Tuesday 27 September 2011

THE NIGERIAN MORTGAGE BANKING SUB-SECTOR REFORMS: THE EXPECTATIONS

INTRODUCTION

For any developing economy like Nigeria, the need for Mortgage banking cannot be over stated.  Basically housing is a need by ma.  It is next to food on the Maslow hierarchy of needs.  This is the reason why governments around the world, including Nigeria from generation to generation has made housing a cardinal objective in its programmes.  In the past, in Nigeria, housing is a cardinal programme of the ruling National Party of Nigeria between 1979 and 1983.  In January 1992 a government housing policy tagged “Housing for All by the year 2000” was into being to strengthen the Federal Mortgage Bank o Nigeria as embodied in the National Housing Fund Decree of 1992.  This policy appeared in the National Housing Fund Decree of 1992.  This policy appeared not have gilded its desired positive result to date.  The National Housing Policy and Mortgage Institutions decree, No 53 of 1989 introduced to tiers in Mortgage financing.  The first tier has the Federal Mortgage Bank of Nigeria as the licensing and regulatory mortgage institution while the second tier consists of the Primary Mortgage Institution.  There was rapid increase in the number of mortgage institutions in the market but product development has been slow and there had not been positive impact on the masses generally.  This trend led us all in Nigeria, into the new millennium.
There were incidences of failure in the Nigeria mortgage banking and this led the Central Bank of Nigeria to assume the regulatory and Supervisory responsibility of mortgage banking in Nigeria.  As at December 2005, out of the  ninety (90) Primary Mortgage Institutions in operation, only forty three (43) were confirmed to have the current statutory minimum paid-up capital of N100 million and only fifteen (15) of the seventy 70 Primary Mortgage institutions (PMIs) met the prescribed minimum mortgage assets to total asset ratio of 30%.  This revealed the unsatisfactory performances of Mortgage banking subsector in their core mortgage operations.
In December 2006, the Central Bank of Nigeria which is the apex mortgage supervisory authority unveiled a 10 –point mortgage banking sector reform agenda.  The target of this reform agenda is the re-engineering of the services of the Primary Mortgage Institution and reposition it for sustainable economic growth and development this action is one of the many economic reform, programmes in Nigeria.
This paper will look into the activities of the Federal Mortgage Bank of Nigeria and Primary Mortgage Institutions in Nigeria, the National Housing Fund and its purposes, the prospects and expectations of the CBN’s Mortgage reform and offer some recommendations.
General Overview of Mortgage Banking, Housing Finance and Mortgage Finance.
Housing refers to shelter, infrastructural facilities (e.g. water, electricity) and social utilities (schools and hospitals).  Housing is both a process and a product as well as an asset and a service.  Housing finance refers to the activities of both private and public sector in providing financial resources for the purchase, construction, improvement or renovation of a housing unit and the immediate infrastructures.  The purchase and development of land and the provision of rental finance and instruction input are part of what could be regarded as and construction input are part of what could be regarded as housing finance 
Financial institutions are firms that supply financial services to the economic community by filling the diversed need of both ultimate borrowers and ultimate lenders. As intermediaries, financial institutions facilitate the low of funds between both surplus and deficit units.  Financial institutions, depending upon their nature, perform commercial banking, merchant banking, and development banking including mortgage banking.                                                                 
Mortgage banking is the mobilization of financial resources from surplus unit in the economy for financing housing participate in mortgage banking, only mortgage finance intermediaries (mortgage banks or mortgage institutions) specialize in mortgage asset creation.  The provide loans to mortgagers while the mortgagers give mortgages (usually legal mortgages) to the primary mortgage banks.
Historical
Mortgage institutions are bodies/organizations allowed to collect saving and deposits for creating mortgage assets.  By any definition they are banks, Mortgage institutions include savings and loans companies, building societies and others, which specialize in financial intermediation for housing development.
According to Osamwonyi (1993), the act of arranging and packaging mortgages could be regarded as mortgage.  The range of  property used as collateral here goes beyond land.  The loan can be used for anything on earth as opposed to housing finance, which is focused on housing acquisition.  Today, mortgage finance as a major area of banking specialization now refers to arranging and packaging of mortgages collateralised by real estate and the loan employed for real estate acquisition.
Access to Mortgage loans today, worldwide, is essentially through specialised financial intermediaries knows as mortgage institutions.  However, mortgage loans are:
(a)  For long period.  This is due to the life span of the asset and the need to relate payment to the age of borrower;
(b)   Secured by immovable legible assets;
(c)  Require proper and registered title deeds
(d)   Usually – have annuity – type repayment schedule and the loan value, usually, does not cover full price of the asset to be acquired;
(e)   The sum borrowered is large – many times annual income of the mortgager.

Development of Mortgage Banking in Nigeria

Formal mortgage market was introduced in Nigeria with the establishment of the Nigerian Building Society (NBS) in 1956 with a share capital of N2.25 million.  Then, it was a joint venture between the Capital Development Corporation, the Nigerian Government and the former Eastern Region.  Because of the significant contributions of the Nigerian Building Society (NBS) the government was dissatisfied land decided to establish the Federal Mortgage Bank of Nigeria (FMBN) by Decree 7 of 1977 with N20 million initial capitals and N150 million capital by 1980. The FMBN assumed the asses and liabilities of the NBS.
In 1993, the FMBN was reconstituted to give birth to two separate institutions which were: (a) The Federal Mortgage Bank of Nigeria and the Federal Mortgage Finance Limited (FMF Ltd.) The National Housing Policy and Mortgage Institutions Decree No 53 1989 restructured the Nigerian Mortgage market.  This divided the Nigerian mortgage market into two-tiers:  (1) The FMBN as the apex (licensing and supervisory) mortgage bank and (2) Primary Mortgage Institutions (PMIs).  Under the decree, the PMIs are allowed to collect savings, deposits, money market funds, pension funds, insurance funds, capital market funds, and national housing funds.  The number of the PMIs in the Nigeria increased rapidly but the development is slow.  As at December 2005 there were ab out ninety (90) PMIs in operation.
The focus of the first generation of the primary mortgage banking institutions was the traditional products of the FMBN namely popular savings, target savings, term savings and children savings.  The second generation PMIs were influenced by the direction of mainstream banking as well as competition introduced by insurance and treasury tinked products.  The third generation now focuses on the implementation of the securitisation of mortgage, which is the final linkage with the capital market.
The National Housing Fund was established by the National Housing Fund Decree No. 3 of 1992.  The main objective of the fund was to facilitate the mobilization of financial resources from different sources for the provision of houses for Nigerian, (especially low income earners) at affordable costs.  The management of the fund is vested in the FMBN.  The fund sourced its fund from the mainstream banks, insurance companies, Nigerian income earners – (2.5% of basic salaries of N3,000 and above), and budgetary allocation by the Federal Government.  The proceeds of the fund were to be channeled by FMBN to the PMIs to finance individual efforts in house ownership.
As at December 2005 the aggregate shareholders’ fund in the Nigerian Mortgage banking sub-sector stood at N18.1 billion while total deposit liabilities and loans and advances were N47.5 billion and N28.5 billion respectively.  A total of 5,250 mortgage loans were originated through the PMIs and 11,216 housing units were financed through estate developers with a combined disbursement of N13.2 billion or 69% of N19 billion mobilized under the National Housing Fund (NHF).
In spite of the above, it was through various returns filed by the PMIs that the performance of the Nigerian Mortgage banking in their area of core mortgage banking operations.  For instance as at 31st December 2005 only 15 out of the 70 PMIs met the prescribed minimum mortgage assets to total asset ratio of 30 per cent.  These called for the need to re-engineer the services of the PMIs and reposition the mortgage-banking sector for the sustainable economic growth and development of Nigeria.  According to the Central Bank of Nigeria (CBN) this could be achieved through its 10 – point mortgage reform agenda.
The Mortgage Banking Sector Reform Agenda of the Central Bank of Nigeria (CBN)          
The existence of a wide gap between the current level of performance of the PMIs and the original mandate of the PMIs prompted the CBN’s mortgage reform agenda.  According to Prof. Charles Soludo the Governor of the Central Bank of Nigeria.  The level of capitalisation, scope of operations and volume of core mortgage activities as well as the capacity of the management and staff has remained low.  This and other factors made the central Bank of Nigeria to come up with its 10 – point. 
Mortgage Banking sector reform agenda in December 2005.  Items on the reform agenda include: 
(1)       Phased Recapitalisation of the Primary Mortgage Institutions (PMIs) between January 2007 and December 2010 with emphasis on the actual injection of fresh funds to provide the needed liquidity for the sub-sector.
(2)       The promotion of professionalism in PMI operation – through the institution of professional training and certification process for the executive management tean and loan/mortgage officers.

(3)       The encouragement of merger and acquisition in the sub-sector and the enforcement of good governance in the sub-sector.
(4)       The evolvement of a level-playing field for all operators especially by mobilizing requisite resources suitable for commitment into mortgages such pension fund management.
(5)       The restructuring of Federal Mortgage Bank of Nigeria (FMBN) to improve its credit appraisal and disbursement mechanism and procedures.
(6)       Encouraging adequates capitalized and repositioned FMIs to package their developer – clients for the purpose of accessing the estate development loan of FMBN.
(7)       Drastic overhauling of the administration of the National Housing Fund in the realms of registration, mobilization and disbursement as well as transforming it to a trust.
(8)       To broady define mortgage business to include areas like tourism, hospitality
business, Furnitures and fittings, construction, estate management and development, consumer lending.
(9)       Establishment of Secondary Mortgage Companies (SMG) to promote secondary   mortgage market facilities for residential mortgage loans.
(10)     Promoting of mortgage insurance as public-private partnership ventures as a financial risk coverage/miligation to the owners of mortgage loans.
Strategies for Accomplishing the Mortgage Banking Reform  
The reform in housing finance activities is expected to be midwife, on the following flat Forms in order to achieve the targets and objectives of the reform agenda:
(a)  Enhancement of housing finance process to meet the challenges of funding the housing deficit gap, particular to the low-income group in Nigeria.
(b)  Strategically repositioning and strengthening the PMIs as a vehicle for housing and home ownership delivery in consonance with the dictates of the National Housing Policy and mortgage business.
(c)  Promoting rural housing programme through market support incentives for asset colleterisation through mortgage origination to make finance available for the development of micro, small and medium enterprises.
(d)  Promoting the development of efficient secondary mortgage market by solidifying the capital base of mortgage market by strengthening the capital base of the mortgage originating institution. 
POLICY IMPLICATIONS OF THE MORTGAGE BANKING REFORM AGENDA
Generally, economic reforms are fundamental to the re-establishment of growth and development of the economy. All over the world, economic systems are moving towards the use of markets for resource allocation. Nigeria cannot afford to be an reception in this regard. The Nigerian government is currently embracing the spirit of the economic reforms in setting the economy on the path of growth and development. Financial sector reform is a subset of the financial sector reform. They all aim at the growth and development of the Nigeria economy through consequential increase in the per capital income and the Gross Domestic Product.
Specially, the implementation of the items on the mortgage banking reform agenda has the following implications and expectations.
(1)  The restructuring Recapitalisation of the primary mortgage institutions (PMIs) through increase in the minimum paid-up capital up to the tune of N2 billion or more.
(2)  Stock absorber whenever there is any financial turbulence. The enhanced financial base of the PMIs and the adequate level of the needed liquidity will ensure this.
(3)  Improved and articulate credit management systems in the mortgage banking sub-sector.
(4)  Reflection of professionalism in mortgage banking operations and the management of the sub-sector. 
(5)  Improved mortgage banking techniques in the face of the keen competition in the mortgage banking subsector. This is essential for survival.
(6)  Complete overhaul of the administration of the National Housing Fund.
(7)  Transformation of the National Housing Fund to a trust.
(8)  Evolution of new corporate bodies known as secondary mortgage companies charged with the following responsibilities.
(a)  Purchase of pools of residential mortgage loans from the primary market lending institutions and holding the loans in its portfolio;
(b)  Packaging of the mortgage loans from its portfolio or from originators and structure than into mortgage backed securities for sale to investors in the capital market. 
(6)      Increase in the activities of the Nigeria Capital Market due to he introduction of the secondary mortgage companies that are to sell mortgage back securities to investors.
(7)      A good blend of the National Housing Fund (NHF) with mortgage securitisation.
(8)      An enhance of mortgage insurance with adequate risk coverage to owners of mortgage loans.
(9)      Introduction of the concept of good corporate governance into mortgage banking which states the effective procedures by which mortgage institutions are directed and controlled for good decision making, corporate business, transparency and accountability.
(10)   Greater access to estate development loans of the federal Mortgage Bank of Nigeria.
(11)   An expanded scope of mortgage business/activities to include new areas like tourism, hospitality business estate management and development etc.
(12)   Improvement in the standard of living of Nigeria especially the low-income earners, through the easy ability to own houses.
(13)   An enhanced rural housing programme.
(14)   Reduction of stiff challenges focused by mortgage institutions from commercial banks.


CONCLUSION AND RECOMMENDATIONS

            The target of the Nigerian Mortgage Banking reform which is the re-engineering of the services of the primary mortgage institution and repositioning it for sustainable economic growth and development is greatly achievable if the items on the reform agenda are followed religiously. The intention to recapitalise the primary mortgage institutions (PMIs) and introduce the secondary mortgage companies (SMCs) is laudable and welcome development. The promotion of professionalism and good corporate governance in mortgage banking will raise the capacity of the management and staff operating in the subsector and also bring about good relationship between managers, shareholders and stakeholders of the institutions. Apart from establishing the structure through which the mortgage institutions will set out and achieve their objectives, the mean of controlling and monitoring performances for results will also be determined.
            The Nigeria mortgage banking sector will have it good and will face the challenges of funding the housing gap with the implementation of the mortgage reform agenda. A re-engineered mortgage banking sub-sector will contribute in no small measure to sustainable economic growth and development in Nigeria. The based on the discussions in this paper, the following recommendations are hereby made:
1.            The operators and all stakeholders in the mortgage banking sub-sector should all embrace the mortgage reform agenda of the Central Bank.
2.            The operations of the National Housing fund (NHF) should be reviewed in order to solve its problems and to conform with the dictates of the new National Housing Policy and the mortgage banking reforms.
3.            The Central Bank of Nigeria through the pilot of the reform programme, the CBN’s other financial institution Department (OFID), should brace up in its regulatory and supervisory responsibility towards mortgage banking.
4.            The secondary mortgage companies to be introduced should be well structured toward efficient performances and services.
5.            mortgage bankers should continue, in all ways, to make themselves relevant to economic realities in Nigeria by contributing meaningfully to the rejuvenation of the Nigerian economy.
6.            Mortgage institution covered by the reform programme should endeavour to invest in modern technology for effective and efficient mortgage services.



BIBLIOGRAPHY

Nwankwo, G.O. (1987):      The Nigerian Financial System, London Macmillan Publishers Ltd.
Ekundayo, J.O. (1996):      Practice and the Nigerian Economy: The way forward. The Nigerian Banker (Charter Institute of Bankers of Nigeria) Jan. – June 1996 Page 7-14
Osamwonyi, I.O (1993):     Mortgage Banking. The Challenges. The Nigeria Banker (Chartered Institute of Bankers of Nigeria). Jan. –Mar. 1993, Page. 6-12
Uchendu, O.A. (1996):       An overview of the financial sector. Reform programmes in Nigeria, The Nigerian Banker (chartered institute of Bankers of Nigeria. Jan. – June 1996 Page 15-16
Uwaegbulam, C. (20060: CBN unfolds 10-point mortgage Reform Agenda, The Guardian, Lagos Nigeria 2 December 2006 Page 41-42.


BEING A PAPER PRESENTED AT THE 3RD NATIONAL CONFERENCE OF THE SCHOOL OF BUSINESS STUDIES THE FEDERAL POLYTECHNIC, ADO-EKITI, HELD BETWEEN 25TH AND 27TH SEPTEMBER, 2007.