What role can mortgage play when economy is diversifying?
The question frequently asked when the mortgage industry is highlighted as economic growth enabler is what role the industry can play when an economy is diversifying.
In Nigeria today, diversification is a major economic discourse where agriculture and manufacturing come handy as low hanging fruits. Perhaps, other growth sectors also being considered, but not mortgage, not even real estate which is the fulcrum around which the mortgage system revolves.
This is surprising because mortgage and economic growth are almost synonymous. Giving out mortgage to home seekers means encouraging house suppliers to develop more houses
In advanced economies, the mortgage industry makes significant contribution to economic development. In Nigeria, this is not the case because no consideration is given to its potential. This lack of consideration explains why mortgage as a percentage of Gross Domestic Product (GDP), till date, remains low at 0.5 percent, leaving it several steps behind other emerging markets such as Mexico, Malaysia and South Africa where mortgage contributions to GDP are as high as 10 percent, 25 percent and 29 percent respectively.
Mortgage has all the potential to stimulate the economy, but for it to do that, all the obstacles to its growth have to be tackled. The relative ‘newness’ of the industry, lack of understanding of its dynamics and operational models by many Nigerians, and poor appreciation of the need and the ultimate benefit of keeping money in a mortgage bank are some of the militating factors.
Finance experts are of the view that a flourishing mortgage banking industry is an effective tool in the hands of the government as the industry will help in pushing the economy in the desired direction.
Presently, the Federal Government is talking about diversification of the economy to stir it away from the current challenges, but attention doesn’t seem to be paid to the mortgage sector. If government really wants to stimulate the economy, a reduction in the interest rate on mortgage loan will be a master stroke as, all things being equal, more people will embrace mortgage loan to buy houses, leading to increased activities in the construction sector.
Because of the identified obstacles, many primary mortgage banks (PMBs) are going through very difficult times, such that some are still unable to meet up with the capital requirements in the industry. “If government pays a closer attention to the PMBs by removing some of the obstacles that they have such as the drawbacks of the Land Use Act of 1978 which essentially vests land ownership in the hands of the state governors; the right to easily foreclose on delinquent borrowers, ease of creating a legal mortgage and perfecting titles and the ease of falling back on their collateral to recover bad loan etc, this sector will surely improve tremendously”, a mortgage operator observed recently.
The operator who did not want to be named, insisted that until all these issues are resolved in a way that encourages the provider of capital, in this case the mortgage bank, the sector will not grow as desired and he hopes that when these obstacles are removed, the supplier of mortgage will allocate more funds towards the provision of home loans while home buyers will better appreciate the implication of prompt interest and capital repayments as well as ensure discipline on the part of the people.
A realtor who pleaded anonymity affirms that the capital base of the PMBs is inadequate, dismissing the idea of a fixed capital base for mortgage institutions. “Saying that a mortgage institution should have a fixed base of, say N10 billion, is wrong because that amount is not enough, not even N100 billion, given the size of projects they finance. The federal government needs to come in, look at what is happening in other civilized world and copy”, the realtor advised.
In the civilized world, according to him, there is secondary market for real estate financing where commercial banks or individual brokerage banks lend money to people and thereafter sell the securitized certificate to the secondary market and come back again to lend to individuals.
Given the size of Nigeria as a mortgage market, the growth of this industry is possible if the Federal Mortgage Bank of Nigeria (FMBN) plays the role of a regulator while the federal government, through the Central Bank of Nigeria (CBN), empowers the PMBs more.
The Nigerian mortgage industry needs more well established and well funded PMBs. 10 in each state of the federation is not too much and Meckson Innocent Okoro, an estate manager, explains that this is to discourage the concentration of these institutions in urban centres.
When this is done, access to housing finance will be increased; the PMBs must be positioned to champion the whole issue of affordable or social housing for the low income earners in the country. Anything the country wants to do without a functional mortgage system that can guarantee homeownership for a good number of people will not succeed.
Talking about mortgage is talking about housing which is capital intensive and so must have capable institutions to finance it. Increased homeownership will, one way or another, contribute to the country’s GDP which translates to economic growth that diversification seeks to foster.