Mortgage Institutions: Housing In Nigeria

A SURVEY OF THE EFFECT OF MORTGAGE INSTITUTIONS IN THE PROVISION OF AFFORDABLE AND SUSTAINABLE HOUSING IN NIGERIA

 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1     CONCEPT OF MORTGAGE

Justus (2010) says a mortgage of land is an arrangement where by a borrower called the mortgagor supplies security for money advanced to him by a lender called the MORTGAGE. The mortgage gives the mortgage right over the land used as security (for instance, a right of sale where by he can recover his money if the mortgagor fails or repay him).

Adeniyi (1996) define mortgage as a debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of he purchase up front.

Mortgages are also known as “liens against property” or “claims on property”.

2.2     THE STRUCTURE OF THE NIGERIA MORTGAGE INSTITUTION

The Federal mortgage Bank of Nigeria (FMBN) took over the assets and liabilities of the Nigerian building Society. The FMBN provides banking and advisory services and undertakes research activities pertaining to housing. Following the adoption of the national housing policy in 1990, FMBN is empowered to license and regulate primary mortgage institution in Nigeria and act as an apex regulatory body for the mortgage finance industry. The financing function of the Federal mortgage bank of Nigeria was carried out and transferred the FMBN retain it regulatory role. FMBN is under the control of the Central Bank.

2.3     THE CENTRAL BANK OF NIGERIA (CBN)

The CBN is the apex regulatory authority of the financial system. It was established by the central Bank of Nigeria act of 1959 among its primary function the bank promotes monetary stability and a sound financial. System and act as banker and financial adviser to the federal government as well as banker of last report to the banks.

The bank also encourages the growth and development of financial institution enabling law made in 1991, give the bank more flexibility in regulating and licensing finance companies which hitherto operate out side any regulatory frame work.

2.4     HISTORICAL BACKGROUND OF MORTGAGE INSTITUTIONS IN NIGERIA

Mortgage institutions in Nigeria commenced with the establishment of the Nigeria building society (NBS) in 1986. The NBS was a joints venture between the common wealth development corporation, the federal regional government in 1977, the name of the building society was changed to the federal mortgage Bank of Nigeria, (FMBN) with a capital base of 20 million by Act N0. 7 of 1977. The capital base was increase further to N100million in 1989, mortgage institutions act was enacted to provide for the establishment and licensing of primary mortgage institutions under the supervision of the FMBN (Olugbenga, 2007).

2.5     CONCEPT OF MORTGAGE FINANCE

Babalola (2002); defined mortgage as a principle format financing housing development. A mortgage is the placement of an encumbrance on a property to secure repayment. It is always accompanied by note which technologically admits the debt and contains an agreement to repay it in accordance both specified conditions. The released when the borrower (mortgagor) pays back the (mortgagor) pays back the loan but if the could not pay back in accordance with he specific conditions the lender (mortgagor) can sell the property to satisfy the debt. Mortgages are small parts of the capital market instrument their maturity funs five (5) to forty (40) years.

2.6     MORTGAGE INSTITUTION IN NIGERIA

In recognition of the importance of housing sector, and considering the banks have access to cheap source of funds through retail deposit as well as the infrastructure to process real estate loan efficiently and he skill o manage the risk involved, he Central Bank of Nigeria has encouraged banks to support the development of housing sector in Nigeria in particular.

Government policy aimed at providing affordable and sustainable housing for all Nigeria includes:

2.6.1  INSURANCE COMPANIES

This is a special category o financing institution. According to Sanusi (2003), defined the insurance companies as well suited for providing housing finance because of their stable base of funding and long term nature of their liabilities. They are therefore not only fund immobilizers, but also important sources of capital fund for the economy. Funds from life insurance also provide resource for the financing of the housing sector in Nigeria. The structure of the loans and advance of the sector indicates that insurance sector have been active in mortgage financing.

2.6.2  SPECIALIST INSTITUTION

The main competiting institution with banks and insurance companies in the areas of housing have been the specialized institution such as semi government agencies, mortgage banks and building societies.

2.6.3  STATE/MUNICIPAL GOVERNMENT FINANCING

Sanusi (2003); Defined posit that, state municipal in mortgage financing have been known to be involves in mortgage financial but on limited scale.

The sources of fund usual include budgetary allocation, complemented with facilities from development institutions. Such fund are usually channeled through the states development finance institution such as the housing corporations or investment property development corporations for lending to individual residential building construction corporations for leading to individual residential building construction.

2.6.4  THE FEDERAL MORTGAGE BANK OF NIGERIA (FMBN)

The federal mortgage bank commenced operation in 1978, following the promulgation of the FMBN decree N0. 7 of January 1977 as direct federal government intervention to accelerate its housing delivery programme. The FMBN is expected to expand and coordinate mortgage lending on nation wide basis, using resources form deposits mobilized and equity contributions by federal government CBN at rate of interest below the market rate (Sanusi, 2003).

Babalola (2002); Affirms that the enabling decree gave the bank power to promote finance, supervise and control all mortgage institutions in the country but as at then the FMBN was the only mortgage institution in Nigeria.

2.6.5  PRIMARY MORTGAGE INSTITUTION (PMI)

The promulgation of the mortgage institution decree N0. 53 of 1989 provided the regulatory framework for the establishment and operation of the primary mortgage institution (PMI) by private entrepreneurs. The FMBN under decree became the apex institution which regulates primary mortgage and was empowered to license the PMIs as second tiers housing financing institution. The PMIs, under the decree were to mobilize savings for the public and grant housing loans to individuals, while the FMBN mobilizes capital funds for primary mortgage institutions. The PMI where expected to enhance private sector participation in housing finance.

2.5.5  THE FEDERAL MORTGAGE FINANCE LIMITED (FMFL)

The federal mortgage finance limited was established in 1993 to carry out the retail aspect of mortgage financing and provide credible and responsive housing finance services, while FMBN became the nation’s apex mortgage agency.

According to Babalola (2002); The FMFL is expected to provide long term facilities to mortgage institutions in Nigeria to enable them grant comparable facilities to individuals desiring to acquire houses of their own, encourage and promote the emergence and growth of primary mortgage institution to serve the need of housing delivery in all parts of Nigeria and to connect manage and administer contributions to the national housing fund (IINF) in accordance with the HHF decree N0 3 of 1992.

2.6.7  NATIONAL HOUSING FUND (NHF)

The NHF was established subsequently to the promulgation of the National Housing Fund decree N0 3 of 1992 as a mandatory contributory scheme to mobilize cheap and long term funds for housing credits. The funds represented the financial components of the housing new national housing policy, which was adopted in 1991.

Okonkwo (1991); Affirmed that the NHF is aimed at encouraging a multiplication of housing finance institutions, enhancing mobilization and growth at long term funds and making loan affordable to more borrowers. Other objectives includes ensuring constant supply of loans to Nigerians for the purpose of building incentives for capital mare tot invest in property development, encouraging the development of specific programmes that would ensure affective financing of housing development.

2.7     MOBILIZATION OF FUNDS

Babalola (2002); observed that funds have always be made inadequate for mortgage institution in the country and this has not allowed any meaningful impact to be felt in the housing sector. In order to achieve a successful finance system and ensure a continuous flow of fund, the government has set out strategies for effective mobilization of finds for housing financing in Nigeria evolving around three areas which includes voluntary schemes, mandatory schemes, government budgetary allocation and financial transfers.

2.7.1  VOLUNTARY SCHEME

These scheme was set up by he government to encourage individuals to save and build or buy houses of low interest rates under this scheme, the primary mortgage institutions are to mobilize savings and deposits form the public like the commercial bank. The success of the PMIs in the competitive financial market therefore depends on their management competence.

According to Sanusi (2003); Government introduces appropriate fiscal measures to protect the assets and liabilities of individuals, contractual savings schemes. The central bank of Nigeria, through its monetary and financial policies, encourages deposit money banks to setup subsidiaries that would specialized in primary mortgage activities.

2.7.2  MANDATORY SCHEME

Under the mandatory scheme, according to Sanusi (2003), we have he mandatory contributory scheme of Nigeria workers in both the public and private sectors. Participation in he scheme is required for all workers earning N3,000 per annum or more. The participants contribute 2.5% of their monthly salary to the housing fund at any interest rate of 4 percent to each saving contribution made contribution of 10 percent of bank’s loan and advances to the fund at an interest rate of 1 percent above the rate on current account. This is subsequently transferred to the FMBN for the housing sector through a properly devised system, thereby liberating deposit money banks form the burden of mortgage loans.

Contributions by he Nigeria social insurance trust fund (NSTIF) and the insurance companies which are expected to invest a minimum of 20 percent of their non-life funds and 40 percent of the life fund in real estate development of which not less than 50 percent must be channeled through FMBN, at an interest rate not exceeding 4 percent. Sanusi (2003) put forward that under this arrangement, government now relaxes the existing restrictive provisions as contained in the insurance decree N0. 59 of 1975 and he trustee investment Act N0 13 of 1962 so as to allow the insurance industry and pension funds to invest huge resources in housing development.

2.7.3  GOVERNMENT BUDGETARY ALLOCATION AND FINANCIAL TRANSFER

Okonkwo (1999); Vowed that under this scheme, budgeting allocation is made at all levels of government to the housing sector to finance low income housing schemes. In this respect, the federal state and local government make direct budgetary allocation of a sum not below 2.5% of their revenue to the housing scheme. The federal government also explained the infrastructural development fund (IFD) from which the state and local government can borrow to provide basic infrastructural facilities.

2.8     HOUSING FINANCE IN THE NON-FORMAL SECTORS

Babalola (2002) posits that there are three (3) different methods of housing finance in Nigeria under this section, they include:

By kind

This is the rotational method of housing finance whereby a prospective house owner seeks the service of his relatives, friends and / or kinsmen to execute some construction works like clearing fo site, brick laying, carpentry works, etc. for him. This method is not common in urban area of the country due to civilization

Money lender

Construction works requires large sums of money which cannot be met through personnel savings. This has made people to resort to borrowing form money lenders which lend at a very high interest rate. The periods for repayment are very short compared with that allowanced financial institutions.

Co-operative society

These are organized and regularized societies that give out loans to members for different purposes they have played noticeable and remarkable role in housing finance in the country. They give out loans to members for building construction and at times acquire land and allocate such land to members.

2.9     THE IMPACT OF MORTGAGE INSTITUTIONS IN NIGERIA

An appraisal of mortgage institutions in Nigeria shows that these measures have produced some salutary effect on housing development (Sanusi, 2003), the effect of mortgage institutions on housing development in Nigeria as identified by Olugbenga (2007) are:

2.9.1  ACCESS TO LONG TERM LOANS FOR HOUSING DEVELOPMENT

According to Olugbenga (2007); Available information reveals that N1.065 billion was granted as loans and advances by the insurance companies to the housing sector between 1990 and 1998. This represents an average of 39.4 percent of their total loans and advances during the period. The analysis of the PMIs operations also indicate that loans to customers amounted to N5.987 billion within the period of 1992-2001 just as the number of operators rose to a peak of 280.

2.9.2  ACCESSIBILITY TO DECENT HOUSES

According to Ebie (2007); Real estate developer obtains loan through NHF contributions or secondary market transaction form FMBN for the development of housing estate. The houses are sold by PMIs designated by the development through a mortgage loan arrangement from FMBN and where funding is from NHF, such houses are sold to contributors only.

According to Olugbenga (2007); As at 2005, 30 housing estate of various sizes across the country are being financed by FMBN with HHF contributors through PMIs. As at July 2005, the total loans approved for both PMIs and estate developers, stood at N26.84 billion.

2.9.3  FUND MOBILIZATION TO APPLICANT

Sanusi (2003), observed that he national housing scheme recorded modest achievements as contributions to the scheme increase ot over N20.073 million in December, 1997.

As at the end of September, 2000 FMBN mobilized a total of N5.8 billion contributors to the NHF while contributors through 20 PMIs for the construction of houses.

2.9.4  REDUCTION IN THE RATE OF ABANDONED PROJECTS

Olugbenga (2007); Affirmed that one of the areas in which mortgage institutions have impacted housing development is reduction in he rate of abandoned projects through the supply of credits. A lot of projects in Nigeria have been abandoned as a result of lack of finance. Nigerian who have contributed to the scheme can borrow from these mortgage institutions and complete their houses.

2.9.5  REDUCTION IN THE RATE OF UNEMPLOYMENT

Olugbenga (2007); observed that increase in he provision of finance for building construction will lead to an increase in the employment of labour in the building sector and also will led to progress in the building and material industry as more building materials will e bought and used for the construction of building.

2.10   PROBLEMS OF MORTGAGE INSTITUTIONS IN NIGERIA

Some of the problems hindering the efficient credit delivery to the housing sector are:

2.10   INTEREST RATE AND LOAN VALUE (LTV) RATION

According to Olugbenga (2007); interest charge by PMIs ranged between 20% -40%, this is quite high for mortgage considering the low yield and long term nature of the underlying property. Low interest rates as well as high loan to value (LTV) are clear indicator of mortgage finance efficiency.

In the United States and United kingdom studies interest rates are as low as 4%, studies have reveled that only 25% of PMs charge less than 10% as interest on how ownership loan, 62% charge 10%-20% while 12% charge above 20%. For commercial property which is preferred type of loan by most PMIs, charge on the interest rate are about 40% (The guardian 2005). Most PMIs require as high as 40%-60% down payment before loan could be granted and balance are usually expected within 12 months, making housing a “cash and carry” commodity in the open market.

Table 1.1 and 1.2 demonstrate the importance of long terms interested on affordability of housing. The longer the term, the lower the repayment and the higher the affordability.

Table 1.1 Interest rate of 15% P.A. for N3million

Monthly 71,369 48,150 41,654.2 39,128 38,024.2 37,516
Rental 79 49 8 69 9 65
(princint)

 

Table 1.1 interest Rate of 10% P.A. for N3 million

Monthly 63,741 39,395 31,904.8 18,575 26,861 25,910
Rental 13 22 2 65 2 48
(princint)

Sources: Onibokun, (1990)

2.10.2                   LEVEL OF PARTICIPATION IN THE NIIF

The number boo contributors to the NHF has been relatively small compared with the national work force. Okonkwo vol. 3 (1999); observed that there are about 9 million workers who are yet to be registered and therefore not making any contributions. There are also alleged cases of diversion of workers contributions to the fund employers to other investment payment.

2.10.3                   MACROECONOMIC ENVIRONMENT

Sanusi (2003); observed that the high inflation rate negatively affected the macroeconomic environment. There is need to continue to keep the rate of inflation moderate, as high inflation rate and structural construction bottleneck in the economy do not encourage contribution towards the fund.

2.10.4                   NON VIBRANCY OF SOME PMIS

The loss of focus by some PMIs in favour of non core activities such as trading as well as the slow disbursement o National Housing Fund (NHF) to the PMls made some of them to b competing with banks in sourcing for funds for purpose of other mortgage financing, Onibokun (1990).

  • CUMBERSOME LEGAL REGULATORY

FRAMEWORK FOR LONG ACQUISITION

Olugbenga (2007); posit that, the existence of a cumbersome process of title documentation of land ownership which is reinforced by inadequate cadastral system takes mortgage financing very difficult. This has been seen as one of the factors responsible for slow disbursement of NHF.

2.10.6                   THE STRUCTURE OF BANK LIABILITIES

This is preponderantly shorts term, therefore, the deposited money bank tend to avoid fund mismatch, that is, borrowing short lending long, which is required in mortgage financing. The key to issue that energies therefore resolves around how to ensure adequate long term lending by financial institutions rather than the current short terms lending practice. This requires significant intermediation effort especially, since housing finance is very sensitive to inflationary environment, Sanusi (2003).

2.10.7                   UNDERCAPITALIZATION OF PMIS

The mortgage sub-sector, as an integral part of the building industry, is very capital intensive. Unfortunately, several PMIs in Nigeria are not adequately capitalized to carry out the function of mortgage financing, as a result of which they are unable to create substantial mortgage assets. At the end of June 2005, only 38 or 50.7 percent f the reporting 75 PMIs had met the statutory minimum paid up capital of N100 million.

2.10.8         INSUFFICIENT ACCESS TO LOW-COST LONG TERM FUND

According to (Oni, 207); mortgage financing involves extending loans to individual / groups for the acquisition of property, in return for with the beneficiaries make repayments to he mortgage financiers who retain ownership of such property until repayment is fully made such repayment covers both the principal and interest payment on the loans and is usually structured to run for upwards of 20 to 30 years. The paucity of consistently priced low-cost-long term fund, therefore, puts ceiling on the number of new mortgage that could be creamed, making it perhaps the most serious problem facing the sub sector.

2.10.9         LACK OF SKILLED HUMAN CAPITAL IN MORTGAGE INSTITUTION

The paucity of skilled human capital in mortgage institution reflect in the poor business philosophies, which in turn, results in the diversion of substantial learnable funds of PMIs to other sector of the economy. Most practitioner of mortgage institutions in Nigeria are exasperators of universal banks and related professionals who are not fully appreciative of the peculiarities and deliverables in the sub-sector.

2.11   OVERVIEW OF HOUSING FINANCE ARRANGEMENTS IN NIGERIA

Adeniyi (1996); Government policies aimed at providing affordable and comfortable housing for all Nigerians include the following

Credit Policies

In recognition of the importance of the housing sector, and considering that banks have ready access to cheap sources of funds through retail deposits as well as he infrastructure to process real estate loans efficiently and the sills to manage the risks involved he central bank of Nigeria has encouraged banks to support the development of the housing sector in Nigeria. In particular, the CBN has through its credit policies required the erstwhile commercial and merchant banks to allocate a stipulated minimum proportion of their credit to the housing / construction sector. In he 1979/80 fiscal year for instance, the minimum stipulated for banks was 5 percent of total loans and advances. The share was raised to 6 percent in 1980 and 13 percent in 1982.

Where banks failed to meet the stipulated target, such shortfalls were dedicated at source form the defaulting banks deposit with the CBN and passed on to the housing / construction sector through the federal mortgage bank of Nigeria. The financial sector was however liberalized in 1993. With the deregulation, the preferred status accorded to he housing and construction sector was discontinued.

  • AN APPRAISAL OF HOUSING / MORTGAGE FINANCING

IN NIGERIA

Okonkwo (1999); An appraisal of mortgage financing in Nigeria shows that these measures have produced some salutary impact on the housing sector. Available information reveal that about N1.065 billion was granted as a loans and advances by the insurance companies to the housing sector between 1990 and 1998. This represented an average of 39.4 percent of their total loans and advances during the period.

The analysis of the PMIs operations also indicate that loans to customers amounted to N5.987billion within the period 1992-2001, just as he number of operators rose steadily to a peak of 280 in 1995 before it declined.

Available information also reveals that the supply of credit by he federal mortgage bank of Nigeria is grossly inadequate to meet the growing demand with regard to cooperative societies and state/municipal governments, evidence seem to suggest increase in the level of funding although, there appears to be a kill in recent times owing to inadequate funds.

In terms of fund mobilization, the national housing scheme recorded modest achievements as contribution to the scheme increased to over N20.073 million by December 1997. As at end of September 2000, FMBN mobilized a total of N5.8billion form N1.8million contributors to the NHF while it granted N375million loans to 631 contributors through 20 PMIs for the construction of houses,

Overall, there is evidence of declining activities in housing finance generally, the average share of FDP invested in housing declined form 3.6 percent in the 1970s to less than 1.7 percent in the 1990s. In addition, between 1992 and 2001, the volume of savings and time deposit with he banks and non bank financial institution grew by 604.94 percent from N54billion to N385.2 billion. However, the proportion held by the housing finance institution declined form 1.4 percent to 0.22 percent in 1998, indicating a fall in the flow of fund into the housing finance sector.

A SURVEY OF THE EFFECT OF MORTGAGE INSTITUTIONS IN THE PROVISION OF AFFORDABLE AND SUSTAINABLE HOUSING IN NIGERIA

 

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