Financial System Strategy 2020 (FSS2020) REALIZING THE POTENTIAL OF MORTGAGE FINANCE IN NIGERIA SULEIMAN BARAU DEPUTY GOVERNOR, CENTRAL BANK OF NIGERIA AND CORDINATOR FSS2020 WORLD BANK GLOBAL HOUSING FINANCE CONFERENCE WASHINGTON, DC, May 26-27, 2010 1
OUTLINE Introduction Financial Crisis Nigeria s Mortgage Sector FSS2020 Mortgage Strategy Conclusions 2
INTRODUCTION Housing is a major challenge in every urbanising society Today, Nigeria s housing deficit is at around 17 million units Population of about 150 million is growing at close to 3% p.a. with an urbanisation rate of 48% Years of neglect and inaction in the sector have opened a financing gap in Nigeria s housing sector in excess of $340 billion Going forward, Nigeria has taken the challenge of housing as one of the key planks of the Vision 20:2020 programme Housing (mortgage) finance is also a major sector of attention in the (FSS 2020) initiative Part of the FSS 2020 mortgage sector objective is to create conducive (regulatory) environment for housing finance in which the private and public sectors are equally active. 3
FINANCIAL CRISIS: IMPACT ON NIGERIA First Phase: Macro-Economic Instability(2008-early 2009) Triggered by fall in commodity prices, particularly oil - (not mortgage finance, unlike the US) Decline in capital inflows (withdrawal of credit lines from banks) and capital flight NSE All Share Index dropped 68% from 2008 peak Unprecedented liquidity challenge, met by CBN s Expanded Discount Window ($1.3bn) Second Phase: Spillover into Banking Industry Stress (2009) In mid-august 2009, CBN injected $2.7billion in the form of Tier 2 capital into five banks (Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank) Executive Management of the five banks were removed In October 2009, CBN injected additional $1.3billion in long term loans into four additional banks; a fifth bank was given till June 30, 2010 to recapitalize Executive Management of 3 of the 4 affected banks were removed The banks problem arose largely out of poor corporate governance and risk management practices and lax lending practices related especially to the domestic equity market and the down-stream oil sector To facilitate improvement in banking sector liquidity and reduction of debt overhang, the CBN sponsored the establishment of Asset Management Company, which was created by a Parliamentary Act approved in May 2010.
FINANCIAL CRISIS: POLICY RESPONSE Nigeria s banking reform program is being implemented under four streams: Enhancing the quality of banks Remedial Programs Risk-based supervision Regulations and regulatory framework reforms Consumer Protection CBN internal reforms Strengthening Financial Stability Asset Management Corporation of Nigeria (AMCON) Introduction of macro-prudential surveillance Enabling healthy financial sector evolution Shift from Universal Banking model to Specialized Banking model Actively support the development and deployment of robust and scalable infrastructure Ensuring financial sector contribution to real economy
NIGERIA S MORTGAGE FINANCE OVERVIEW Mortgage finance is not yet a significant macro-financial factor Mortgage finance plays a marginal role in Nigeria s financial system and housing market Outstanding mortgage loans are 0.5% (2005) of GDP o Compared to 77% US, 80% UK, 50% Hong Kong, 33% Malaysia Only 0.1% of potential homeowners have a mortgage o Home ownership in Nigeria only 10% (60% China, 54% Korea) o 95% of homeowners do not have a mortgage Primary market players Primary Mortgage Institutions (Building Societies) Commercial Banks Federal Mortgage Bank of Nigeria with National Housing Fund Private developers Cooperatives sponsored by corporate entities No secondary mortgage market 6
NIGERIA S MORTGAGE INDUSTRY CHALLENGES Absence of clear property and security rights Mandatory State Governor s consent for any land transaction Inefficient Land Management System Lengthy, rigid and ineffective foreclosure procedures High Cost Associated with Property Transactions Scarcity of Cheap Long Term Funding Inefficient Structure of Housing Delivery Source: FSS2020 Mortgage Sector Report 7
FSS 2020 STRATEGY Aspiration Strategy Financial Sector as Catalyst & IFC Evolution To Be among the top 20 economies by 2020 Strengthen Domestic Financial Provide Enabling Markets To Be Environment & The Safest & Infrastructure Establish Fastest Growing Enhance Integration Financial Financial with External System as System Financial Markets Growth amongst Develop Catalyst Emerging Financial Sector Economies Build International & Engineer Int l Financial Center Financial Center FSS2020 Strategy: Develop Financial Sector & Engineer Nigeria s Evolution into IFC Credit SME Finance Mortgage Capital Markets Insurance Money & ForEx Human Capital ICT Infrastructure Payment Systems Legal Reforms Central Banking Regulatory Reforms Drivers Enablers 8 8
FSS2020:THE JOURNEY SO FAR I M P L E M E N T A T I O N D I A G N O S T I C S FSS 2020 Implementation Committees SUBMISSION OF THE BLUEPRINT AND ELEVEN SECTOR REPORTS INDUSTRY WIDE STRATEGY SESSION FOCUS GROUP SESSIONS TECHNICAL COMMITTEE/PMO OFFICE TAKE OFF STUDY TOUR TO WASHINGTON INTERNATIONAL CONFERENCE STUDY TOUR TO DUBAI PRESIDENTIAL APPROVAL OF FSS2020 9 MSME FIN MKT 5 5 INSURANCE MORTGAGE 10 8 2006 2007 2008 2009 LEGAL Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 8 Implementatio n Committee Sessions
FSS2020 STRATEGY BACKGROUND The Financial System Strategy (FSS)2020 is an initiative of the Federal Government of Nigeria aimed at developing a coherent blueprint to develop Nigeria s financial system to help achieve its vision to be one of the top 20 largest economies in the world by the year 2020 and a major international financial centre. The FSS 2020 Strategy is fully synchronized and integrated with the ongoing V20-2020 economic reforms and the Seven-Point Agenda of the Federal Government of Nigeria. 10
FSS2020 STRATEGY RATIONALE Need to sustain macroeconomic Stability Deepen the Banking/Financial System Evolve appropriate regulations and laws to power the new economy Funding of infrastructure: power, roads, telecom etc Challenge of continuing fight against corruption Addressing the shortage of qualified and experienced manpower Enhancing corporate governance regime across the financial system
FSS 2020 ARCHITECTURE FSS 2020 has a Presidential Steering Committee which sets and approves policy for the initiatives. It is populated by heads of all regulatory agencies in the financial system and representatives of critical stakeholder groups The FSS 2020 Secretariat handles the day to day coordinating activities of the project and reports to the Coordinator Sectors have been identified as Drivers and Enablers Diagnostic studies were carried out on a thematic basis by over 170 Nigerian and international professionals from over 140 institutions Implementation Committees have been set up to help focus actions and outcomes Development partners have been engaged to source for valuable technical assistance and funding Enacting institutions are charged with the implementation of their work plans (about 390 specific initiatives).
FSS2020 MORTGAGE SECTOR VISION VISION By the year 2020 Nigeria would have developed: CHANGE IMPLICATIONS A mortgage market that is safe and profitable. A market that would have provided access to housing finance to over 30% of Nigerians in all social classes in urban centres to own their own houses; A market that has multiple long-term funding sources including full integration with the Nigerian capital market where the value of listed mortgage backed securities will be at 20% of the market capitalization of equities; A market that would account for about 15% of the gross domestic product of the country, stimulating construction activities with attendant multipliers and providing up to 10% of the population with jobs. 13 Access to housing finance should grow from present level of 0.5% to 30% over the next ten years. Capital Market products for the finance of the mortgage sector including mortgage backed securities should grow from the present zero percent to 20% over the next ten years. The contribution of mortgage finance to the gross domestic product of Nigeria to grow from 0.76% to 15% in the next ten years
FSS2020 MORTGAGE REFORM DIRECTIONS Strong emphasis on business environment Legal framework and involvement of real estate professionals Strengthen role of Primary Mortgage Institutions as asset originators In line with new emphasis on specialized banking functions away from universal banking Creating vibrant secondary market Mortgage Refinance Liquidity Vehicle Building on ongoing FSS2020 Capital Markets reforms Repositioning Federal Mortgage Bank of Nigeria Greater emphasis on regulatory activities 14
1 2 3 4 To introduce a new framework to strengthen property/security rights To establish a safe and profitable mortgage market by setting up appropriate infrastructure/institutions/processes 15 Use existing mortgage market mechanisms to make affordable long term finance available to all classes of Nigerians to own their homes and build wealth. LEGEND: Business Environment Issues Core Mortgage Finance Issue Enhance use of market mechanisms to improve housing delivery system INSTITUTIONAL DEVELOPMENT To reposition State Housing Corporations To make land transactions cheaper, To restructure Federal Mortgage Bank of Government strategy for infrastructure quicker and easier Nigeria development and financial support To restructure Federal Housing Authority To computerize land registries To redesign National Housing Fund To strengthen collective representation of To create efficient registries for To recapitalize and refocus Primary To organize and monitor housing real estate developers mortgage assets Mortgage Institutions delivery system To establish Commercial Courts To ensure private sector has adequate incentives to participate in mortgage markets To create Alternative Dispute Resolution mechanisms To modernize building permit procedures and improve building codes and quality of construction materials FSS2020 MORTGAGE FINANCE OBJECTIVES To review foreclosure procedures under current Law To create framework for urban renewal and slum upgrade MARKET DEVELOPMENT LEGAL/REGULATORY DEVELOPMENT Enactment of Securitization and Power of Sales Bill CBN to regulate mortgage products (underwriting limits and business conduct/consumer protection) CBN to assign lower CAR requirement to mortgage assets PENCOM to allow pension funds to increase their asset allocation to mortgages through intermediaries To prepare new capital regime for Primary Mortgage Institutions To establish legal and regulatory framework for Nigeria Mortgage Refinance Company To expand mortgage financing to nonsalaried informal sector To develop new products to address housing needs of low income rural population Rental Market Development To create mortgage insurance products
VALUE OF THE FSS2020 STRATEGY PROCESS (1) To vitalize mortgage finance Nigeria needs to overcome complex multi-sectoral challenges Rooted in institutional legacies and real economy inefficiencies Land Use Act under Nigerian Constitution Ineffective land acquisition and housing delivery systems Coordination issues between real estate development and use of government incentives Enhanced by shallowness of mortgage finance market Weaknesses in both asset acquisition and refinancing Addressed through parallel FSS2020 Capital Markets and Legal work The FSS2020 multi-stakeholder strategy and implementation planning process proved essential to tackle these interrelated issues 16
VALUE OF THE FSS2020 STRATEGY PROCESS (2) In addition to core mortgage finance issues, we placed considerable importance on business environment recommendations that are key to sustainable mortgage finance development Partnership with Real Estate Developers Association Set up building certifications and simplify building permit approval process Modernize National Building Code for quality control Develop and promote use of indigenous building materials Partnership between States and Surveyor General to facilitate easy plot allocation, registration and administration Introduce Alternative Dispute Resolutions mechanisms enforceable in courts.. 17
CONCLUSION Nigeria has a housing crisis but of a different kind Nigeria has a massive housing deficit (12-16 million units) Nigeria has a new mortgage sector policy orientation with market based incentives and solutions. The capital market with appropriate securitization and price discovery mechanism, which can be used to exploit this potential, is already in existence in Nigeria The Capital Market is one of the key sectors undergoing further reforms under the FSS 2020 programme 18