Mortgage Industry vs Informal Sector – Relationship or Crisis?

Mortgage Industry vs Informal Sector - Relationship or Crisis

While the reported losses and foreclosure rate increases due to the coronavirus pandemic are alarming in and of themselves, they are relative figures that, when presented as stand-alone information, may cause one to form unbalanced conclusions. The truth is that there is a fair share of development involved. Much of the media frenzy surrounding the climate of the housing market is more about the mortgage and the informal sector.

Because of the inherent risks involved with lending and also given the significant impact of coronavirus pandemic on the global economy, the mortgage industry in Nigeria needs the informal sector of the economy for it to walk out of an impending downturn that may severely affect its growth.

The aggressive push for market share by lenders who are no longer satisfied with profits from traditional, conforming loans has created an entire industry that needs the intervention of the informal sector. The informal sector has the numbers to provide a market that can sustain the needs of the mortgage industry. Still, the mortgage operators would need to be creative and innovative in their consumer products offerings.

In Nigeria, for instance, there are ongoing talks on the possibility of including the informal sector, with its estimated N81.048 trillion annual income, in a new housing fund that could be created and added to the existing Pension Commission’s (PenCom). The purpose is to narrow down the housing affordability gap.

This, however, has to happen concurrently with dropping of mortgage interest rate to a single digit of 8- 9 per cent, down from the current 18-22 per cent commercial rate which operators charge on mortgage loans. It is expected that the inclusion of the informal sector operators who constitute 67.54 million of Nigeria’s 81.15 million work-force in the pension scheme will lead to increased housing affordability.

There is a trickle-down effect involved with the bust of this market, but the outcomes are not of the pandemic nature that many predictions imply. An alliance of the two industries is the solution. If you don't know this fact, sensationalism alone can cause you to lose sleep.

Low capital base, together with the current economic conditions, has impacted the operations of these banks that a good number of them are unable to meet their contractual and statutory responsibilities to their clients and regulators.

However, operators and constructors alike are not resting. They are building blocks and putting measures in place to engender the growth of the sector to increase access and affordability and, by extension, enlarge the number of homeowners in the country.

Because mortgage is a sub-sector of the economy, operators are saying that since the broader economy is not doing well, what is happening to them is not unexpected. Ayodele Olowookere, CEO, Imperial Mortgage Bank, has said, “We know what happened to oil price and the foreign exchange market. These have affected everything in the economy. In the case of oil, both the volume and the price went down. All these affected consumer purchasing power. Don’tDon’t forget that the balance sheet of the mortgage banks were not strong ab initio.”

Vice-chair/ CEO, Fine and Country West Africa, Udo Okonjo, agrees, emphasizing that the real core factor responsible for the slow growth in this sector is that the banks and the mortgage institutions don’t have long term funds; all they have are short term deposits.

Technically speaking, Nigeria has no mortgage system and Okonjo reasons that the country doesn’t have a real estate sector. “What we are doing is just scratching the surface. If we want to create wealth through real estate, which is one of the major ways the developed world creates wealth, then we have to develop and grow the mortgage sector,” she emphasized.

But the operators are not discouraged. “We are here to stay and grow this sector,” Olowookere assures, adding, “We are looking at the best way to do things, especially in credit management and evaluation. We are looking at the informal sector.”

There is a trickle-down effect involved with the bust of this market, but the outcomes are not of the pandemic nature that many predictions imply. An alliance of the two industries is the solution. If you don’t know this fact, sensationalism alone can cause you to lose sleep.

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