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Recapitalization and the Challenge of Effective Mortgage System in Nigeria

Mortgage banks play a very critical role in a country’s housing sector, so much so that the effectiveness or otherwise of housing policies are largely dependent on how functional the mortgage system is. In Nigeria, the case is not different. Mortgage banks are very important, but their inability to meet up with the necessary requirements that will help address Nigeria’s housing deficit has remained a major cause of concern.

Most primary mortgage banks in Nigeria are embroiled in debts, equity crisis and insolvency. This, among other reasons bordering on poor performance has recently prompted the Central Bank of Nigeria (CBN) to announce a recapitalization plan by raising capital requirements for Primary Mortgage Banks (PMBs) by 73.3% to a total of N13 billion as a whole, from N7.5 billion in 2013.

A breakdown of the financial requirements of the sub-sector shows that operators of national category of the PMBs are required to shore up their capital base to N8 billion, which is an increase of 60 percent compared to N5 billion it stood in 2013. Regional licence (formerly state), operators are expected to increase their financial base by 100 percent to N5 billion from N2.5 billion six years ago.

According to Ibrahim Tukur, Director, Financial Policy and Regulation Department, CBN, the new guidelines introduced enhanced requirements for capital, risk management, internal control, and corporate governance. Notwithstanding the measures put in place, the mortgage sub-sector according to him continued to struggle against the headwinds occasioned by unfavourable macroeconomic and other developments.

The CBN’s draft half-year 2018 report indicated that there were 34 licensed PMBs in operation at end-June 2018, comprising 11 national and 23 state PMBs, same as at the end of December 2017. Total assets of the PMBs decreased marginally by 1.0 percent to N384.37 billion at the end of June 2018, from N388.58 billion at the end of December 2017, due largely to losses from loan impairments in the review period.

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Investment and credit growth has slowed down significantly given lower capacity utilization rate and bankers’ rising risk aversion due to non-performing assets (NPAs).

Is Recapitalization the right way?

A lot of people in the industry are agreeing with CBN that the bad loans problem facing mortgage banks in Nigeria, if left uncontrolled, can lead to a systemic failure in the banking system. The country’s housing finance system needed a very strong incentive to revive the plunge of its growth momentum. And it has come in the form of a recapitalization measure.

This recent decision by CBN is not new, not even in Nigeria. It has been seen in various countries around the world, especially those keen on reviving a failing mortgage system.

This move by CBN for the immediate recapitalization of mortgage banks is seen by many as brave. Any risk in the mortgage banking system, if left uncontrolled, can bring about systemic failures in the financial sector.

According to experts, considering that not all mortgage banks will be able to raise capital from the markets, the recapitalization will definitely provide some cushion to the mortgage banks to manage their risk and credit capital-related requirements and cater to the demand for loans.

The downturn in the investment cycle holds back the demand for credit at this juncture. While there have been no clear details from the CBN about how this recapitalization will work, one can relate it with the recapitalization move of the early 2010s, wherein the industry experienced winding downs, mergers and acquisitions and reorganizations.

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If consolidation of mortgage banks can make them relevant, competitive, efficient and profitable, then this move by the industry regulator is seen as a right step in the right direction.

But some sceptics also believe that this might not be a magic wand, mostly because that there is no transparency in financial reporting and the entire system is compromised and lacks corporate governance. Since the early 2010’s, not only has the percentage of troubled assets gone up, the provisioning for expected losses has also grown substantially. This has led to a dent in mortgage bank lending and in turn, investment and growth. Furthermore, mortgage banks need capital to meet the Basel III norms.

Experts say that the capital required by mortgage banks is far in excess to what the CBN has announced for troubled loans and to meet the Basel III requirements. Mortgage banks operating within the shores of Nigeria are technically insolvent. This is also the case with FMBN, where the government has been recapitalizing it through budgetary provisions. The current announcement is a timely wakeup call and is nearly double the amount already injected by the previous recapitalization.

Saving Nigerian Mortgage System

Based on popular opinion, redeeming the Nigerian Mortgage System will require the convergence of relevant stakeholders in a discussion that will produce concrete resolutions.

The excessive incursion of commercial banks into mortgage businesses have also been largely blamed for how defective the country’s mortgage system is. Commercial banks need to reduce their overbearing influence in the mortgage space.

For state owned mortgage banks, the stake of the government should be brought down considerably in these banks so that they can operate in a flexible manner with an overhaul in the governance structure with an independent board and competitive approach. In the end, it is very crucial to ensure that a clear message is sent out to the banks that the government is not available to rescue them every time their loan book goes-off beam.

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The nation needs policy makers that are housing specialist who have the requisite knowledge and competence and not just political figures who do not understand the role of housing in an economy.

The primary impediment to the development of a virile mortgage banking sector is the Land Use Act (LUA) 1978 because it affects every aspect that relates to the acquisition of affordable housing ranging from basic human rights to mortgage lending. The successful amendment of this land use act will effect certain changes that would ultimately encourage processes that would facilitate the delivery of affordable housing in the country.

The success of Family Home Funds, FMBN and NMRC largely depends on having vibrant mortgage banks around the country to originate new loans. If this can be effectively tackled with the required will and expertise, then Nigeria can begin to look ahead.

By  Ojonugwa Felix Ugboja

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