Having shelter is the second most important necessity of life. Hence, the importance of the provision of adequate affordable housing in any nation-state cannot be overemphasized.
Nigeria, with a population of 195.9 million people (World Bank, 2020), has a housing deficit of 22 million units approximately (Shelter Afrique, 2019).
This shows that Nigeria’s housing demand is increasing rapidly whereas, the supply is staggering behind and also implies that the housing market is targeted to a few and not readily available or affordable to low-income and Medium-income salary earners.
In a concerted effort to solve the critical issue of housing Deficit, the responsibility of the Federal Government of Nigeria has been to drive the implementation of intervention schemes for housing financing through various policies and programs either as a provider in the 70s and 80s and as a facilitator and enabler in the recent time.
One policy that stood out among others is the establishment of the National Housing Funds.
This article aims to provide policymakers with a clear picture of the Housing Market, the demand and supply constraints of the housing finance market in Nigeria, examine successful interventions and policies employed in developing and developed countries, and advise on solutions to the challenges therein.
The Current State of the Housing Market
Nigeria has experienced rapid urbanization with an urbanization rate of 51.58% (Statista, 2020) and a housing deficit rate of at least 22 million units (World Bank).
Housing prices are high-end and are not easily available or affordable to low-income to medium-income salary earners.
The provision of housing in Nigeria over the past few years has been saddled with the inability of low-income to medium-income earners to access, who constitute the majority of the nation’s population.
To mitigate this constraint, the Federal Mortgage Bank of Nigeria FMBN was commissioned to bring a check to the insufficiency of the housing market as well as manage the National Housing Fund Scheme.
The Federal Mortgage Bank of Nigeria is the sole regulator of the housing market industry.
The National Housing Fund (NHF) was established by the Federal Government to mobilize funds that will facilitate the provision of affordable housing for Nigerians.
Under the extant NHF law, every Nigerian earning above the minimum wage is required to contribute 2.5% of their monthly salary to the NHF.
The funds mobilized will be made available to contributors at affordable interest rates to build homes.
However, this fund scheme has not been fully effective with redundancies from the supply side of the housing market.
The major issues regarding housing microfinance in Nigeria include:
- Affordability for the households
- Limited access to medium- and long-term capital
- Insecure land tenure
- Funding issues
- The perceived risk of the market and the effect of the Inefficient land management systems.
- High prices of property transactions.
Theoretical and Practical reasons for the failure of the housing finance
The following reasons describe the lack of housing finance:
The inflation rate affects the price of everything including mortgage rates. This is expected at lenders or investors must ensure that the value of the money being returned to the lender is at the perceived value.
Level of Economic Growth
The level of economic growth is usually signified by indicators such as the Gross Domestic Product, ($432.20 Billion in 2020) and Unemployment rate (33.3% in Q4, 2020) (Trading economics, 2020).
An increased level of economic growth means more spending capacity and GDP per capita, which will allow individuals to think about purchasing mortgage loans for higher comforts.
It also increases investors’ interest, immigration, and urbanization; which will all positively affect the demand for housing in Nigeria.
High demand may also lead to an increase in interest rates as there is a limited supply of lenders for the mortgage market.
Housing Microfinance: Market Segment, Characteristics, Demand, and Supply Constraint
The underserved in Nigeria are the same irrespective of the type of financing needed. They are commonly referred to as the “financially excluded” and are largely made up of the rural populations who do not have access to basic banking services, cannot be assessed for credits, and therefore cannot receive loans.
The number of people living in rural areas consists of 48.84% of the total population (Trading economics, 2020)
The middle class, earning between N75,000- N120,000, according to African Development Bank will also fall into the category of the underserved as they cannot afford standard mortgage loans. According to a survey conducted by Renaissance Capital (Robertson C., A survey of the Nigerian middle class, 2011), these are some predominant characteristics of the middle class:
· 92% of middle-class Nigerians have post-secondary education or have studied at higher institutions of learning.
· The majority (76%) work in the public sector, while 22% work in the private sector. Only 2% of the middle-class population is employed in other forms of work or is part of a non-governmental organization.
· About half of the middle-class population are skilled professionals in paid employment, while 38% own their businesses.
Demand and Supply Constraints
Housing Market Conditions
The housing market conditions go a long way to affect the demand and supply of housing finance in the economy. When fewer homes are constructed and offered for sale, this leads to a reduction in the demand for mortgages in a geographical region.
Federal Monetary Policy
The Federal Reserve does not specifically set the mortgage rate in the market. However, its ability to control the amount of money available to the public (i.e. cash injection to the public) determines, to a large extent the mortgage rates available in the market. In general, the more the supply of cash to the borrowing public, the lower the interest rates and the more demand for mortgage loans (Ahmad Abdullahi, 2019).
Lack of Sufficient Credit Information
There is a lack of sufficient information regarding borrowers, largely as a result of the poor data storage practices in Nigeria. In most economies, a key part of assessing loans is reviewing the creditworthiness of the borrower.
This includes his credit history as well as his ability to save over time. Most bankers see this as the single most important information needed to underwrite loans successfully.
In Nigeria, the credit bureaus are still very much under development. Some examples are CRC and First Central Credit Bureau. These organizations largely depend on primary and secondary lending institutions to update the general system, to keep abreast of all consumers’ loans.
A low-Interest rate on National Housing Fund
The interest rate enforced by the government on investments in the NHF funds is quite low and does not provide competitive returns to the investor. This is where market bonds come in. Since there are more competitive corporate and government bonds, investors tend to opt for those in a bid to maximize interest.
Taiwo Oyedele (2008) said it best when he remarked, “While the proposed law may be well-intentioned, availability of funds alone will not solve the myriad of challenges facing the housing sector which center mostly on policies and regulations.
If you make funds available at a low rate by regulation rather than by market forces, it does not mean the funds are cheap, it means someone else is paying for it.”
Strategies and potential solutions: how housing microfinance can mitigate housing constraints:
Some potential solutions for housing finance in Nigeria include:
Consolidation of Housing Cooperatives to create a source of long-term funds
Today, cooperative societies contribute upward of N500 billion directly and indirectly to Nigeria’s GDP.
Cooperative societies in Nigeria can consolidate as a form of a savings group in different regions to provide a source of housing finance for the underserved in Nigeria.
They can also partner with the government, NGOs, and other institutions to raise further funds for this cause.
Provision of government subsidies for low-income housing
The role of governments cannot be overlooked while discussing housing subsidies. Innovative policies can be implemented to provide subsidies for the underserved in society.
A good example of innovation is the 10% tax on cement being channeled to the FHS to provide 30% subsidies on housing for the poor in Morocco. Subsidies may also come in form of government-backed guarantees. Helping banks to provide greater levity when dealing with low-income earners with irregular income history. It is recommended that the government provides guarantees of at most 50% to avoid excess levity from the bank while providing these loans.
Promotion of savings culture among low- and middle-income earners to build credibility.
Financial inclusion is a focus of every financial institution in Nigeria and stands at the epicenter of most of the problems facing financing in Nigeria today.
One strategy that can be employed in driving financial inclusion is educating the public, especially the people from the unserved and underserved category, on the importance of developing a savings culture.
Borrowers need to create a history of savings and repayments to further facilitate loans by banks.
Another viable solution for the unbanked is the availability of banks in rural areas. It is important to develop infrastructure to allow banks to be more situated in rural areas. This will increase their availability to the poor and increase the chances of these underserved populations becoming a banking population.
The policy recommendation for the Nigerian population is to adopt a community-driven approach through the use of consolidated cooperative societies. These societies can be checked and balanced by each other and an overall governing body, decided by the collective group. The combined cooperative can then have access to impact, donor, and government funding, to further facilitate its purposes.
This is the best approach as other approaches depend strongly on the government to pass fiscal and economic policies in favor of the poor. Unfortunately, we know this is hardly the case in Nigeria. However, it is pertinent that Nigerians continue to push for continued systemic reform to cater to the poor, financially, and socioeconomically.
But until such a time that such change comes to effect, the cooperative model can suffice in driving positive change in the housing microfinance space in Nigeria.
Author: Victor Kareem