THE MORTGAGE MARKET IN GHANA

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Kobla Nyaletey

1.0 Introduction

2.0 Institutional corporates in a mortgage/housing industry

2.1 Private real estate firms

2.2 Financial institutions (banks and specialist mortgage houses)

2.3 Consumers (mortgage buyers)

2.4 Government (the regulator)

3.0 Factors inhibiting the growth of the mortgage market in Ghana

3.1 Lack of policy and regulation around land ownership and tenure

3.2 Weak mortgage financing

3.2.1 Lack of critical profitable mortgage portfolio

3.2.2 High interest rate regime in Ghana

3.2.3 Lack of access to long term sources of funds by financial institutions

4.0 Recommendations to grow the mortgage market in Ghana

Outline of presentation

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1.0 Introduction

1. Ghana has significant housing deficit with the mortgage market unable to really develop to address this growing deficit

2. The 2000 Population and Housing Census reported the existence of a housing deficit of 1m units. Ghana needs to put up 2.5m housing units by 2025 if we are to meet the housing needs of the populace - about 150,000 per year

3. A mortgage is loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.

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2.0 Institutional corporates in a mortgage/housing industry

2.1 Private Real estate firms

• In Ghana, private real estate firms aggregate under the umbrella of the Ghana Real Estate Developers Association (GREDA).

• Key GREDA members includes: Regimanuel Grey, NTHC Properties, Trassaco Estates Development, Lakeside Estate Ltd, Devtraco, Salem Investment, Flexcon and Civil Master Company.

• They have also not delivered sufficient quantities of housing across income bands mainly because the ordinary Ghanaian worker cannot afford the housing they provide.

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2.2 Financial institutions

• There are 26 commercial banks in the financial market in Ghana.

• Out of the 26 commercial banks, only 5 currently offer mortgage financing. These are Stanbic Bank, Fidelity Bank, Ecobank, HFC Bank and CAL Bank with HFC Bank dominating the mortgage market, having had a monopoly for several years in the 1990s with an estimated market share of 30%.

• The leading non-bank financial institution in mortgage financing in Ghana is Ghana Home Loans.

• Absent from the mortgage market are banking industry giants like Barclays, Standard Chartered and GCB.

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Item Stanbic Bank Fidelity Bank Ecobank HFC Bank CAL Bank Ghana Home Loans

Loan Amt. Max.

No Cap. Minimum property value of GHS 40,000

No Cap On Loan Amount. Loan to value (LTV) ratio is 90%

Maximum amount of US$ 350,000

No Cap. Subject to customer’s credit profile. LTV is 80% of property Value, 20% down payment expected from customer.

No Cap No Cap

Interest Rate 0-4% above base rate. Base rate is 17.5%

14%. Offers only US dollar loans

20.5% for Cedi 3-5% above base rate. Base rate is 24.75%

Base rate + 3%. Base Rate is 24%

US$ rate of 12%

Tenor Up to 20 years

Up to 15 years Up to 10 years Up to 20years 5-15 years Up to 20years

Debt Service Ratio (DSR)

35% No consideration of DSR.

40% cap 40% 40% No consideration of DSR

Documents required to access mortgage

Documents Perfected In The Name Of The Vendor, Valuation Report

Title Deed, Certificate Of Ownership, Inspection Report, Valuation Report

Valuation Report, Confirmation From Employer.

Power Of Attorney, Valuation Report, House Documents

Proof Of Income, Valuation Report, Confirmation Of Income From Employer, Personal Guarantee

Proof Of Income, Valuation Report, Confirmation Of Income From Employer, Personal Guarantee

2.3 Consumers (mortgage buyers)

Classified into 3 groups based on the value of properties they buy.

• High income group: US$100,000 (GHS190,000) and above in up-market locations such as Airport residential area, cantonment, etc. There is not a sizeable number of Ghanaians who can afford properties in these areas however.

• Middle income group: US$50,000 – US$100,000 (GHS 95,000 – GHS 190,000). Majority of mortgageable properties are in the middle class band with most of them also in community-based areas.

• Low income group: Majority of working class Ghanaians have income levels that can support mortgages in this band. Properties in this band usually have poor re-sale value which deters financiers away from the segment. 7

2.4 Government (the regulator)

Government has two main roles to play, a legislative/regulatory role and an economic role.

1. The government through the legislature must enact laws that will make the housing/mortgage market operate within a clear legal framework, guaranteeing the ownership rights of all rightful owners

2. Ensure the right economic environment that ensures the development of the housing/mortgage market through appropriate taxes and interest rate regimes.

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3.0 Factors inhibiting the growth of the mortgage market in Ghana

1. Unclear, circuitous, duplicated legal land ownership and tenure system

• The time needed to register a title in the country is over 140 days, one of the longest in the world.

• Ghana’s land administration system is characterized by the coexistence of overlapping systems, namely traditional, state and private.

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2. Weak mortgage financing

2.1. Lack of critical profitable mortgage portfolios.

• Only few affordable mortgageable properties exist in the market

• Over-priced properties or a case of unaffordable tastes?

2.2. High interest rate regime in Ghana

• High interest rate regime in Ghana (~25%pa) make mortgages un-affordable to most Ghanaians

• The mortgage market can only develop if interest rates in Ghana sustainably decline into single digit territory

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2. Weak mortgage financing cont.

2.3 Lack of access to long term sources of funds by financial institutions

• Most financial institutions only have access to short term customer deposits

• The corporate bond market is undeveloped.

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4.0 Recommendations to grow the mortgage market in Ghana

 1. Reform and simplify the land ownership and tenure system in Ghana

 2. Government and the Bank of Ghana to work to move the Ghanaian economy into a sustainably low interest rate regime

 3. Financial institutions to use the stock market and bond markets to access long term financing to fund their mortgage portfolios

 4. A significantly large government support/financed housing project to kick-start the mortgage market

5. Government involvement to develop mortgage financing to the mass market segment.

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Money Markets• Over-the-counter, short-term, wholesale debt markets.

• Financial instruments traded here normally possess high liquidity and short maturities.

• Typically used as a means for borrowing and lending in the short term- i.e. from over-night to just under a year. (simple interest is the norm in the money markets; compound interest computations normally kick in after one year)

• Examples of Money market instruments: Negotiable certificates of deposit (CDs), bankers acceptances (BAs), Treasury bills, commercial paper, repurchase agreements (repos).

• Domestic money market / ‘euro-market’:The market within Ghana is our domestic money market for example / Time deposits in a bank located OUTSIDE the country of the currency concerned.

Money Markets cont.• Loans and deposits

Transactions are either ‘time deposits’ – where maturity date and interest rate are agreed in advance or ‘call deposits’ where the deposit is rolled over daily at the prevailing market rate, but can be withdrawn at a 24-hour notice period.

• The ‘bid’ is the rate a bank is willing to borrow money for the period and pay interest to the counterparty; The offer is the rate the bank is prepared to lend funds and charge interest.

• LIBOR, EURIBOR and AIBOR – benchmark rates for short term interest rates

• Primary markets: markets where short-term financial instruments are first issued; Participation in the primary market for government debt issues is often restricted to ‘primary dealers’

• Secondary markets: provide liquidity for the trading of instruments issued in the primary market, and provides a means for holders of such instruments to realise their investment earlier than the official maturity date if they require access to their cash.

Money Markets II

• Discount instruments are a class of MM instruments that are issued at a discount i.e. the price/cost on issue date is less than the ‘par’ or ‘face value’

• The true yield is always higher than the equivalent discount rate.

True yield =Discount Rate / 1 – [(Discount Rate * day count) / annual

basis ]

Proceeds at maturity = Face Value * {1 + [ (coupon * day count) / (annual basis) ]}

Secondary market proceeds =Proceeds at maturity / { 1 + (yield * day count) / (annual basis) }

Examples of Money Market Instruments

• Bills of Exchange:

Short term instruments used for financing physical trade transactions;

Two main types: trade bills and bankers acceptance;

• Commercial Paper:

Short term unsecured promissory note with a fixed maturity date, usually issued by companies.

Low cost alternative to bank finance; often sold directly by issuers to investors without any bank intermediation.

In the US, CP can be issued for a maximum of 270 days

Examples of MM instruments II• Repurchase Agreements (Repos)

A mechanism employed by central banks to temporarily inject liquidity into the banking system.

The CB purchases securities from commercial banks with the banks agreeing to repurchase them at a later date.

The opposite transaction, in which specific securities are sold from the CB’s portfolio and simultaneously repurchased for settlement is called a…. Reverse Repo.

A repo / reverse repo is also in effect a collateralised transaction in which cash is either lent or borrowed using the security as collateral.

Examples of MM instruments III• Treasury Bills

Short term debt securities issued by the Government of a country

Considered risk free assets as far as the country of issue is concerned.

Normally issued through a competitive tender at weekly auction. Ghana subscribes to the ‘discriminatory’ format for its short term instruments and the ‘uniform allocation / Dutch auction’ for medium term (1 year – 5 year securities).

• Certificates of Deposit

A negotiable fixed deposit receipt issued by a bank or building society for funds placed for a specific period;

Normally issued at par, for less than a year

Bonds• A bond is a ‘promise/contract’ undertaken by a borrower (called the

issuer) to an investor (the buyer of the bond) to make periodic payments on fixed dates for a fixed tenor.

• The periodic payment is usually made semi-annually, and is equal to half of the coupon rate on the bond.

• The coupon rate of a bond is determined at a primary market auction. • In an auction, a number of investors propose bids (rates of return they

require to lend their funds to the borrower).• After the auction closes, the borrower then determines the highest rate

it is willing to pay and then allocates that rate to all bidders whose rates fall below the cut-off point. That cut-off point is called the coupon rate.

• In Ghana, tenors of 1 and 2 years are called notes, and tenors of 3 and 5 years are called bonds

Bonds cont.• An investor may decide to sell his holdings before the

official/original maturity date. Secondary market.• As interest is paid half-yearly, it accrues interest on a daily

basis. The price/cost of a bond on the secondary market recognizes the fact that the holder of the bond prior to the sale should be compensated for bearing some ‘risk’.

• Dirty price: the cost of a bond taking the accrued interest into consideration. Clean Price.

• Premium / Discount – Difference between the par value of a bond and the cost / price paid.

• Yield to maturity- may differ from coupon rate; premium / discount adjusts the return on investment.

Questions/Comments?

Thank You For Listening

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