the causes of inefficiencies in the Sub-sector. For instance, a major factor that impaired the efficiency of mortgage banks was dearth of long-term funds. This dual-faced issue of funding presented as absence of long term funds on one hand and fund mismatch using short-term deposit to finance long-term assets) on the other hand.
To tackle this, the Federal Government, through the Federal Ministry of Finance in collaboration with the Central Bank of Nigeria (CBN), Federal Ministry of Lands, Housing & Urban Development (FMLHUD), the World Bank/IFC and Mortgage Banking Association of Nigeria (MBAN) instituted the Nigerian Mortgage Refinance Company (NMRC) Plc. to provide long-term funds. NMRC was established to resolve the issues of liquidity, mismatch of tenor (using short-term deposits for finance long-term assets) and access to long-term funds in the Mortgage Finance Sub-sector.
Apart from the NMRC, the Nigerian Mortgage Warehouse Facility (MWFL) was also established in to serve as a buffer for the NMRC refinancing scheme by providing a short-term (30 – 90 working days) pre-finance for mortgage banks to create loans which would be refinanced by NMRC.
So with these and a host of other reforms like the development of Uniform Underwriting Standards for the Formal sector, the informal and self-employed, Nigerians in Diaspora and Non-interest Mortgage Financing, the integration of the customers of Mortgage Banks into the BVN platform as well issuance of NUBAN Numbers to facilitate online transactions for Mortgage Bank customers, I am sure that the efficiency of the Sub-sector pre-COVID-19 had improved significantly from what it was in 2012, when an assessment was done.
COVID-19 is a global reality and Nigeria, as a nation has not been exempted. Since the pandemic commenced in Nigeria around February, and the Government towards the end of March initiated the lockdown, economic activities in all sectors have dwindled significantly. The Mortgage Banking Sub-sector as a part of the larger Financial Service Industry is not exempted from this. So it is highly probable that efficiency of individual Mortgage banks within the Sub-sector have been negatively impacted.
Q: In what ways do you think the Mortgage Industry would/should have prepared for a rainy day as this pandemic.
Sincerely, I think the pandemic caught everyone unawares. Be that as it may, Mortgage banks could better brace the effect of similar situations in the future by ensuring NPL are at the barest minimum. Mortgage Banks could also better prepare for unforeseen circumstances by maintaining a high level of liquidity and having higher retained earnings that could serve as buffer for them, at least in the short-term.
Q: What are the expected impacts of COVID-19 on mortgage banking efficiency in Nigeria
COVID pandemic have posed a serious challenge to the world at large and its immediate impact on Mortgage Banking in Nigeria is high rate of default. Customers who until now have been up-to-date on their repayments are beginning to default.
Mortgage Banks finds themselves juggling some major priorities including keeping up with their monthly repayments to funds providers the like NMRC, NHF and other private investors, this, in the face of dwindling revenues and defaults from customers whose finances have been negatively impacted by pandemic. While overheads have reduced as a result of the lockdown and operation below full capacity, the While grappling with these, at the same time, most Mortgage Banks are also recalibrating for the immediate and far future. For instance, in the immediate, most banks would be concerned with safety measures to keep their branches open, to adopt physical distancing measures without having overcrowded banking halls. Another challenge that c.. managing supervisory and compliance gfunctions that were never designed for remote work. All these are bound to affect efficiency, at least in th shot term.
Q: Has the pandemic brought about greater policy debate for stakeholders in the mortgage sub-sector or would you say key regulatory agencies have reacted promptly to the situation
There have been a number of meetings of Industry and Sub-sector practitioners to brainstorm and deliberate on strategies to ensure safety and survival, to mitigate the effect the pandemic and to fortify the Sub-sector against shocks from such events going forward. The National Executive Council of the Mortgage Banking Association of Nigeria had a meeting to that effect in March. The Housing Development Agency Network (HDAN) also organized a series of Webinars to suggest practical ways to mitigate the effect of the pandemic on housing. Be that as it may, there is still ample room for the Housing and Financial Services Industry Stakeholders at large as well as housing finance/mortgage banking sub-sector stakeholders to deliberate on these issues and come up with industry and sub-sector policies that could help businesses manage the risks that such events could pose.
In the same vein, Industry regulators have put in place policy measures to mitigate the effect of the pandemic by granting moratorium, and reduction of interest rate on its intervention facilities. The mortgage Banking sub-sector have also initiated engagement with the CBN on palliative for the sub-sector however, the Sub-sector is still awaiting a feedback. Apart from policy measures, the CBN has made provision for regulatory measures to combat the impact of the pandemic. All commercial Banks and possibly by extension Mortgage Banks have been allowed to restructure loan tenor and terms for individuals or businesses most affected by the pandemic.
Q: what are the key areas of impact that mortgage banks needs to focus attention on in order to manage the impact positively
Due to the peculiar nature of mortgages, and going by the experience of the sub-prime crisis in developed countries, the pandemic is likely going to impact mortgage banking through:
- Increased defaults from customers resulting in high NPLs
- Increased loss for the Mortgage Banks as a result of high default level which might put undue pressure on Mortgage Banks’ capital requirement
- Pressure on capital level resulting from reevaluation and loan classification requirement under IFRS9
- Depending on how long the pandemic lasts, its effect could eventually hit the secondary market resulting in liquidity pressure and higher cost of accessing the capital market for funding.
In light of the possible impacts of the pandemic, Mortgage Banks can, in the immediate focus on the following critical issues: business continuity, managing defaults, ensuring continuing new loan origination and cost reduction. It is essential that Mortgage Banks focus on continuity not only from the financial and Business perspective, but also from the health angle. There has to be a strong strategy for managing defaults, mortgage banks and the entire Sub-sector should also pay attention to devise ways of keeping loan origination going to and reduce cost as much as possible.
Q: What are the short-term solutions to address the identified impact areas?
To ensure continuity in light of dwindling resources and high defaults, Mortgage Banks would need some form of intervention from the government. From the health point of view, Mortgage banks would do well to embrace all the laid down guidelines such as physical distancing, provision of hand washing facilities, frequent temperature checks, fumigation and disinfection of all surfaces and surroundings regularly. For managing default, Mortgage Banks should consider restructuring loan terms and tenor. They should also reduce operating costs and overheads as much as possible.
Q: What are the long term solutions to enhancing mortgage banking efficiency in Nigeria
For enhancing efficiency, a lot has been done, like I mentioned earlier. There have been several reforms and initiatives to create an enabling environment for mortgages to thrive. Most of interventions however have been focused on creating an ambient macroeconomic environment. The Sub-sector would experience a higher level of efficiency if interventions are planned to target Legal framework surrounding mortgage creation and Land administration. With every reform and initiative embarked on to create an enabling environment for housing finance/mortgage banking and to deepen mortgage financing, the Mortgage Banking Sub-sector is improving and getting more efficient. If the legal framework for mortgage ad the land administration system is revamp, I believe there would further be a significant improvement in the efficiency of the Sub-sector.
Q: What lessons can we take from the COVID-19 pandemic situation
Personally, this pandemic has made me realize the true purpose of businesses and economies – to serve human needs and purposes. It has taught me that contrary to the human imposed devise of wealth, class or status, we are all interdependent and connected. No individual, family, organization or business is in isolation and the pandemic has painfully uncovered the dangers of ignoring or interdependence. Another lesson I learnt from the Pandemic is to “Prepare for the Worst”. As the world is gradually returning to a new normal, it is important to know that ‘rainy day funds critical for all businesses’. For the Mortgage Banking Sub-sector, the Pandemic has further highlighted the importance of investing in technology. It is high time Mortgage Banks also give serious considerations to a loan origination process that is at least 60% online.