A FEASIBILITY STUDY ON THE ESTABLISHMENT OF A SECONDARY

MORTGAGE INSTITUTION IN NIGERIA

Final Report

Submitted to

The Company for Habitat and Housing in Africa (Shelter-Afrique)

By

P licygnosis International

Policy & Financial Advisory

USA

[3322 Secretariat Way, Glenwood, MD 21738, USA]

July 2011

i

TABLE OF CONTENTS

Table of Contents i

Introduction iii

Executive Summary iv

I BACKGROUND 1

1.1 Preview of the Nigerian Economy and the Housing Sector 1

1.2 Economic and Political Setting for Housing Finance 2

1.3 The Nigerian Housing Sector Relative to Some Other Countries 3

II HOUSING MARKET ANALYSIS (NIGERIA) 4

2.1 Housing Demand and Supply Estimates 4

2.2 Housing Development Efforts of the Government 5

2.3 Land Ownership and Registration 6

2.4 Players in the Nigerian Housing Market 7

2.5 Attitude of Nigerians towards taking Mortgages/Loans for Housing 11

2.6 Mortgage Loan Default and Foreclosure Laws 11

III SECONDARY MORTGAGE INSTITUTIONS IN SELECTED COUNTRIES 12

3.1 United States of America 12

3.2 India: Review of Secondary Mortgage Institution in India 15

3.3 Egypt: The Egyptian Company for Mortgage Refinancing 19

3.4 Malaysia: The National Mortgage Corporation, CAGAMAS BERHAD 21

3.5 Nigeria: Review of Secondary Mortgage Institution –

Federal Mortgage Bank of Nigeria 23

IV LEGAL AND INSTITUTIONAL ISSUES FOR OPERATING A SECONDARY

MORTGAGE INSTITUTION IN NIGERIA 27

4.1 Legal and Institutional Issues on Nigeria 27

4.2 The Role of Money and Capital Market Regulators in Nigeria 29

4.3 Protocol of Agreement between Shelter-Afrique and Nigeria 29

4.4 Institutional Issues: Shelter-Afrique 31

V. POSSIBLE SOURCES OF FUNDING FOR A SECONDARY

MORTGAGE INSTITUTION IN NIGERIA 36

5.1 African Development Bank 36

5.2 International Finance Corporation (IFC) 36

5.3 African Export-Import Bank (Afreximbank) 37

5.4 The Export-Import Bank of China 37

5.5 Central Bank of Nigeria (CBN) 37

5.6 Nigeria Sovereign Wealth Fund 38

VI THE PROPOSED OPERATING MODEL 39

6.1 Strategic Objective 39

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6.2 The Operating Philosophy 39

6.3 Operating Strategy 39

6.4 Location 40

6.5 Product and Services 41

6.6 Currency of Operations/Risk Management 41

6.7 Fund Mobilization Currency 42

6.8 Tenure of Lending 42

6.9 Partner Institutions (Lending) 42

6.10 Partner Institutions (Fund Mobilization) 42

6.11 Risk Management 43

6.12 Organizational Structure 43

6.13 Human Resources 43

6.14 Compensation 44

VII FINANCIAL PROJECTIONS 45

7.1 Estimated Project Cost 45

7.2 Detailed Project Cost 45

VIII. PROPOSED FUNDING FOR THE OPERATION 50

8.1 Profit and Loss Statement 50

8.2 Analysis of the Funding Scenarios 51

8.3 Viability of the Scenarios 52

8.4 Recommended Scope of Operation 53

8.5 Risks 53

8.6 Conclusion 53

8.7 Actions for Implementation 54

8.8 Plan of Action for Implementation 54

REFERENCES 56

ANNEXES 57

iii

INTRODUCTION

Preamble

On 17th

December 2010, The Company for Habitat and Housing in Africa (Shelter-Afrique)

engaged Policygnosis to undertake a feasibility study on the establishment of a secondary

Mortgage institution in Nigeria.

Scope of Work

The terms of reference for the study are as follows:

1. Undertake housing sector review and bring together some of the policy lessons

learnt in the creation of mortgage liquidities facilities around the world and in

Africa in particular e.g. Egypt experience;

2. Advise on the technical and financial capacity and viability of such a facility

in Shelter-Afrique;

3. Advise on the level of investments, financial and professional expertise

Shelter-Afrique would commit to make the facility operational;

4. Assist to identify potential financing pipeline for the facility for consideration;

5. Design and develop the structure of the facility including capital requirements,

management requirements, investment strategies, expected returns and

associated costs;

6. Prepare and present detailed report on the establishment of a Secondary

Mortgage Institution (SMI) in the country (Nigeria).

Methodology

The methodology adopted involves the review of existing reports, articles, documents and

publications on housing finance. Also, evaluation and survey tools such as semi-structured

questionnaire and key informant interviews (KIIs) were employed, to collect data.

Project Team

The project was prepared by Policygnosis International, USA and the project team included,

Chidozie Emenuga (Project Coordinator), Dan Okenu, Uka Ezenwe, Neo Modisi, Patience Egbo,

Simon Ojonye and other staff of Policygnosis International.

iv

Executive Summary: Final Report

Background

The findings from the study have shown that Nigeria is under-housed. While investment in

housing accounts for 15% to 35% of aggregate investment worldwide, it is only 0.4% in Nigeria.

Meanwhile at about 5.3% annual growth rate, urbanization in Nigeria is one of the highest in the

world. The consequence is that there are 14-16 million units of housing deficit in Nigeria.

Outstanding mortgage loans stood at 0.5% of GDP (2005) compared to 77% in US, 80% in UK,

50% in Hong Kong and 33% in Malaysia (World Bank, 2008).

In Nigeria housing conditions are poor due largely to poor housing finance, poor access to land,

absence of residential infrastructures, weak institutions and regulations, and high cost of building

materials and other housing related expenses.

Mortgage Financing

Primary Mortgage financing and housing development in Nigeria are being provided by three

major classes of investors, namely, Primary Mortgage Institutions (PMIs), Real Estate

Developers and State Housing Corporations. Secondary Mortgage financing in Nigeria is only

being provided by the Federal Mortgage Bank of Nigeria (FMBN) whose supply of funds is

highly insufficient to meet the demand.

From the review of secondary mortgage financing in the United States of America, India,

Malaysia and the recent experience of Egypt, successful secondary mortgage market is often

rooted on support from the public sector or public sector-backed institutions. Thus, initiating a

secondary mortgage market in Nigeria by Shelter-Afrique, a development finance institution, is

in line with historical precedents.

Housing Finance Deficit

Nigeria‟s development strategy, Vision 2020 targets a construction of 10,398,650 housing units

from 2012 to 2020 which amounts to 1,155,406 housing units per annum. At an average cost of

about US$50,000 per house, the annual required investment in housing amounts to about

US$57.8 billion. Meanwhile the current funding from housing financiers is not more than US$2

billion per year, still leaving a funding gap of over US$55 billion per annum.

The New National Housing Policy specifically provides for an annual target of 1,000 housing

units per annum by each state government. This requires an annual investment of at least US$50

million by each State government. For the 36 state governments, the investment sums up to

about US$1.8 billion per annum and the State Housing Corporations are seeking opportunities

for a secondary mortgage lender to support them. Borrowing by State Housing Corporations is

often backed by sovereign guarantees.

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The funding gap of about US$55 billion per annum over the next nine years is not expected to be

met from own funds of any mortgage institution. The success of secondary mortgage institutions

in USA, India, Malaysia, and Egypt has been due to the ability of the institutions to leverage

external financing, thus the ability to leverage large external financing will be a key success

factor in the Nigerian secondary mortgage industry.

Risk of Mortgage Finance in Nigeria

Risk of default in the Nigerian mortgage market is very low as Nigerians place high premium on

owning their homes and protecting investments in homes is as one of their top priorities.

Moreover, beneficiaries of housing finance loans are either employees who often borrow less

than half of the value of the property and repay the loans through direct deductions from their

salaries; housing developers who borrow short-term to develop and sell; or State housing

corporations whose borrowings are backed by government guarantee. From our consultations,

State Governments in Nigeria are willing to provide sovereign guarantees (to be backed by the

Federal Government) for borrowings by their housing corporations from any secondary

mortgage lender.

Authorization to Operate in Nigeria

A review of the constitutive documents of Shelter-Afrique shows that the company has the legal

mandate to house an SMI facility in Nigeria. Apart from Shelter-Afrique and the Federal

Mortgage Bank of Nigeria, we are not aware of any other institution that has the legal mandate to

operate as an SMI in Nigeria. Neither is there any provision that permits a company to be

incorporated to operate as an SMI. It therefore appears that for any new entrant other than

Shelter-Afrique to directly operate in the Nigerian secondary mortgage market, a new legislation

will be required to give legal backing to the company. A fresh company, incorporated by Shelter-

Afrique and other partners, which does not carry the full legal authority and immunity of Shelter-

Afrique, may not qualify to operate in Nigeria as an SMI under the current laws. However,

Shelter-Afrique may choose to mobilize external resources, in the form of debt or equity, for its

envisaged operation in Nigeria.

The terms of the Protocol of Agreement between the Shelter-Afrique and Nigeria afford the

company favorable working conditions in Nigeria, including exemption from taxes and

enjoyment of diplomatic privileges.

Resource Mobilization

A major challenge for Shelter Afrique will be to mobilize external funds for an SMI operation in

Nigeria. Another challenge for Shelter-Afrique, and closely tied to the funding challenge, is the

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fact that it does not have a high credit rating, which makes it difficult to raise funds from the

international capital market. An option in the short run will be to focus on accessing funds from

development finance institutions.

Shelter-Afrique is an institution backed by the sovereign goodwill of many countries and that of

the African Development Bank. This goodwill will be a boost in its bid to mobilize external

resources for investment in the Nigerian housing market.

Partner Institutions (Fund Mobilization)

Shelter-Afrique (SHAF) could develop appropriate instruments (deposits, line of credit, bonds,

loans, etc.) to mobilize funds from the following institutions for its operations in the Nigerian

secondary mortgage market: Central Bank of Nigeria; Nigeria Sovereign Wealth Fund; African

Development Bank; International Finance Corporation; Export-Import Bank of China; African

Export-Import Bank; Nigerian commercial banks; among others.

Office Location

Abuja or Lagos can effectively serve as the operational base for SHAF in Nigeria.

Partner Institutions (Lending)

The lending operations of SHAF will be channeled through the following institutions: Primary

Mortgage Banks; Real Estate Developers; State Housing Corporations; and the Federal

Mortgage Bank of Nigeria.

Recommended Scope of Operation

To ensure that the SMI operation is run profitably from inception, the study analyzed various

funding scenarios and recommends the following minimum levels of funding at the

commencement of operations:

A. An equity funding of at least US$40 million; or

B. A leveraged funding of at least US$150 million

A combination of equity and debt with a total operating fund of about US$150 million will also

ensure profitable operations from the first year. Any other level of funding other than the

recommended options could result in losses from the first year. The outcomes of both scenarios

are shown in Table A and Table B below.

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Table A: The Profit and Loss Statements with an initial Equity of US$40 million

Item Yr 1 Yr2 Yr3 Yr4 Yr5

Initial Equity Fund 40,000,000

Borrowed Funds (Current) 100,000,000 100,000,000 150,000,000 150,000,000

Borrowed funds (Cumulative) 100,000,000 200,000,000 350,000,000 500,000,000

Net Income (earnings) 408,596 2,592,796 4,413,786 7,296,739 10,078,918

Cumulative earnings 408,596 3,001,392 7,415,178 14,711,917 24,790,835

Return on Equity 1% 6% 11% 18% 25%

Table B: The Profit and Loss Statements with an initial Borrowed Fund of US$150 million

Item Yr 1 Yr2 Yr3 Yr4 Yr5

Borrowed Funds (Current)

150,000,000

50,000,000

100,000,000

100,000,000

100,000,000

Borrowed funds

(Cumulative)

150,000,000

200,000,000

300,000,000

400,000,000

500,000,000

Net Income (earnings)

428,846

1,466,296 3,287,286 5,023,489 6,658,918

Cumulative earnings

428,846

1,895,142

5,182,428 10,205,917 16,864,835

Risks

A major risk envisaged in undertaking the SMI operation is inability to raise funds up to the

recommended minimum threshold to operate profitably. Such will lead to losses that will

undermine the sustainability of the investment. If the promoters are not reasonably sure of

raising the required minimum capital, they may reconsider undertaking the operation.

Conclusion

The huge demand for housing finance in Nigeria cannot be significantly addressed with the own-

funds of Shelter-Afrique or any other current player in the Nigerian market. However, SHAF or

any other entrant can play a great role in the market if it is able to intermediate and mobilize

funds for its planned secondary market operations in Nigeria.

Analysis of the cost of setting up and operating an office in Nigeria shows that the venture would

be an expensive one, with minimum annual operating cost of not less than US$3 million. The

costs of facilities and personnel are high; therefore a large volume of operations is required to

operate profitably in Nigeria.

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To operate with intermediated funds of less than US$150 million or equity of less than US$40

million would result in losses. Therefore, if Shelter-Afrique is risk-averse towards mobilizing

over US$150 million it may not worth it to launch a secondary mortgage operation in Nigeria.

On the positive side, with leveraged fund of US$150 million or an equity fund of about US$40

million (or a mixture of the two with a total fund of about US$150 million) plus further

borrowings in subsequent years, a secondary mortgage operation in Nigeria will be a very

profitable venture. In fact, with cumulative borrowed funds of about US$500 million over a five

year period, the operations would generate profits of over US$6.5 million per annum from the

fifth year while contributing immensely towards housing sector development in Nigeria.

The experience of Cagamas of Malaysia amplifies the fact that has also been demonstrated by

other countries that a secondary mortgage market can succeed through large leveraging capacity

and not necessarily through own equity. Shelter-Afrique can follow that lead in launching a

secondary mortgage operation in Nigeria.

The initial fund raising exercise could target the US$200 million projected for the first two years

with an underwriting for US$150 million to ensure that the minimum take-off amount is realized.

Actions for Implementation

A plan of action for the realization of the secondary mortgage market in Nigeria is shown in

Table C below.

Table C: Plan of Action for Implementation

Activity Time-line

Road Show/Sensitization of Stakeholders July-September 2011

Preparation for Fund raising October – December 2011

Fund raising January – March 2012

Commencement of Operations April 2012

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I. BACKGROUND

1.1 Preview of the Nigerian Economy and the Housing Sector

Nigeria is the most populous country in Africa. Located in West Africa, it has an estimated

population of 154 million inhabitants (2009 estimates) and covers a land area of about 923,770sq

km. It is Africa‟s largest producer of crude oil and has the 10th

largest oil reserves in the world as

well as the 7th

largest natural gas reserves at 187TCF, with potential to grow to as much as 600

TCF (NTWG on Energy, V2020, 2009).

Furthermore, Nigeria offers huge opportunities in other sectors (such as agriculture, tourism,

telecommunications and power generation) whose development would significantly impact on

housing provision. But these sectors have remained largely underdeveloped. Of particular

concern is the issue of acute shortage of infrastructure, especially power supply. Infrastructure is

an important element in the quest to improve housing in Nigeria because it accounts for about

25% to 30% of housing costs.

Although the Nigerian economy has been growing at an annual average rate of over 5% since

2004, this has not trickled down to the ordinary Nigerian as the incidence of poverty has been

increasing. Housing is a key psychogenic need of individuals, next to food and clothing. It is also

among the important contributors to the economy as it accounts for a sizeable portion of the

production of a country, through its backward linkages to land markets, building materials, tools,

furniture, and labor markets as well as its forward linkages with financial markets. Housing

markets are frequently mentioned as important leading indicators of overall macroeconomic

activity, and home ownership is a measure of household wealth and GDP distribution.

Investment in housing accounts for 15% to 35% of aggregate investment worldwide, compared

to 0.4% in Nigeria. This seeming neglect of the development of the housing sector has persisted

since independence.

At independence in 1960, there was the need to strengthen and boost the economy which led to

the formulation of a five-year National Development Plan, 1962 – 1968. This plan ostensibly

recognized the necessity for housing, urban and town planning. The development plan for the

period 1970 to 1974 set a target of 60,000 units over the plan period. The second plan, like its

predecessor did not achieve its housing targets.

The third National Development Plan covering 1975 to 1980 followed after its predecessors in

setting housing targets and this time some important decisions on housing were reached

including establishing a housing unit in the cabinet office, floating the Federal Mortgage Bank of

Nigeria (FMBN), setting up a committee on standardization of housing types/policies, passing

the Rent Control Law and the Land Use Act. In 1982, Nigeria‟s first housing policy was

launched. The Policy aimed at resolving the huge housing shortage but achieved very little.

Eventually less than 15% of the planned dwelling units were completed (EF/nA, 2010). The

fourth National Development Plan (1981 – 1985) was more ambitious than the preceding ones as

2

it sought to mobilize housing finance from all available sources, provide infrastructural services

to facilitate the establishment of new building sites, improve the quality of rural housing and the

rural environment through integrated rural development programs.

Despite the above initiatives and efforts, achievements have been poor. Meanwhile, at about

5.3% annual growth rate, urbanization in Nigeria is one of the highest in the world. The

consequence is that there are 14-16 million units of housing deficit in Nigeria today (EFInA,

2010, Nasir Imam, 2008).

1.2. Economic and Political Setting for Housing Finance

The Nigerian economy has been doing well in recent years. Nigeria‟s GDP at Purchasing Power

Party (PPP) almost doubled from $170 billion in 2005 to $319 in 2008 (CBN, 2008). Its growth

rate was 6.7% in 2009, which exceeded the 6% recorded in 2008 and ranked 3rd

in Africa. The

Nigerian real estate sector grew significantly from 1999 to 2009 due in the main to the country‟s

return to democracy and ensuring relative political stability. The sector was valued at N1.06

trillion ($7 billion) as at the end of 2008 (CBN, 2008) representing about 2% of contribution to

GDP. The average growth rate in the sector between 2000 and 2005 was 10.7% (NSE, 2008).

Like other economies in the world, growth in Nigeria‟s GDP is directly linked to growth in real

estate activity.

With respect to country risk level, Nigeria is ranked among the top 60 countries in the world

according to good governance indicators as shown in Table 1.1 below, Nigeria performed poorly.

Issues examined in the ranking are seven-point governance indicators, namely voice and

accountability, political stability, government effectiveness, regulatory quality, rule of law,

control of corruption and corruption perception index. Although, the 60 countries considered in

the study were analyzed on the basis of ODA received, current level of debt and FDI, the

analysis provides a fair picture of Nigeria‟s country risk level for our immediate purpose. The

Nigerian Government is making efforts for improvements in all the 7-Point governance areas as

part of its vision 2020 program currently under implementation.

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Table 1.1: Ranking of Nigeria with best and lowest performed countries by good governance

indicators. Governance indicators Country with Maximum

score

Country with

Minimum score

Nigeria’s score

Value Rank

Voice and accountability Finland (1.49) Libya (-1.93) -0.69 45th

Political Stability Ireland (1.38) Iraq (-2.82) -1.77 57th

Government effectiveness Ireland (2.20) South Korea (-1.82) -0.92 56th

Regulatory quality Hong Kong (1.89) South Korea (-2.31) -1.01 55th

Rule of Law Ireland (2.49) Iraq (-1.81) -1.38 59th

Control of Corruption Ireland (2.49) Iraq (-1.32) -1.22 57th

Corruption perception index Ireland (9.7) Nigeria (1.9) 1.90 60th

Source: Culled from V2020 NTWG report, 2009. P. 46

1.3 The Nigerian Housing Sector Relative to Some Other Countries

In most countries of the world, housing has become one of the most booming productive

industries. In many countries, the rates of urbanization exceed the capacity of national and local

governments to plan and organize the housing needs of the population; while poor housing

conditions, insecure land tenure systems, urban crime and homelessness have become common

place in many developing and emerging markets.

The recent sub-prime mortgage crisis that started in the USA and affected most of the world‟s

capital markets created a severe negative impact on housing credits and values of the real estate.

While this situation is expected to improve in the near feature, partly due to the strength of the

underlying household assets backing the delinquent sub-prime loans and better regulation of the

relevant sectors, it needs tracking. For instance, in Mexico, the success stories recorded was due

largely to the country‟s ability to attract huge funds from America because they have strong

regulations and foreclosure laws in the housing sector which reduce the rate of risk. In the UK,

there was remarkable success in the provision of public and social housing. In Burkina Faso,

successes are recorded in the area of one-stop shop in the mapping and streamlining of land

procedures to reduce the time and cost of land documentation. The case for India was in the area

of developing building centers. In the European countries, they were able to develop a robust

mortgage bonds market to facilitate access to credit.

In Nigeria housing conditions are poor due largely to poor housing finance, poor access to land,

absence of residential infrastructures, weak institutional regulations and cost of high building

material costs and related expenses. A World Bank study (2008) revealed that most people, over

80% of the population, live in informal housing structures of varying degrees of permanence on

land on which they have no ownership rights.

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II HOUSING MARKET ANALYSIS (NIGERIA)

2.1 Housing Demand and Supply Estimates

Demand for housing in Nigeria is influenced by several economic factors, including increased

economic activity that has led to increased demand for labor and rural-urban migration.

According to EFInA and FinMark trust (2010), “the result is that there are 14 million units of

housing deficit in the country. This is about a 100% increase when compared to the deficit in

2001”. Table 2.1 below shows the structure of housing demand.

Table 2.1: Estimated Housing Needs (1991 – 2001) (‘000 units)

Items Urban Area Rural areas Total

Housing stock 1991 3,373 11,848 15,221

Estimated No. of households 2001 7,289 15,295 22,584

Required output 1991 – 2001 3,916 3,447 7,363

Required annual output 1991- 2001 391.6 344.7 736.3

Source: UN-Habitat, 2002

The worsening gap between government supply efforts and actual achievement over the years

was due largely to population growth from about 42 million in 1960 to more than 151 million in

2010. The immediate consequence is the development of slums in the urban areas.

Depending on the individual state ability to address the housing challenge, the higher the annual

population growth rate the greater the likelihood of growth of slums. A disaggregated population

growth is given in Annex 2. Given the relative small land areas of Lagos and Abuja (Federal

Capital Territory), these two places harbor a lot of slums in Nigeria.

Supply of housing in Nigeria can be viewed from the formal and the informal sectors of the

economy. The formal sector refers to the supply from the private sector and the various agencies

of the public sector. Table 2.2 below shows the structure of housing supply in Nigeria.

Table 2.2: Housing Supply Structure

Formal (Public Sector

Federal Ministry of Housing

Federal Housing Authority

State Ministry of Housing

State Housing Corporations

Local Government House

Programs

Formal (Organized Private

Sector)

Real Estate Developers

Primary Mortgage

Institutions (PMI‟s)

Deposit money Banks

(DMB‟s)

Cooperative Bodies

Real Estate Investment

Vehicles (Trust)

Development Finance

Institutions

Informal Sector

Individuals

Families

Cooperatives

Community Development

Efforts (CDEs).

Source: Pison Housing Company

5

Nigeria‟s development strategy, Vision 2020 projects and targets a construction of 10,398,650

housing units from 2012 to 2020 which amounts to 1,155,406 housing units per annum. At an

average cost of about US$50,000 per house, the annual required investment in housing amounts

to US$57,770,300,000 (fifty seven billion, seven hundred and seventy million, three hundred

thousand dollars). Meanwhile the current funding from housing financiers is not more than

US$2 billion per year, still leaving a funding gap of over US$55 billion per annum.

The New National Housing Policy specifically provides for an annual target of 1,000 housing

units per annum by each state government. This requires an annual investment of at least US$50

million by each State government. For the 36 state governments, the investment sums up to

about US$1.8 billion per annum and the State Housing Corporations are seeking opportunities

for a Secondary mortgage lender to support them. Borrowing by State Housing Corporations is

often backed by sovereign guarantees.

Table 2.3: Vision 20: 2020 Housing Requirements

Year Houses to be built Nation-wide Average number of homes per state

2011 - -

2012 500,000 12,500

2013 600,000 15,000

2014 720,000 18,000

2015 864,000 21,600

2016 1,036,000 25,920

2017 1,244,000 31,104

2018 1,492,992 37,325

2019 1,781,590 44,790

2020 2,149,908 53,749

Total 10,398,650 259,987

Source: Sam Odia, Thisday, August 3, 2010

2.2 Housing Development Efforts of the Government

Historically, formal housing developments in Nigeria started during the colonial era when the

first formal mortgage institution; the Nigerian Building Society was established in 1956, as a

joint venture of the Commonwealth Development Corporation, the Federal Government and the

Eastern Regional Government. By 1977, the Nigerian Building Society was converted to the

Federal mortgage Bank of Nigeria (FMBN). The details of the FMBN are described in Chapter

III (3.5).

Up until 1989, the FMBN combined the functions of a primary and a secondary mortgage

institution. In that same year, the mortgage Institutions Act was passed formally, recognizing the

two-tier system of housing finance with private sector institutions handling primary or retail

mortgaging, and the FMBN made to operate essentially as a secondary mortgage institution. Its

early primary mortgage functions were now transferred to the newly established Federal

6

Mortgage Finance Limited. Going by experience, it became obvious that government funding

was grossly inadequate and limited to meet the enormous demand by Nigerians seeking

mortgage finance for their homeownership aspirations.

The need to address the housing deficits in Nigeria led to the promulgation of the 1991 National

Housing Policy, which was intended to serve as a palliative measure to ensure more access to

housing by Nigerians. To achieve this goal, government was to pursue the following policy

objectives.

i. Encourage and promote active participation in housing delivery in all tiers of government,

ii. Strengthen institutions within the system to make their operations more responsive to

demand,

iii. Emphasize housing investment which satisfy basic needs, and

iv. Encourage greater participation by private sector in housing development

Following the failure of the 1991 National Housing Policy to meet its objectives, the National

Housing Fund (NHF) Decree No.3 of 1992 was formulated. Its primary goal was to ensure that

all Nigerians own or have access to decent housing accommodation at affordable cost by the year

2000. Further, in 2001, a new policy provided that mass housing for Nigeria will be based on

mortgage financing, while the role of government will be to provide the enabling environment. It

also encouraged all real estate developers in the country to come under the umbrella of an

association, which is known as the Real Estate Developers Association of Nigeria (REDAN).

Similarly, the new role requires that real estate developers learn how to build houses to particular

price targets, so that members of different income groups can aspire to the status of

homeownership.

Currently, a range of plans and programs emphasizing the need for accelerated housing

development exist in the following national documents:

The New National Housing Policy of 2006;

The NEEDS (1 & 2) documents;

The Report of the Presidential Technical Committee on Housing and Urban

Development of 2002;

The Presidential Committee Report on Affordable Housing 2007; and

The 7 Point Agenda of the Federal Government.

2.3 Land Ownership and Registration

Land ownership in Nigeria is backed by the land Use Act of 1978 which vests ownership of all

land in the Governor of each state, who has the rights and privileges to allocate land through a

leasehold system. The lease is generally for 99 years less one day. This right of occupancy is

legalized with a certificate of occupancy issued. The process of getting the certificate of

Occupancy can sometimes be tortuous and adds significantly to the cost of land registration.

7

Although about 70% of the land in the country is still held under customary title, families or

communities that want to transform such land for development must subject themselves to the

dictates of the Act. And land once allocated must be developed within three years or taken back

by the Governor. In 2007, the World Bank ranked Nigeria 173 (out of 179) in the country

ranking of registering property, with 14 procedures, 82 days duration, and costs of 22.2% of

property value.

Fortunately, computerized land registries have been introduced starting with Lagos and Abuja. In

Lagos, assistance from the British Council and the Land registry in England and Wales has

helped in championing this exercise. In the case of Abuja, computerized title registration system

and cadastral mapping using GIS have taken off and titles can be printed out on secure,

numbered paper at the Abuja GIS Office on request (EFInA & Finmark Trust). This has

improved the search for titles, which previously took several weeks to complete. Furthermore,

the one-stop shop program of the Nigerian investment Promotion Commission (NIPC) with

respect to the registration of companies has significantly contributed in reducing the time spent

on title registration.

2.4 Players in the Nigerian Housing Market

Table 2.4: Key players in the Nigerian Housing market

Regulators Financial Institutions Developers

Central Bank of Nigeria Federal Mortgage Bank of Nigeria Federal Housing Authority

Federal Ministry of Lands,

Housing and Urban Development

101 Primary Mortgage Institutions 36 State Housing

Corporations

Securities and Exchange

Commission

24 Deposit Money Banks 36 State Ministries of

Housing and Urban Dev.

850 Real Estate Developers

55 Insurance Companies

Source: Pison Housing Company (as in EFIna, 2010).

Federal Housing Authority (FHA)

The Federal Housing Authority was established in 1973 to supervise and manage the housing

program. The FHA is still responsible for the supply of affordable (cheap) housing in Nigeria but

its capacity to respond to the housing needs is constrained by funding. By 2002 only a total of

35,000 units had been built by the FHA since its inception (FHA, 2002).

8

State Housing Corporations

There are 36 States in the country, in addition to the Federal Capital Territory (FCT). Each state

has a Ministry of Housing and Urban Development and Housing Corporation. The state

Ministries provide land to the Corporations.

The funding of the Corporations comes mainly from government budgetary allocations and

housing units built by the Corporations are usually sold for cash. Buyers either pay cash or are

allowed to pay in installments over the period of construction as mortgage finance is hardly

available to buyers.

Notwithstanding, the efforts of State Housing Corporations, their supply of houses is very

meager. For example, the Lagos State Development and Property Corporation, the most active

housing corporation in Nigeria has produced less than 25,000 housing units since its inception

about 35 years ago (Lagos State, 2009).

Private Sector developers

The private sector is playing an important role in housing provision in Nigeria. Their activities

however are concentrated in the urban centers especially Lagos, Abuja, Kano, Ibadan, Enugu and

Kaduna to mention a few. There are about 850 companies in housing provision scattered in

different parts of the country. Fortunately in more recent times, activities of the private

developers are now coordinated under the Real Estate Developers Association of Nigeria

(REDAN).

The private developers provide a ready medium to deliver secondary mortgage funds to housing

development in Nigeria.

Non-Governmental Organizations

A few Non-Governmental Organizations (NGOs) have recently waded into the Nigerian housing

market to improve the supply situation. The two more notable ones are:

i. MTNF Low Cost Housing Project – Shelter for Comfort; and

ii. Women‟s Housing Plan Initiative (WHPI)

The WHPI initiative was designed to empower women and families towards owning affordable

houses. To enhance accessibility, the plan is often structured with gradual repayments. It also

collaborates with developers and provides them with bulk buyers after negotiation on behalf of

its members.

9

In 2005, the MTN Foundation and Habitat for Humanity launched a low-cost housing project. It

sought to address poverty and homelessness by providing simple, decent and affordable houses

to low-income earners. The foundation planned to build 600 low-cost units in blocks of 100 units

in each of the six geo-political zones. It is envisaged that individuals will be able to acquire these

houses by obtaining mortgages. Already 100 units have been completed in New Karu, Nasarawa

State (EFInA & Fin Mark Trust, 2010).

Primary Mortgage Institutions in Nigeria

There has been a remarkable growth in the number of primary mortgage institutions in Nigeria.

There are currently 101 PMIs with total assets of N333 billion (about US$2.2billion) of which

about 25% or N83 billion (US$555million) are invested in housing by the PMIs. The rest of the

funds of PMIs are in placements with banks and other investments. Although the PMIs are over

100 in numbers, their resources are grossly inadequate to meet the needs of the Nigerian housing

market. In a bid to increase the resources for funding the housing sector, the Central Bank of

Nigeria recently increased the capital base of PMIs from N100 million to N5 billion, to be

complied with in 24 months (in 2012). It is doubtful that all the existing PMIs will meet the new

capital requirement, but even if all of them meet the new capitalization, the funding for housing

will still fall short of the demand.

There are a number of reasons for the extremely low level of PMI activity in Nigeria. These

include:

(a) Limited sources of funds; and

(b) Funds available to PMIs are mainly short-term (the tenor average being 5-10 years) while

mortgages require long-term financing, which is currently not available.

None of the 101 PMIs has a capital base of N3.5 billion. Virtually all the PMIs operating in

Nigeria have their capital base in the neighborhood of N100 million (which is the minimum

capital base necessary to perform the role of PMI).

Available statistics indicate that only 15 of the 101 PMIs have a capital base of N1 billion while

5 others are working towards shareholders funds of up to N3.5 billion (names were not given yet

pending the period of consolidation). Meanwhile, expectations are high for mergers and

acquisitions within the sector, especially among independently owned mortgage firms.

Mortgage Banking Association of Nigeria (MBAN)

The Mortgage Banking Association of Nigeria (MBAN) was incorporated in Nigeria in 1992

under the Companies and Allied Matters Act (CAMA) as an umbrella organization for all

Primary Mortgage Institutions (PMIs).

10

The MBAN has its Secretariat at the Skye Bank Building (4th Floor), 30, Marina, Lagos. It has

over 99 Member-Institutions and serves as the pressure group and advocate for Mortgage

Banking (Savings and Loans/Building Societies) Industry in Nigeria; and as a Channel for

communicating the needs and problems of the Industry to the Government and its Agencies, as

well as other Private Sector Organizations and Individuals. It also acts as Catalyst for the

development of Mortgage/Housing Finance Sector in Nigeria.

Institutional members of MBAN are required to comply with the Revised Guidelines for Primary

Mortgage Institutions (PMIs) issued by the Central Bank of Nigeria (CBN), which include the

following:

Granting of loans or advances to any person for the building, improvement or extension

of a dwelling/commercial house;

Granting loans and advances to any person for the purchase or construction of a dwelling

/commercial house;

Acceptance of savings and deposits from the public and payment of interest thereon;

Management of pension funds/schemes;

Offering of technical advisory services for the purchase or construction of a dwelling

house;

Performing estate management duties;

Offering of project consultancy services for estate development;

Engaging in estate development through loan syndication, subject to the restriction

imposed by the shareholders‟ funds unimpaired by losses;

Engaging in property trading including land acquisition and disposal; and

Engaging in other activities which the Bank may approve from time to time.

The MBAN operates the MBAN Center for Professional Mortgage Development (MCPMOD)

which was established with the objective of creating an environment for continued existence of

Primary Mortgage Institutions (PMIs) as profitable going-concerns, through continuous human

capital development. In delivering on its mandate, the Center collaborates with a number of

International organizations, including:

International Finance Corporation (IFC)/World Bank;

Canada Mortgage & Housing Corporation (CMFC), Canada;

Wharton Real Estate Centre, Philadelphia, USA; and

Mortgage Bankers Association (MBA), USA

The MBAN is currently actively involved in ensuring that the Primary Mortgage Institutions in

Nigeria operate to the highest ethical and professional standard. It also works closely with

Government, Legislators and Mortgage regulatory institutions to institutionalize a healthy

environment for mortgage business and housing sector development in Nigeria. The MBAN

umbrella presents a good entry point for Shelter-Afrique to penetrate the Nigerian primary

mortgage market.

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2.5 Attitude of Nigerians towards taking Mortgages/Loans for Housing

Nigerians are generally optimistic in business matters particularly in real estate investment. It is a

mark of honor for a Nigerian to be living in his own house and an average Nigerian is willing to

take a loan to achieve the dream of being a home owner. Since the utility derived from obtaining

mortgages is often greater (in absolute terms) than the expected value of mortgages, Nigerians

are attracted to mortgages. Both the Federal Mortgage Bank of Nigeria and the primary mortgage

institutions we have consulted indicated that the request they receive for mortgage financing is at

least ten times their ability to finance.

2.6 Mortgage Loan Default and Foreclosure Laws

Mortgage repayment in Nigeria is relatively high with low default risk. This is because those

who have the privilege to acquire mortgage loans pay for such loans on installment basis and it is

often deducted from their salaries at source.

There are three major categories of house buyers:

Private self employed/business men and women

Confirmed employed/salaried people

Unemployed/poor people

The first group nearly always pays cash out rightly for their purchase, the second category with

the consent of their employers sign legal agreement with housing providers that unpaid balance

be deducted at source from their salaries until the loan is fully amortized. The third group that

comprises the majority is not involved in the formal sector housing market.

As a matter of fact, Nigeria is operating a “cash and carry” home–ownership tradition, as

compared to mortgage and housing financing scheme obtainable in other parts of the world. One

of the developers attested that 90% of home buyers pay cash to acquire their properties through

outright purchase. This is because real estate developers are not willing to collect payments over

a long term as this may delay other planned projects. Thus, homes are mostly acquired by the

high income earners by paying installments over a short period (say 24 to 36 months) or an

outright purchase by cash. In a survey by EFInA Fin Mark Trust (2010), 70% of real estate

developers often target the middle–and high–income earners while only 30% targets the low

income earners. In contrast, low income housing is mostly demanded and this is not being met.

Since the target market by real estate developers are the middle and high income class who can

readily pay to own a home, the risk of default is abysmally low or non-existent in Nigeria.

Although, collaterals are not so much needed, the operation is that when a housing loan is taken,

the borrowers give the lender a mortgage (usually called a deed of trust) which creates a security

interest in the house and gives the lender the right to institute a foreclosure proceeding in the

event of default.

In all of these circumstances, generally, the risk of default is quite low as payments are done

direct from the borrower‟s salaries.

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III. SECONDARY MORTGAGE INSTITUTIONS IN SELECTED COUNTRIES

3.1. United States of America

The United States housing finance system (HFS) remains the most advanced in the world. The

present HFS configuration arose from the ashes of several economic shocks that spanned almost

200 years, including the great depression of the 1930s.

Appendix 4 summarizes the four different eras in the evolution of U.S. HFS, namely, the era of

exploration, the era of institutionalization, the era of securitization and the current era of

automation or computerization. It also details out the various measures including institutions and

products created by government as a direct response to the economic shocks and risks prevailing

at the time. There are several important milestones recorded in the advancement of the HFS,

especially the establishment of the Federal Housing Administration (FHA) in 1934, and the

creation of government-sponsored enterprises (GSEs) namely, Fannie Mae in 1938 and Freddie

Mac in 1970.

Fannie Mae and Freddie Mac were the largest of the many entities of the secondary markets that

provide securitized capitals to the housing market, enabling borrowers to finance the purchase of

both single and multi-family homes. The activities of these GSEs were so vast and encompassing

that during the recent sub-prime mortgage loan collapse of 2008, these entities were considered

“too big” to fail, and as such were “bailed out” using public funds.

The 1968 act also divided Fannie Mae into two separate entities namely Ginnie Mae, which

provides explicit government guarantee on mortgage-backed securities insured by FHA and the

Veterans Administration (VA); and Fannie Mae, which issues securities backed by FHA and VA

mortgages and guaranteed by Ginnie Mae. In addition, a 1970 legislation established the Federal

Home Loan Mortgage Corporation a.k.a Freddie Mac, chartered by Congress to increase the

availability of mortgage financing for residential homes. These two policies formed the basis for

linking the mortgage markets with the broader capital markets through the restructuring of

Fannie Mae into Fannie Mae and Ginnie Mae, and the establishment of Freddie Mac (Colton,

2002).

The Establishment of Fannie Mae and Freddie Mac

Fannie Mae or the Federal National Mortgage Association was established in 1934 as a

government-owned secondary market for FHA-insured and later VA-guaranteed mortgages.

Originally set up as a publicly traded company, it was later chartered as a government-sponsored

enterprise (GSE). Its purpose is to expand the secondary mortgage market by purchasing FHA-

insured mortgages and securitizing them in the form of mortgage-backed securities (MBS),

which meant that lenders could reinvest their assets into more lending and in effect increase the

number of lenders in the market and reducing dependence on a few. The idea was that mortgage

lenders would be more willing to originate the FHA fixed rate mortgage if they did not have to

hold them in portfolio. In addition, by selling the mortgages, lenders could fund more mortgages.

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In 1954 Fannie Mae was re-chartered as a public-private mixed ownership corporation, and in

1968 it was split into two organizations: Fannie Mae, a government chartered corporation owned

by private shareholders, and the new Government National Mortgage Association (GNMA) or

Ginnie Mae, a government agency. GNMA mandate enhanced liquidity for FHA, VA and

Farmers Home Administration (FmHA) mortgages with the explicit backing of the federal

government. Ginnie Mae acts as a conduit that purchases mortgage loans, packages them into

securities (MBS) and sells participation in the securities to investors. Unlike Fannie Mae, Ginnie

Mae MBS are guaranteed by the full faith and credit of the U.S. government. The guarantee

promises investors that principal and interest due will be paid by Ginnie Mae if not by

borrowers. In addition, Ginnie Mae services a portfolio of mortgages owned by the federal

government. Problems were identified in the US housing financial industry which created the

need to review the current infrastructure. One of the problems identified was that the investor

base of conventional mortgages was much narrower than the broader-based investment in

government-insured and guaranteed mortgages. This highlighted the need to attract pension

funds and other institutional investors to conventional home mortgage loans.

In 1970, the U.S. federal government authorized Fannie Mae to purchase private mortgages, i.e.

those not insured by the FHA, VA, or FmHA, and created the Federal Home Loan Mortgage

Corporation (FHLMC) or Freddie Mac. Freddie Mac was established as part of the Federal

Home Loan Bank (FHLB) system and was able raise capital based on the implicit backing of the

U.S. federal government (Ellen, Tye and Willis, 2010). Freddie Mac was created ostensibly to

provide a secondary mortgage market for conventional mortgages with its focus on providing a

secondary market for thrifts (savings and loan companies) and to compete with Fannie Mae and

thereby facilitate a more competitive secondary mortgage market. It began with funding from the

FHLB, which served as the central bank for thrifts. Its dominant approach was to purchase

mortgages, package them into securities and sell the securities to investors. Historically, Freddie

Mac has held very little mortgages in portfolio.

Fannie Mae has now moved towards mortgage purchases by packaging mortgage-backed

securities (MBS) and selling the securities to investors. The creation of Fannie Mae and Freddie

Mac and their implied guarantee by the federal government enhanced the growth of the

secondary market, preserving the 30-year fixed mortgage interest rate, and self-amortizing loans

without prepayment penalties. The current proposals at reforming these GSEs following the

recent 2008 subprime mortgage bubble dwells on enhancing the institutions‟ present mandate,

increasing statutory regulation and expanding the secondary mortgage market, so that the United

States can maintain its progress in the housing mortgage finance industry.

Technological Advancement in the US Housing Finance Market

Technological innovations have changed not just the business landscape but the very way we

think towards the delivery of goods and services. The Internet, computer soft-wares and hard-

wares and the entire information technology (IT) system have impacted the housing finance

market in many positive ways. It has improved the home buying process in a variety of ways

namely, simplified and increased the speed of the process, made the process less expensive and

provided quick access to information and greater choice for consumers (Colton, 2002). For the

lenders, technology increases their productivity and enhances their ability to provide expanded

14

services at lower costs. Moreover, they are no longer restricted to local or regional mortgage

markets with physical office space. With technology, housing mortgage is just a couple of mouse

clicks away, irrespective of your physical location.

Advances in technology have been hailed as a revolution that transformed the U.S. Housing

Finance System beyond our wildest dreams, and continues to impact the system with the

development of new mortgage instruments to cater for the needs of our brave new world of

cashless society. Instructively, it is the organized private sector, the GSEs (Fannie Mae and

Freddie Mac) that are the leading players driving such technological innovations. The automated

underwriting systems (AUSs) were the most prominent, and both GSEs did implement the

Desktop Underwrite and Loan Prospector AUSs. In fact, Fannie Mae acquisitions using AUSs

increased from less than 10% in 1997 to over 60% in 2002 (Pafenberg, 2004). According to

National Mortgage News (2000-2002), on-line mortgage loan originations rose to $86.88 billion

for the top ten on-line lenders including the two biggest players - Countrywide Credit Industries

and Washington Mutual. The impact of advanced technology will even be magnified as

consumers become more computer literate and IT-based financial instruments become widely

acceptable across all population groups.

Lessons from the US Housing Finance System

Liquidity Enhancement increases Home Ownership

A virile secondary mortgage market leads to availability of mortgage capitals and multiple

mortgage instruments for populations of diverse economic status. Mortgage-backed securities

(MBS) through the GSEs supported by sound risk-sharing arrangements enhance liquidity for the

mortgage industry, and thus leading to affordable lending. An example of such affordable loan

products includes zero down-payment (100% financing), low-down payments or even 103%

financing which includes the 3% closing cost. Securitization provided by government policies

through implicit and explicit guarantees is a prerequisite for a thriving MBS market. In addition,

(Saayman and Styger, 2003) noted that a strong demand for and supply of liquid MBS boosts the

availability of mortgage capitals leading to increased home ownership. Although MBS financing

is sound and efficient, it was not the only method of wholesale funding that was used to increase

liquidity. Other method includes the issuance of debentures by highly rated institutions.

Target Disadvantaged Populations Using Specific Policies

Stephens (2000) observed that informal housing finance poses a serious equity issue since a key

determinant of access to housing is dependent on the accident of birth (wealthy or working class,

minority or ethnic populations, racial and religious or even geographical locations) and the

advantage or disadvantage are passed down from generation to generation. Thus, to achieve

universal housing targets, government policies must design financial products that target special

15

populations, including those that rely essentially on informal loan arrangements. Several U.S.

government policies including the Community Reinvestment Act (CRA) of 1977, and loan-limits

for FHA insurance and GSEs were targeted at providing credit and loans for the underserved

populations. The Federal Housing Enterprise Financial Safety and Soundness Act of 1992

stipulated that part of the loans acquired by GSEs should be made available to low-income

individuals and to low-income neighborhoods.

Technological Advancement Reduces Cost and Increases Home Ownership

The impact of technology on the U.S. Housing Finance System is enormous. Both borrowers and

lenders have benefitted from technological innovations. For example, automated underwriting

systems have resulted in faster loan qualifications and processing and the time from mortgage

application to approval has been reduced from months to minutes (Colton, 2002).

The total economic cost of a mortgage is about 3% of the total mortgage value, and these costs

can be divided into core costs, transaction costs and loan-program design costs. Technology has

the potential of drastically reducing this total economic cost of closing a mortgage deal, thus

making mortgage loans available to a larger segment of the population. General acceptance of

Internet-based mortgage transactions and computer-literacy for mortgage consumers may even

lower the overall mortgage interest rates, as the cost of doing business plunges due to automation

of the entire procedure including application, origination, processing and servicing of mortgage

loans.

3.2 India: Review of Secondary Mortgage Institution in India - The National Housing

Bank

Origin/Setup

The National Housing Bank (NHB) was established in 1988 with headquarters in New Delhi,

India. The preamble of the National Housing Bank Act, 1987 describes the basic functions of the

NHB as follows; Operate as a principal agency to promote housing finance institutions both at

local and regional levels and to provide financial and other support to such institutions and for

matters connected therewith or incidental thereto. The NHB has its headquarters in New Delhi

and seven regional offices in Mumbai, Hyderabad, Bangalore, Chennai, Kolkata, Lucknow and

Ahmedabad.

The NHB was established to achieve the following objectives:

a. To promote a sound, healthy, viable and cost effective housing finance system to cater to

all segments of the population and to integrate the housing finance system with the

overall financial system.

b. To promote a network of dedicated housing finance institutions to adequately serve

various regions and different income groups.

c. To augment resources for the sector and channelize them for housing.

16

d. To make housing credit more affordable.

e. To regulate the activities of housing finance companies based on regulatory and

supervisory authority derived under the Act.

f. To encourage augmentation of supply of buildable land and also building materials for

housing and to upgrade the housing stock in the country.

g. To encourage public agencies to emerge as facilitators and suppliers of serviced land, for

housing.

The NHB supports housing finance sector by:

Extending refinance to different primary lenders in respect of:

Eligible housing loans extended by them to individual beneficiaries,

For project loans extended by them to various implementing agencies.

Lending directly in respect of projects undertaken by public housing agencies for

housing construction and development of housing related infrastructure.

Guaranteeing the repayment of principal and payment of interest on bonds issued

by Housing Finance Companies.

Acting as Special Purpose Vehicle for securitizing the housing loan receivables.

Ownership

The NHB is wholly owned by the Reserve Bank of India. The Government of India contributed

the entire paid-up capital.

Financial Products/Lending Instruments

The NHB provides financial assistance for project lending to a range of borrowers both in the

public and private sectors.

(i) Public Agencies:

These include agencies incorporated under the enactments of the Central or State legislatures or

under the Companies Act, 1956 such as:

State Housing Boards/Improvement Trusts

State Slum Clearance Boards/Authorities

Development Authorities

Municipal Corporations/Councils

New Town Development Agencies

Local Authorities for Housing & Urban Development

Public Sector Companies for employee housing projects

Agencies set up or notified by Government for Specific Housing Programs (e.g.

Earthquake rehabilitation etc).

(ii) General Projects:

Township cum housing development projects

17

Construction of houses on individual plots or group housing

Land acquisition for the purpose of township and housing development

Land development for housing, including provision of facilities like roads, water supply,

storm water drains, sewerage system etc.

Development of land into buildable plots

Employee Housing

Special housing projects for people affected by natural calamities.

(iii) Special Projects: Water and Sanitation Programs being undertaken by:

Microfinance Institutions

Self Help Groups

Non Government Organizations (NGOs)

Slum redevelopment projects

Housing for Economically Weaker Sections/Low Income Groups, etc

(iv) Short Term Facility

Short term finance facility of up to a maximum period of 2 years to public agencies engaged

in housing projects.

(v) Takeover of Term Loan Liabilities of Public Housing and development Agencies.

Loan Ration/Tenure

The extent of financing of projects is based on the type of project and also the rating assigned by

National Housing Bank. It varies between 65 and 100% of the project cost. The maximum tenure

of a loan is 15 years.

Securitization: Project finance by the Bank is secured through one or more of the following,

depending on the Agency/project:

Mortgage/charge over immovable property acceptable to NHB

Charge over receivables

Bank Guarantee

Government Guarantee

Corporate Guarantee

Charge on Book Debts

Fixed Deposit Receipts

Hypothecation of property

Interim Security (in some cases interim security may be required till the main security is

lodged with the Bank)

Any other security acceptable to NHB

18

Sources of Operating Funds

The sources of funding for the NHB include the Reserve Bank of India (RBI), the Government

of India, Bonds, Debentures, Securitization, External Loans (Canada, Japan, etc.). Short term

resources included issuance of Commercial Papers (CPs), Short Term Loans from Banks and

Special Refinance window of the Reserve Bank of India (RBI). Long term borrowings included

issuance of Zero-coupon Bonds (ZCB), Certificate of Deposit (CD), and Term Loans from

Banks, Deposits from Banks under Rural Housing Fund (RHF), Deposits from Housing Finance

Companies (HFCs) and Deposits from the public under term deposit schemes.

Size of Operating Funds

During the year 2008-2009, refinance aggregating Rs. 10,853.62 Crore (about US$2.5 billion)

was disbursed, out of which Rs. 2,479.92 Crore (US$578.47 M) was disbursed towards rural

housing under the Golden Jubilee Rural Housing Refinance Scheme and Rural Housing Fund.

This was the highest disbursement achieved in a single year since the inception of the Bank. In

the year 2009-2010 that ended on June 30th

2010, disbursements stood at Rs. 8,160 Crore (about

US$1.9), while Net Own Fund was Rs. 2,485 Crore (about US$579.6 million).

Governance of the Institution

The activities of the NHB are overseen by a 12 member Board of Directors, including a

Chairman & a Managing Director. Members are appointed by the Government of India in

pursuance to Section 6 of the National Housing Bank Act, 1987. The Committees of the Bank

include the Executive Committee of Directors, Audit Committee of the Board and Risk

Management Advisory Committee.

Risks Management

NHB has a robust Risk Management System in place to monitor actual and potential risks. There

are three risk management committees, namely;

(i) Asset and Liability Management Committee (ALCO) which monitors the management

of market risks.

(ii) Credit Risk Management Committee (CRMC) which monitors credit risks.

(iii) Operational Risk Management Committee which monitors the operational risks.

In addition, there is a Board appointed Risk Management Advisory Committee (RMAC) with

three external members who are experts in Banking and Finance, and are mandated to review

NHB‟s risk management policies and functions in relation to the three areas of risks outlined

above.

Collaborating Institutions

Government of India

Reserve Bank of India

Housing Finance Corporations (HFCs), the Primary Mortgage Institutions.

19

o NHB has equity participation in two HFCs, namely, GRUH Finance Limited and

Cent Bank Home Finance Limited. To the tune of Rs.5.24 Crore (about US$

1.22M for year ended June 30, 2009.

Micro Finance Institutions (MFIs)

Non Government Organizations (NGOs)

Urban Local Bodies (ULBs)

Urban Cooperative Banks

Financial Intelligence Unit- India – to prevent money laundering.

Regional Rural Banks

Public Sector Agencies

External Financial Institutions/Donors – Asian Development Bank (ADB), Canada

Mortgage and Housing Corporation (CMHC), The Japan Bank for International

Cooperation (JBIC), USAID, etc.

Lessons

a. The NHB targets special populations with specialized programs aimed at increasing access

to affordable housing among the poor and middle class. Such programs include the Housing

programs for Economically Weaker Sections and for Low Income Groups, and slum re-

development programs or the Golden Jubilee Rural Housing Finance Scheme (GJRHFS)

b. The NHB provides credit enhancement through Residential Mortgage Backed Securities

(RMBS) of Primary Lending Institutions by way of NHB Guarantee, thus increasing

mortgage originations and availability of mortgage loans to individuals.

c. The bulk of the operating capital of the Bank comes from borrowed funds, which amount

to about five times the own-fund of the institution.

3.3 Egypt: The Egyptian Company for Mortgage Refinancing

Origin/Setup

The housing mortgage industry is still in its infancy in Egypt. In 2001, the Mortgage Finance

Authority (MFA) was established to implement the Law 148/2001 and regulate mortgage finance

and licensing. The Egyptian Financial Services Authority (EFSA) took over mortgage regulation

from MFA in 2009.

The Egyptian Company for Mortgage Refinancing (ECMR) was created in 2006 with an initial

capital of 200 million EGP to support the secondary mortgage market. The ECMR was

established by the Central Bank of Egypt and 24 private and public financial institutions as a

specialized financial institution that provides refinancing funds to primary mortgage lenders

(PML). The ECMR raises funds through long-term mortgage loans from institutional investors

and equity contributions, its PML shareholders and the bond market. It provides secured loans to

20

banks and mortgage companies, and also statutorily empowered to issue long-term bonds to the

public in order to support its activities and expand its lending capacity.

To ensure liquidity in the housing mortgage industry, the ECMR refinances loan portfolios for

banks and mortgage finance companies at below-market interest rates. This reduces liquidity risk

and increases mortgage loan originations by primary mortgage lenders. The ECMR was modeled

after secondary mortgage financial institutions like Fannie Mae, and the Malaysian National

Mortgage Corporation (MNMC). It is designed to purchase loans from mortgage lenders and

issue MBSs in the capital market through an efficient panel of primary dealers and underwriters,

which diversifies lending risks and motivates capital market investors to purchase such securities

(Hassanein and El-Barkouky, 2008).

The ECMR is legally empowered to issue tax-exempt bonds, and enjoy all creditors‟ rights

including foreclosure. It is subject to financial oversight by the Egyptian Financial Supervisory

Authority (EFSA).

The ECMR‟s guideline for refinancing lending by primary mortgage lenders includes the

following:

Fully disbursed loans for the purchase, construction or renovation of a residential unit;

The mortgage loan has not been in default within the most recent 6-month period, and no

payment is overdue by more than 60 days ;

Maximum loan to value (value being the lower of property price or appraised value) of

80%;

The borrower is a natural person;

The mortgage property is insured against fire and other risks up to its full insurable value

Ownership

The ECMR is owned by the Central Bank of Egypt and 24 private and public financial

institutions.

Financial Products/Lending Instruments

The ECMR provides refinancing to primary mortgage lenders (PML) and raises funds through

long-term borrowing (bonds) from the Egyptian financial market.

Size of Operations

The assets of ECMR for the financial year ended 31 December 2009 amounted to 434.24 million

Egyptian Pounds (about US$73.14 million). The authorized capital of the Bank is 640 million

EGP (US$107.55 million) while the issued and paid up capital is 240.98 EGP (about US$40.49

million).

Governance of the Institution

21

The Bank has an eleven-member Board of Directors including the Managing Director and a non

executive Chairman. Its management team is headed by the Managing Director.

Risk Management

As provided by the real estate finance law, the operations of ECMR is focused on the presence of

legally sound collateral as the major decisive factor that determines qualification for borrowing,

rather than focusing on the borrower‟s credit rating, which in any case is not available in the

Egyptian market.

Lessons

The real estate law in Egypt is focused on the presence of legally sound collateral as the major

decisive factor that attracts a lender rather than focusing on the borrower‟s credit worthiness. The

transactions by ECMR are limited to refinancing, backed by real estate property as the collateral.

3.4 Malaysia: The National Mortgage Corporation, CAGAMAS BERHAD

Origin/Setup

The Malaysian National Mortgage Corporation, Cagamas Berhad (Cagamas) “was established in

1986 to promote the broader spread of house ownership and growth of the secondary mortgage

market in Malaysia. It issues debt securities to finance the purchase of housing loans from

financial institutions and non-financial institutions. The provision of liquidity to financial

institutions at a reasonable cost to the primary lenders of housing loans encourages further

expansion of financing for houses at an affordable cost”1.

The vision of Cagamas is “To be the leading securitization house in Malaysia and in the region

and to actively support the further development of the capital market and financial sector in

Malaysia”2

Ownership

Cagamas is fully owned by the Government of Malaysia.

Financial Products/Lending Instruments

The financial products provided by Cagamas to its clients include:

Housing loans

Industrial property loans

Property leasing finance

Islamic House Financing Debts

Purchase of housing facilities from primary lenders

1 http://cagamas.com

2 ibid

22

Loan Ratio/Tenure/Interest

The tenure of lending ranges from 1 to 10 years and the interest rate ranges from 3.7% to 5.2%

depending on the type of assets being financed and the adjudged risk status of the lending.

Industrial property financing attracts higher interest charges than residential housing. Also, the

longer the tenure of financing, the higher the interest rate.

Securitization:

Loans granted to primary mortgage institutions and other players in the Malaysian housing

market are secured against the houses and real estate assets being financed.

Sources of Operating Funds

In addition to the shareholder‟s funds, the operating funds for Cagamas are sourced through

bonds and Notes issued in Malaysia. Cagamas is a lead issuer of debt securities in Malaysia.

Cagamas‟ debt securities have the highest ratings of AAA by RAM Rating Services Berhad and

by Malaysian Rating Corporation Berhad.

Size of Operating Funds

The balance sheet of Cagamas, up to 2009, shows that the paid up capital of the Bank as at 2009

was RM150 million (about US$50 million) while the total assets amounted to Rm32,894.2

million (about US$11 billion), being over 200 times the paid up capital within 23 year of the

Bank‟s existence. The shareholder‟s fund amounted to Rm 3,047 (about US$1 billion), less than

10% of the total assets of the Bank. These balance sheet figures demonstrate the strong positive

impact of Cagamas‟ leveraging ability in the growth of its shareholder‟s fund and total assets.

Profitability

Cagamas operates as a social development institution, yet its earnings are subject to taxation.

These notwithstanding, the Bank have been operating profitably. In 2009, its profit after tax was

16% of the shareholder‟s funds in the previous year.

Governance of the Institution

The highest governing body of the institution is its 11-member Board of Directors that is

responsible for formulation of policies. In between Board meetings, a three-member Executive

Committee Board acts on behalf of the Board of Directors. Government appoints the chairman of

the Board while the day to day activities of the Bank is overseen by the President/Chief

Executive Officer, who is assisted by seven Senior Vice Presidents and 13 Vice Presidents.

Collaborating Institutions

Cagamas has maintained a close working relationship with commercial banks and primary

mortgage institutions in Malaysia.

23

Lessons

The success of Cagamas as a major player in the Malaysian housing market has derived from its

ability to raise funds from the Malaysian financial market. From inception, the Bank recognized

that its own fund was inadequate to meet the needs of the housing sector and to overcome this

inadequacy, it invested in maintaining a good record of performance that has enabled it to

borrow substantially from the local market through issuing of bonds and other financial products.

The facilitation of housing development by Cagamas has entailed designing and using special

lending instruments for the disadvantaged groups of the population and this has ensured that the

general population benefit from the development of the housing sector.

3.5 NIGERIA: Review of Secondary Mortgage Institution in Nigeria: Federal

Mortgage Bank of Nigeria (FMBN)

Origin/Setup

In 1977, the Nigerian Building Society was converted into the FMBN with an authorized share

capital of N20 million, which was later, increased to N150 million in 1979. Since then it has

metamorphosed into what is today the apex mortgage institution in Nigeria with a broad mandate

to:

provide long-term credit facilities to mortgage institutions in Nigeria at such rates and

such terms as may be determined by the Board in accordance with the policy directed by

the Federal Government, being rates and terms designed to enable the mortgage

institutions to grant comparable facilities to Nigerian individuals desiring to acquire

houses of their own;

license and encourage the emergence and growth of the required number of viable

secondary mortgage institutions to service the need of housing delivery in all parts of

Nigeria;

encourage and promote the development of mortgage institutions at rural, local, State and

Federal levels;

supervise and control the activities of mortgage institutions in Nigeria;

collect, manage and administer the National Housing Fund in accordance with the

provisions of the National Housing Fund Act;

do anything and enter into any transaction which in the opinion of the Board is necessary

to ensure the proper performance of its functions.

Between 1979 and 1989, the FMBN Combined the functions of a primary and secondary

mortgage institution, and in that year, the mortgage institutions Act was passed formally, to give

recognition to the two-tier system of housing finance with private sector institutions handling

primary or retail mortgaging while FMBN operating the secondary mortgage institution. Its

earlier primary mortgage functions were later transferred to the newly established Federal

mortgage finance limited, an arm of the FMBN.

24

Ownership

The Federal Mortgage Bank of Nigeria is government-owned, with the shareholding split among

the Federal Government (50%), the Central Bank of Nigeria (30%) and the Nigeria Social

Insurance Trust Fund (20%).

Securitization

Lending by the Bank through primary mortgage institutions are secured against the properties

financed and the assets of the PMIs. The Bank does not lend to a PMI more than 25% of the

assets of the primary lender. Lending to real estate developers are often short term, to cover the

development stage of the project and are secured by the assets of the developer and the property

being developed.

Sources of Operating Funds

National Housing Fund

A National Housing Fund Decree No.3 of 1992 established a fund known as the National

Housing Fund (the Fund). One of the stated contributors to the Fund is „the Federal Government

for long-term housing loans‟3. The FMBN manages the National Housing Fund.

According to the FMBN, “The Bank collects contributions to NHF based mainly on statutory

deductions and remittances of 2.5% of monthly incomes of Nigerian workers earning above the

national minimum wage. This operation is funded by the NHF to finance social housing. Two

types of mortgage facilities are granted from the window at subsidized rates of interest. Both

have the goal of facilitating affordable homeownership by contributors to the Fund”.

On contributing continuously for a minimum of six months, contributors become pre-qualified to

access home loans from the Fund by forwarding applications to the FMBN via accredited

primary mortgage institutions (PMIs). Such loans are granted by the FMBN at 4% interest per

annum to PMIs for on-lending to contributors at 6%, subject to an individual loan ceiling of N15

million, who repay over a maximum period of 30 years.

The other facility is estate development loan (EDL) granted to housing estate developers (Private

Developers, Housing Corporations and Housing Cooperatives) to build houses within affordable

target prices for sale to NHTF contributors. It attracts 10% interest and is repayable in 24

months. Membership of the Real Estate Developers Association of Nigeria (REDAN) is part of

the conditions for accessing the EDL. The mobilization of the contributions is facilitated by the

outreach structure made up of 8 Zonal Offices and 39 State and District Offices including

Federal Capital Territory (FCT, Abuja), whose functions are to register contributors and collect

contributions”4.

3 Article 3(d)

4 ( http://WWW.FMBnigeria.org

25

Contributions by workers to the NHF are statutory and are based on deductions and remittances

of 2.5% of monthly incomes of workers in Nigeria who earn not less than the national minimum

wage. The collection of the contributions is facilitated by the FMBN‟s 8 Zonal Offices and 39

State and District Offices.

As at March 2011 the FMBN have mobilized from the NHF window a total of N65 billion. There

are about 3.5 million contributors to the NHF but only one out of ten contributors is able to

access loan from the NHF due to scarcity of funds5.

Commercial Window

The FMBN also lends at market interest rates to commercial banks and private sector operators

in the housing market.

Capital Markets Operations

The capital market instruments at the disposal of the Bank include6:

Issuance of securities tied to FMBN assets;

Sale of Promissory Notes based on FGN Guarantees, explicit or implicit to source funds

for on-lending through rated mortgage originators;

Securitization of mortgage assets surplus to its portfolio requirements to raise funds to

finance both the primary and secondary mortgage markets; and

Sale of certificates of deposits to raise funds from investors including financial

institutions.

Operating Funds

As at February 2011, the FMBN had approved N51 billion as NHF loans for Primary Mortgage

Institutions (PMIs) and N70.5 billion for estate developers, bringing the total loans approved for

PMIs and EDL (estate developers) to N121.5 billion. In terms of proportions, the primary

mortgage institutions have received 42% of the loans while real estate developers have gotten

58% of loans from the FMBN. The relationship between the FMBN and real estate developers is

growing stronger as in December 2010 the FMBN approved a loan of N17.6 billion (about

US$120 million) for 32 real estate developers to build 6,214 housing units in Abuja.

The current management of FMBN is geared towards increasing its capital base substantially.

“As part of its on-going restructuring program aimed at delivering on its mandate, the

Federal Mortgage Bank of Nigeria (FMBN) is perfecting plans to raise its capital base to N150

billion”7.

5 Vanguard 14 February 2010

6 http://WWW.FMBnigeria.org

7 Punch, Tuesday, 22 March 2011

26

Governance of the Institution

The FMBN is governed by a Board of nine Directors, including the Chairman (non executive),

the Managing Director and three Executive Directors. The current Board was constituted on 17th

December 2010.

Scope for Collaboration

One of the stated medium-term objectives of the Federal Mortgage Bank of Nigeria (FMBN) is

to attract foreign funding and investments into the Nigerian mortgage sector by securing

facilities from international financial and multilateral institutions as well as private international

investments. The FMBN has recently stated that it is exploring the possibility of raising funds

offshore from international capital markets.8 This would suggest that the bank is open to new

initiatives and to collaborations with third parties.

Lessons

The major challenge facing the FMBN is insufficiency of operating funds. The Federal Mortgage

Bank of Nigeria finances the Nigerian housing market through two principal categories of

primary market players, the primary mortgage institutions and the real estate developers. Real

estate developers constitute about 60% of the lending while primary mortgage institutions

receive about 40%. The primary mortgage institutions and the real estate developers will serve as

part of the “ready-made” channels through which Shelter-Afrique will finance the Nigerian

housing market under its planned secondary mortgage operation. The FMBN will be a key

collaborator with the Shelter-Afrique in the Nigerian market.

8 Meeting with FMBN 11 February 2011

27

IV. LEGAL AND INSTITUTIONAL ISSUES FOR OPERATING A SECONDARY

MORTGAGE INSTITUTION IN NIGERIA

4.1 Legal and Institutional Issues on Nigeria

The housing and finance-related laws operational in Nigeria are presented below.

The Act establishing the Federal Mortgage Bank of Nigeria

Promulgated in 1993, the Act, as amended, established the Federal Mortgage Bank of Nigeria

(FMBN) to provide long-term credit facilities to mortgage institutions in Nigeria and encourage

and promote the development of mortgage institutions at the rural, local, State and Federal

levels.

Section 6(2) of the Act provides that the bank‟s liability, which may be incurred in connection

with the exercise of its powers under Section (6)(1), shall be discountable with the Central Bank

of Nigeria. The bank is exempt from the payment of income tax9 and the provisions of the Banks

and Other Financial Institutions Act also do not apply to the bank.10

Relevance of the Act to Shelter-Afrique

The purpose of the Act was to create the Federal Mortgage Bank of Nigeria, so its provisions

will not regulate the establishment by Shelter-Afrique of a SMI in Nigeria. However, the Act

does provide that the bank shall supervise and control the activities of mortgage institutions in

Nigeria11

. That the bank has a duty to supervise primary mortgage institutions in Nigeria is not in

question, however, it is unclear whether this supervisory role is intended to (or indeed can

possibly) extend to the supervision of another secondary mortgage institution. A common sense

approach would dictate that the bank should not supervise the SMI activities of Shelter-Afrique

in Nigeria, being that the two institutions should be identical functionally and operationally, and

on the same level. This does not, however, preclude co-operation and/or collaboration on certain

levels (e.g. research, project financing, etc) between the two institutions.

The Federal Ministry of lands, Housing and Urban Development and the National Housing

Fund

The present Ministry of Lands, Housing and Urban Development (Formally the Ministry of

Housing, Urban development and Environment) was created in 2002 and its roles include but not

limited to:

Policy formulation;

9 Section 19(1)

10 Section 19(2)

11 Section 5(d)

28

Setting standards for the sector;

Establishing building standards and codes for housing delivery; and

Setting safety standards in collaboration with relevant professional bodies.

The National Housing Fund Act, 1992, provides for the establishment of the National Housing

Fund (NHF) and specifies that the Fund shall be managed and administered by the Federal

Mortgage Bank of Nigeria (FMBN), which shall ensure that the proceeds of the Fund are utilized

to finance the housing sector of the economy12

.

Relevance of the Acts to Shelter-Afrique

Shelter-Afrique will ensure that projects it finances in Nigeria conform to the policies and

standards set by the Ministry of Housing. For the resources of the National Housing Fund, the

current position is that the Fund is the sole preserve of the Federal Mortgage Bank of Nigeria,

thus the proceeds of the NHF will not be available for the SMI operations of Shelter-Afrique.

The Mortgage Institutions Act, 1989

The Act made provisions for establishing and licensing of primary mortgage institutions to grant

loans and advances to individuals for the purchase or construction of a dwelling house;

improvement or extension of an existing dwelling house; and to accept savings and deposits from

members of the public and to pay interest thereon.

Relevance of the Act to Shelter-Afrique

This Act is not applicable to the proposed SMI functions of Shelter-Afrique, as its focus is the

regulation of primary mortgage institutions. However, the Act should be viewed as providing

information to Shelter-Afrique as to what is required of PMIs in Nigeria, and should guide the

company to deal with only those PMIs that are compliant with all the legal and regulatory

requirements.

The Investment and Securities Act, 1999

This Act established the Securities and Exchange Commission and makes provisions for the

functioning of the Commission. It is the duty of the Commission to regulate investments and

securities business in Nigeria, including registration of securities to be offered for subscription or

sale to the public, and to act as a regulatory apex organization for the Nigerian capital market.

Relevance of the Act to Shelter-Afrique

The rules and regulations of the Commission are be adhered to if Shelter-Afrique wishes to issue

mortgage-backed securities locally in Nigeria.

12

Section 7

29

The Federal Housing Authority Act, 1990

The Act established the Federal Housing Authority as a Statutory Corporation and vested on the

Authority the responsibility for implementing Federal Government‟s housing program.

Relevance of the Act to Shelter-Afrique

Shelter-Afrique will have grounds to collaborate with the Federal Housing Authority in carrying

out its SMI functions as both will be addressing a similar purpose.

4.2 The Role of Money and Capital Market Regulators in Nigeria

The role of the capital market in the secondary mortgage market is to act as a marketplace for

dealings in mortgage-backed asset products where lenders can secure long-term funds for

mortgage financing and development purposes. It is comprised of the primary market for new

issues and the secondary market for trading in existing securities. The Securities and Exchange

Commission (SEC) is the regulatory authority of the market and the operational institutions are

the Nigerian Stock Exchange, the issuing houses and the stock broking firms.

4.3 Protocol of Agreement between Shelter-Afrique and Nigeria

There is in existence a Protocol of Agreement Concerning Privileges and Immunities

Accorded to the Company for Habitat and Housing in Africa (Shelter-Afrique) by the

Government of the Federal Republic of Nigeria. This Agreement, dated 28th February 1989,

contains the following relevant provisions, amongst others:

The preamble recites the purpose of Shelter-Afrique as an organization established by its

shareholders to serve as an instrument for assisting African Governments with the definition of

coherent and effective housing policies, and to help with their implementation. It provides

further that Shelter-Afrique by its nature can most effectively achieve its objectives if it enjoys

certain privileges and immunities in respect of itself, its property and assets, among others:

Article I – Shelter-Afrique shall have full juridical personality and full capacity to, in particular,

contract, acquire and dispose of immovable and movable property and institute legal

proceedings.

Article III(c) – To the extent necessary to carry out its purpose and functions, Shelter-Afrique

shall be free from exchange and other restrictions by financial controls, regulations or moratoria

of any kind.

Article VI(a) – exemption from taxation – Shelter-Afrique, its assets, property, income,

operations and transactions shall be exempt from all direct taxation, and from all customs duties,

or taxes having equivalent effect, on goods imported for its official use.

30

Article VI(b) - No tax shall be levied on or in respect of salaries and emoluments paid by

Shelter-Afrique to its representatives, officials, agents, employees and experts where such

representatives, officials, agents, employees and experts are not nationals or permanent residents

of Nigeria.

Article VII (Financial Facilities) – Without being restricted by financial controls, restrictions,

regulations or moratoria of any kind, Shelter-Afrique may acquire negotiable currencies from

authorized banks, hold them....

Article VII(d) – the Government of the Federal Republic of Nigeria shall assist Shelter-Afrique

to obtain the most favorable conditions as regards exchange rates, banking commissions on

exchange transactions and the like.

Article IX (Amendments and Supplementary Agreement) – (b) – The Government and Shelter-

Afrique may enter into such supplementary agreements within the scope of this Agreement as

may be desirable in the light of their operating experience.

Legal Mandate for Shelter-Afrique to House a Facility in Nigeria

A review of the constitutive documents of Shelter-Afrique shows that the company has the legal

mandate to house an SMI facility in Nigeria. Its stated objective in terms of providing financial

assistance for housing in Africa is wide and encompasses the establishment of an SMI in a

member country. But in order to proceed, the company would need to obtain prior approval from

its Board of Directors.13

Apart from Shelter-Afrique and the Federal Mortgage Bank of Nigeria, we are not aware of any

other institution that has the legal mandate to operate as an SMI in Nigeria. Neither is there any

provision that permits a company to be incorporated to operate as an SMI. It therefore appears

that for any other company other than Shelter-Afrique to directly operate in the Nigerian

secondary mortgage market, a new legislation will be required to give legal backing to the

company.

The terms of a Protocol of Agreement between the Shelter-Afrique and Nigeria afford the

company favorable working conditions in Nigeria, including exemption from taxes and

enjoyment of diplomatic privileges. This does not, however, preclude the necessity of Shelter-

Afrique establishing good working relations with other agencies in Nigeria concerned with the

provision of housing services (the Ministry of Lands, Housing and Urban Development, the

Central Bank of Nigeria, the Federal Mortgage Bank of Nigeria and various other agencies and

associations such as REDAN, MBAN, state housing corporations, etc).

13

See 4.3 Review of Shelter Afrique below

31

A fresh company, incorporated by Shelter-Afrique and other partners, which does not carry the

full legal authority and immunity of Shelter-Afrique, may not qualify to operate in Nigeria as an

SMI under the current laws. But Shelter-Afrique may choose to mobilize external resources, in

the form of debt or equity, for its envisaged operation in Nigeria.

4.4 Institutional Issues: Shelter-Afrique

Origin/Set up

The Company for Habitat and Housing in Africa (Shelter-Afrique) was established in May 1982

by some African countries, the African Development Bank, the Commonwealth Development

Corporation (now ACTIS) and African Reinsurance Corporation with its principal office in

Nairobi, Kenya. The purpose of the company is to promote financing for housing and urban

development in African countries14

.

The functions of the company include the following:

(i) To mobilize capital from which loan and equity resources shall, based upon

policies and procedures approved by the Board from time to time, be made

available for approved housing and related schemes in African countries and to

national housing development institutions in African countries.

(ii) To promote, encourage and contribute directly through equity participation, and

indirectly through financing and technical assistance through a special Fund or

otherwise, in the investment of public and private capital for housing and related

schemes and in the establishment and development of viable housing institutions

in African countries.

(iii) To develop or acquire directly or by way of joint venture housing and related

schemes in African countries and to sell or deal therewith in any manner deemed

profitable to the company.

(vi) To engage in or finance the research of any aspect of housing and of construction

and building industries in African countries and finance in whole or in part any

housing project developed from such research.

(viii) To carry out any other business which may profitably or usefully be combined

with any of the said business which may seem to the company, capable of being

carried out in connection with or in combination with any of the aforementioned

objects, or calculated directly or indirectly to enhance the value of or render

profitable any of the company‟s property or rights and to do all such other things

as are incidental or conducive to the attainment of the above objectives or any of

them.

Other functions include the ability to raise money by issuing shares and debentures and other

securities and to grant mortgages and fixed and floating charges over the company‟s assets; to

buy, underwrite, invest in, and acquire shares, bonds and other securities15

.

14

Article 4(a) Statutes of the Company for Habitat and Housing in Africa, hereinafter called the Statutes 15

Article 4(b)(iv) and (v) Statutes

32

Ownership

The ownership of the company is in the hands of 41 African countries, the African Development

Bank, ACTIS and the African Reinsurance Company. As at the end of 2007 membership was as

follows*:

Kenya 15%

Nigeria 13.8%

African Development Bank 12.9%

Algeria 8.0%

Cameroon 5.1%

ACTIS 4.3%

Senegal 3.9%

Gabon 3.6%

Zambia 3.3%

Africa Reinsurance Corporation 2.6%

Mali 2.4%

Botswana 2.3%

Burkina Faso 2.2%

Others 20.6%

* Source: Global Credit Rating Co.

The authorized share capital of the company is US$300,000,000, divided into 300,000 shares of

$1,000 each. There are two classes of shares: A and B. The A shares are issued to member

countries while the B shares are issued to organizations and institutions. Both rank pari passu in

all respects.

If a member of the company fails to fulfill its obligations to the company, the General Meeting

may suspend such a member by way of special resolution.16

The member so suspended shall

automatically cease to be a member of the company one year from the date of its suspension

unless the General Meeting decides, within that period and by the same resolution necessary for

suspension, to restore the member to good standing.17

It is of note that Nigeria is not under

suspension and remains a full member of Shelter-Afrique.

Financial Products/Lending Instruments

The company‟s lending and operational instruments include debt, lines of credit, equity and

quasi equity, short term facilities, trade finance and technical assistance:

Debt – the company provides short-term (1-5 years) construction loans to developers to co-

finance real estate projects for outright sale. It also participates in syndicated lending. The

16

Article 14(a) Statutes 17

Article 14(b) Statutes

33

company also provides concessionary loans and grants to NGOs, CBOs and groups

formed by or to assist target populations. These loans are structured to provide affordable

local currency financing for meeting the housing needs of the poor.

Lines of credit and mortgage loans – lines of credit may be provided to banks or housing finance

institutions for on-lending to individuals to buy houses or for small and medium

developers. The company can also buy a portfolio of mortgages from housing finance

institutions with or without recourse to them, but provided the HFIs continue to provide

servicing functions.

Equity/quasi equity – the company sometimes provides risk capital by way of equity or quasi

equity investments to partners. Equity/quasi equity could be through direct investment in

share acquisition, convertible bonds, mezzanine finance or joint ventures.

Trade finance – a recent product of the company is the trade finance facility for building

materials. The company provides short term (1-2 years) to building contractors. These

include structured loan products, invoice discounting and advance payment guarantees.

Technical assistance – the company provides technical assistance for, amongst other things,

structuring project proposals, preparing feasibility studies and/or implementing projects;

developing and implementing housing policies and developing mortgage instruments.

Funding activities of Shelter-Afrique

70%

20%

5%5%

Loan

Joint Venture

Trade Finance

Others

34

Current Size/Amount of Operating Fund

A review of the company‟s financial performance for the period 200818

shows that its total assets

amounted to $81.3 million with capital and reserves at $61.3 million.

Governance of the Institution

General Meeting

All the powers of the company shall be vested in the General Meeting,19

which may delegate to

the Board of Directors authority to exercise any of its powers except the power to increase or

decrease the authorized capital of the company; elect and remove directors and determine their

allowances as well as that of their Alternates; to approve the appointment and remuneration of

external auditors to audit the accounts of the company; approve, after reviewing the report of the

auditors, the balance sheet and statement of profit and loss of the company; approve any

distribution or allocation of net income by the Board of Directors; and amend the Statutes.

Board of Directors

The Board of Directors shall be elected by the General Meeting, and a member holding 10% of

called-up shares shall be entitled to a seat on the Board.20

The Board shall be responsible for the

day-to-day conduct of the company and shall exercise those powers in addition to any that the

General Meeting shall bestow upon it.

The Board shall meet for the dispatch of the business of the company as it thinks fit, and unless

otherwise provided by the Statutes, questions arising shall be decided by a majority of votes and

each Director shall have one vote. The Chairman shall have a casting vote. The quorum for

meetings shall be six, however, there must be at least one member present from each class of

share. The Board may delegate some of its powers to committees consisting of such members or

members of its body as it thinks fit.21

Managing Director

The Board may by majority vote appoint, suspend or remove a Managing Director for the

company. The appointment will be for a term of five years, renewable for a further five years.

The Managing Director shall participate in the proceedings of the Board of Directors and the

General Meeting, but shall not vote. The Managing Director shall be responsible for the

appointment and dismissal of other officers of the company in accordance with regulations

adopted by the Board.22

18

More recent financial information is not available 19

Article 16(a) and (b) Statutes 20

Article 20 Statutes 21

Article 24 22

Article 25 Statutes

35

Next to the Managing Director is the Deputy Managing Director, followed by Directors

responsible for the departments of the company.

Collaborating Institutions

The company actively collaborates with other institutions in furtherance of its objectives. It has

financed, in collaboration with Afrexim Bank, the construction of hotels and tourism projects.

Indeed, the company actively seeks co-financing arrangements and opportunities with both local

and international financial institutions as part of its mandate to mobilize additional resources. It

also participates in syndicated loans to raise funds jointly with other financial institutions to

finance large scale housing and infrastructure loans. On the equity side, the company is also

willing to engage in joint ventures with developers and other reputable financial institutions.

As discussed earlier23

the CBN has stated that of the FMBN, it intends to promote the

establishment of a new SMI24

where, it is hoped, foreign shareholders and other agencies

including a development agency such as Shelter-Afrique might participate.

Risks Encountered

These include the long-term nature of housing projects. Long-term capital intensive projects can

be difficult to manage and risk mitigation can prove difficult and/or expensive. In Nigeria, one of

the problems currently facing the mortgage market is the lack of insurers against housing-related

risks. This is an area where the CBN is involving itself to seek to resolve the issue.

Major Challenges

The major challenges the company has in meeting its mandate include the following. Firstly,

there is a severe shortage of funds. With total assets at less than $100 million, embarking on the

establishment of an SMI would seem an ambitious exercise. A mitigating factor is for Shelter-

Afrique to follow the footsteps of other secondary mortgage companies that do not depend on

their core capital. For instance Fannie Mae had a core capital of about $47 billion in the second

quarter of 2009. In that same quarter its mortgage credit book business had increased to $3.19

trillion and during the same period it securitized $94.6 billion of whole loans.

Another challenge for Shelter-Afrique, and closely tied to the funding challenge, is the fact that it

does not have a high credit rating, which makes it difficult to raise funds internationally. A

further challenge for the company is that it operates in a very difficult African environment.

Although Africa offers huge opportunities, the risks of operating there are equally huge.

23

See above under heading ‘Do their Mandates and Powers Exclude Any Other Player or is There Room for New Entrants’ 24

Meeting with CBN 7 February 2011

36

V. Possible Sources of Funding for a Secondary Mortgage Institution in Nigeria

A number of sources have been identified as possible sources of funding for a secondary

mortgage operation in Nigeria. These are briefly described below.

5.1 African Development Bank

The African Development Bank was established on 4th August 1963 for the purpose of

contributing to the development of it regional member countries.25

Among the broad functions of

the Bank are to:

(a) use the resources at its disposal for the financing of investment projects

and programmes relating to the economic and social development of its

regional members;

(b) undertake, or participate in, the selection, study and preparation of

projects, enterprises and activities contributing to such development;

(c) mobilise and increase in Africa, and outside Africa, resources for the

financing of such investment projects and programmes;

(d) provide such technical assistance as may be needed in Africa for the

study, preparation, financing and execution of development projects or

programmes.

In carrying out its functions, the Bank co-operates with national, regional and sub-regional

development institutions in Africa. The Bank is well positioned to collaborate with another

institution such as Shelter-Afrique in financing a secondary mortgage market in its member

countries of which Nigeria is one. The Bank does not finance mortgage projects directly but

providing resources through Shelter-Afrique falls within the operational scope of the Bank‟s

private sector window.

5.2 International Finance Corporation (IFC)

The International Finance Corporation is the private-sector investment arm of the World Bank.

It was established in 1956 and is wholly owned by the World Bank‟s member countries. The

purpose of the Corporation is to promote economic development by encouraging the growth of

productive private enterprises in the World Bank‟s developing member countries, thus

supplementing the activities of the World Bank.26

As at 30 June 2010 the IFC‟s authorized capital was $2.45 billion of which $2.37 billion had

been paid up. Nigeria has been a member of the Corporation since 1961 and projects in Nigeria

fall within the scope of financing by the IFC. All other member countries of Shelter-Afrique are

25

Article 1, Articles of Agreement of the African Development Bank, 1963, as amended 26

Article I, Articles of Agreement of the International Finance Corporation, as amended through April 28, 1993

37

also members of the IFC, a situation that portends a cordial business relationship between IFC

and Shelter-Afrique.

Operationally, IFC does not normally lend directly to micro, small and medium-scale enterprises,

or individual entrepreneurs but lends through financial intermediaries that on-lend to the end

clients. Shelter-Afrique could be one of such intermediaries.

5.3 African Export-Import Bank (Afreximbank)

The African Export-Import Bank was established in 1993 for the purpose of financing,

promoting and expanding trade among African countries and between African countries and the

rest of the world. It is owned by African governments, African private and institutional investors

and some non-African financial institutions and private investors. The bank had total assets of

US$1.9 billion and shareholders‟ funds of US$457 million as at 31 December 2010.

The Bank‟s activities are generally focused on financing the import-export industry in its

member countries including Nigeria. Importation of building materials is financed by the Bank

and Nigeria is import-dependent for most of the materials used in its housing sector. Financing

trade on building materials provides an avenue for collaboration between Afreximbank and

Shelter-Afrique for the Nigerian mortgage industry.

5.4 The Export-Import Bank of China

The Export-Import Bank of China was established in 1994 and it is fully owned by the Chinese

government. Its primary activity is financing the Chinese import and export industry. The bank

also grants loans to overseas investment projects by Chinese companies and provides on-lending

loans to foreign governments and international financial institutions, particularly institutions

operating in countries that are trading partners to China, of which Nigeria is one.

Of particular interest to Shelter-Afrique would be the bank‟s activities in on-lending loans to

international financial institutions. The Bank has been financing projects in Nigeria and could be

a good partner to Shelter-Afrique for promoting secondary mortgage investments in Nigeria.

5.5 Central Bank of Nigeria (CBN)

The CBN is the apex regulatory authority of the Nigerian financial system. It was established by

the CBN act of 1958 and commenced operations in July 1959. Among its primary functions, the

CBN promotes development finance. In 2005, the Federal Government in conjunction with the

CBN set up the Financial System Strategy (FSS) 2020 Mortgage Committee. Four key objectives

were spelt out for the Committee. They include:

38

1. Establish a safe and profitable mortgage market by setting up appropriate

infrastructure/institutions/processes and remodeling existing ones,

2. Introduce a framework to strengthen property/security rights.

3. Use the mortgage market to make long- term finance available and affordable to all

Nigerians.

4. Enhance market mechanisms to improve the housing delivery system.

In 2010, the Central Bank publicly announced that it was exploring ways to provide financing for

the mortgage industry27

and when this is realized, the Central Bank could be a source of funding

for the intended operations of Shelter-Afrique.

5.6 Nigeria Sovereign Wealth Fund

The Nigeria Sovereign Investment Act (NSIA) establishing the Nigeria Sovereign Wealth Fund

(SWF) was enacted in May 2011. Like in other resource-rich countries, the Nigeria SWF is

planned to institutionalize a saving of part of the proceeds of the crude oil industry for the future.

By the Act, the SWF is to have three components, namely: Savings Fund (for future

generations); Stabilization Fund (as a cushion in terms of budget shortfalls); and Infrastructure

Fund (to speed up the development of infrastructure). Government has voted an initial

US$1billion for the fund and all earnings from crude oil above the budget benchmark will accrue

to the SWF.

The SWF is expected to start operations in the third quarter of 2011 and the resources of the

SWF, particularly the Savings and the Infrastructure components might be sources of financing

for the Nigerian housing sector.

27

Meeting with CBN 7 February 2011

39

VI. THE PROPOSED OPERATING MODEL

This chapter presents a feasible operating model for SHAF in the Nigerian secondary mortgage

market taking into account the issues identified in the foregoing chapters. In particular, the

chapter draws on the lessons from other secondary mortgage markets in the developing countries

of comparative status with Nigeria as well as peculiar issues on the present operating

environment in Nigeria. Having noted in chapter IV that only the Federal Mortgage of Nigeria

and Shelter-Afrique have the statutory powers to operate secondary mortgage financing in

Nigeria for now, the operating model presented hereunder is based on Shelter-Afrique executing

a secondary mortgage investment in Nigeria, backed by its full legal status.

6.1 Strategic Objective

The overall strategic objective of Shelter-Afrique (SHAF) would be to accelerate the

development of the entire housing sector in Nigeria. To achieve this objective, SHAF will

provide financial and non financial support to operators in the Nigerian housing market.

6.2 The Operating Philosophy

In line with its originating mandate, Shelter-Afrique will operate in Nigeria as a profit-oriented

development finance institution that is focused on promoting the development of the entire

housing sector. To this end, SHAF could engage in mobilizing resources from within and outside

Nigeria and invest the resources through any viable and credible public or private sector

intermediary in the Nigerian housing market. Shelter-Afrique will undertake all necessary

actions to fulfil its mission in Nigeria and in such a manner that it is not vulnerable to

bureaucratic and operational dominance by the Government or its fund providers.

6.3 Operating Strategy

Operating Entity

There are a number of options SHAF can adopt to operate in the Nigerian secondary mortgage

market:

(i) Continue to reach out to the Nigerian market from its operating base in Nairobi as it

presently does (could evolve into creating a special window for Nigeria);

(ii) Incorporate a joint venture with other players to specifically focus on the Nigerian

market;

(iii)Set up an outreach office in Nigeria to focus on the Nigerian market; or

(iv) Create a fully-owned subsidiary to focus on the Nigerian market.

We have reviewed the implications of each of the four options vis-à-vis the current status of both

the Nigerian market and the Shelter-Afrique and noted the salient requirements that have to be

met by a chosen option, which are as follows:

40

1) The Nigerian housing market is under-funded and the demand for housing and housing

finance is huge and subsisting. Shelter-Afrique, in its present mode and level of

intervention in the Nigerian housing market, is not making a significant contribution

towards developing the market. Although Shelter-Afrique is not a major player in the

market, its current Management desires that it becomes one of the recognizable players in

the market. A chosen option has to lead to making more financial resources available

to the Nigerian housing market and also rev up the role of Shelter-Afrique in the

Nigerian housing market.

2) The huge financing needs of the Nigerian housing market cannot be met by the current

operating funds of Shelter-Afrique; therefore an operating option by Shelter-Afrique

necessitates positioning the institution to intermediate in mobilizing external resources

for the Nigerian market. Any new institution, either fully owned by Shelter-Afrique or a

joint venture with other partners will require some years to prove itself before it can

effectively mobilize external resources. Even if a new institution has substantial

resources to play in the Nigerian market, we doubt the legal basis for such an institution

to be a secondary mortgage player in Nigeria as the laws in Nigeria make no reference to

any other institution as a secondary mortgage lender other than the Federal Mortgage

Bank of Nigeria.

3) Shelter-Afrique is an institution backed by the sovereign goodwill of many countries and

that of the African Development Bank. This goodwill will be a boost in its bid to

mobilize external resources for investment in the Nigerian housing market. Thus it is

advantageous for Shelter-Afrique to back its operations in Nigeria with its total legal

and corporate status. Shelter Afrique, by its enabling legal status, can operate as a

secondary mortgage lender in Nigeria.

4) Nigeria presents a rich source for resources to be mobilized by Shelter-Afrique for its

operations in Nigeria. To effectively tap into the Nigerian financial resource base,

Shelter-Afrique has to establish an operating office in Nigeria to ease operations,

market the institution to the Nigerian financier and clearly demonstrate the institution‟s

readiness to invest the resources.

Recommended Option

Having considered issues highlighted above, we recommend that SHAF adopts Option (iii) for

its operations in the Nigerian secondary mortgage market. Thus, Shelter-Afrique should “Set up

an outreach office in Nigeria to focus on the Nigerian market”.

6.4 Location

The two cities with the largest concentration of real estate development business in Nigeria are

Abuja and Lagos. Abuja is the federal capital city, located at the center of Nigeria‟s geographical

spread, it is easily accessible from other parts of Nigeria by road and flight and it also has a

41

major and viable international airport. The Central Bank of Nigeria, all federal ministries and all

embassies have their head offices in Abuja. Lagos is the major commercial city, located at the tip

of Nigeria‟s southern region. Most commercial banks have their head offices in Lagos and many

foreign embassies and missions have representative offices in Lagos. The city has a major

international airport and is easily accessible by domestic and international flights, just like

Abuja.

Either Abuja or Lagos can effectively serve as the operational base of SHAF in Nigeria.

The additional advantage of Abuja is that it will facilitate outreach to Government institutions

(Central Bank, Federal Mortgage Bank, Sovereign Wealth Fund, etc) for the purpose of

mobilizing funds for operations. If SHAF will depend substantially on resources from Nigeria

for its operations, it is better to have its head office in Abuja and when the scope of its

operations increases, it can have an additional office in Lagos.

Continuous growth and expansion of activities over the sixth to the tenth year of operation

would lead to opening of zonal offices in all of Nigeria‟s six geo-political zones, namely South-

East, South-South, South-West, North-East, North-West and North-Central.

6.5 Product and Services

The activities of SHAF in Nigeria will replicate most of the current lending products and

services of SHAF which include:

Commercial construction loans

Syndicated lending

Concessionary loans to target populations

Lines of credit to mortgage and commercial banks

Trade finance (of real estate products)

Technical assistance

Etc

SHAF may decide to refrain from engaging in equity/quasi equity financing (particularly in the

first 2 years) until it gains full on-the-field experience of the risks involved in the Nigerian

mortgage industry.

6.6 Currency of Operations/Risk Management

The accounting currency of SHAF is US dollars whereas the official legal tender in Nigeria is

the Nigerian naira. Like other international institutions (World Bank, ADB, IFC, AFC, etc.)

SHAF will be permitted to transact its Nigerian business in dollars or the naira.

The exchange rate in Nigeria has not been particularly stable over the years. From 2007 to 2011,

the naira/dollar exchange rate depreciated from about 125 to about 150, a depreciation of 20%

over the period, or an annual depreciation of 5%. However, the rate of depreciation from year to

42

year is not evenly spread as while zero rates of depreciation have been achieved in some recent

years, as much as 15% has occurred in a year.

At the initial years, SHAF may choose to operate both in the naira and the US dollars to

avoid too much exposure to risks associated with the local currency. Our interaction with

potential borrowers showed that funds lent in US dollars at interest rate of not more than 10%

per annum will be attractive and preferred to borrowing in naira at over 20% per annum.

6.7 Fund Mobilization Currency

As an international institution whose target market for funds mobilization is not restricted to any

one country, SHAF could denominate its borrowing from outside Nigeria in US dollars or any

other international currency depending on the preferences of lenders. Borrowing within Nigeria

could be either in an international currency or the naira. While funds from the Central Bank of

Nigeria and some other local sources could be in naira, the Sovereign Wealth Fund financing

might be available in naira or an international currency.

6.8 Tenure of Lending

Ideally, the most preferred lending tenure will be long-term of 15 to 30 years as practiced in

developed countries. The tenure of lending by SHAF will however be constrained by the tenure

of its intermediated funds. A reassuring factor is the indicated willingness of operators in the

Nigerian market to borrow short-term (2-5 years), particularly real estate developers and state

housing corporations.

6.9 Partner Institutions (Lending)

The lending operations of SHAF will be channeled through the following institutions:

Primary Mortgage Banks

Real Estate Developers

State Housing Corporations

Federal Mortgage Bank of Nigeria

The Federal Mortgage of Nigeria (FMBN) is operationally established in Nigeria but has

inadequate funds to meet the funding requests it receives and in an event where SHAF has a

short-term excess funds, it will find in FMBN, a ready-made partner through which to deploy the

funds for on-lending to primary mortgage operators.

6.10 Partner Institutions (Fund Mobilization)

SHAF will develop appropriate instruments (deposits, line of credit, bonds, loans, etc.) to

mobilize funds from the following institutions for its operations in the Nigerian secondary

mortgage market:

43

Central Bank of Nigeria

Nigeria Sovereign Wealth Fund

African Development Bank

International Finance Corporation

Export-Import Bank of China

African Export-Import Bank

Nigerian commercial banks

Others

6.11 Risk Management

The risk management services for the operations in Nigeria could be mainstreamed within the

risk management structure and activities of the SHAF head office.

6.12 Organizational Structure

It is proposed that for the start-up and for the first five years (with modifications when it

becomes expedient), the operation in Nigeria will be headed by a senior management staff of

SHAF, who will be domiciled in Nigeria. The Head will be supported by a core professional

team (staff) who will report to him/her administratively and take instructions from him/her on

technical issues. The execution of technical assignments will be carried out by the professional

team members in liaison with their technical supervisors at the head office. For an instance, fund

management actions initiated by the Head of the Nigerian office and the attached treasury officer

will require guidance and approval from the Head of the Treasury Department at the Head office.

There will also be a few support staff for the Nigerian office while the provision of some support

services (like cleaning, office facility management, etc.) could be contracted out to local firms in

Nigeria.

The Nigerian office will conform to the governance structure at the head office in terms of

Board oversight, Management control, Risk Management, Project approval authority, audit,

exercise of administrative levels of authority, protocol, etc.

6.13 Human Resources

The Head of the Nigerian office will be ranked a Deputy Managing Director or at least a Director

and will report directly to the Managing Director of Shelter-Afrique. The recommended level of

seniority will enable the Head of the Nigerian office to elicit all necessary support and

cooperation from the Directors and Heads of Units at the head office. He also needs to be a

sufficiently experienced professional to effectively manage the envisaged huge volume of

transactions in the Nigerian office.

44

There will be other professional staff in the following areas:

2 Officers, Project Management

1 Officer, Legal Services

1 Officer, Risk Management

2 Officers, Treasury

1 Officer, Accounts

1 Officer, Administration

6.14 Compensation

The estimation of fees to be paid to the staff of the Nigerian office is based on the market rate in

the banking industry in Nigeria.

45

VII. FINANCIAL PROJECTIONS

7.1 Estimated Project Cost

The total estimated project cost, covering pre-operational expenses and capital expenditure is

shown below. Total estimates were based on the current year 2011 prices for goods and services.

Table 7.1: Estimated Project Cost

Activity Description Amount (US$)

Pre-operational Expenses 270,000

Capital Expenditure 1,762,294

Total 2,032,294

Table 7.1: Operating Expenses (US$)

Year Yr 1 Yr2 Yr3 Yr4 Yr5

Management meetings 125,000 137,500 151,250 166,375 183,013

Missions (domestic &

external) 240,000 264,000 290,400 319,440 351,384

Business Development 85,000 93,500 102,850 113,135 124,449

Stationeries and

Consumables 140,000 154,000 169,400 186,340 204,974

Office Space 240,000 240,000 264,000 290,400 319,440

Fees to External consultants

(project evaluation, etc) 75,000 82,500 90,750 99,825 109,808

Pre-operational Expenses 270,000 -- -- -- --

Payroll costs 1,564,000 1,876,800 2,252,160 2,702,592 3,243,110

Depreciation 272,404 272,404 272,404 272,404 272,404

Total 3,011,404 3,120,704 3,593,214 4,150,511 4,808,582

Most expenses are projected to increase at 5 % to 10% per annum to accommodate rapid expansion and cost

increases.

7.2 Detailed Project Cost

Pre-operational Expenses

The pre-operational expenses are expected to be incurred before start-up of business, ideally

between 0 to 3 months before the grand-opening day for a SHAF-led SMI in Nigeria.

46

Table 7.3 Pre-operational Expenses

Capital Expenditure

The capital expenditure provides the details of hard core capital investment required for starting

the business, as presented below. The different activity descriptions under the capital expenditure

are further expanded to show individual line items and estimated cost for each category.

Table 7.4: Capital Expenditure

Table 7.5: Computer Hardware, Printers, etc.

Activity Description Unit Unit Cost (US$) Total Cost (US$)

Desktops & UPS 8 2,400 19,200

Notebooks & iPads 4 2,400 9,600

Servers & UPS 8 18,000 144,000

Printers 6 3,000 18,000

Wireless & Network Capabilities - - 9,120

Accessories - - 2,760

TOTAL 211,680

Activity Description Amount (US$)

Advisory Fees (feasibility study, etc) --

Consulting (Recruitment, Office

procurement; IT advisory, etc.)

70,000

Road Show Expenses 200,000

Total 270,000

Activity Description Amount (US$)

Computer Hardware 211,680

Computer Software 168,000

Telecommunications. 92,414

Office Space Lease (two years) 480,000

Vehicles 400,000

Furniture & Fittings 349,000

Office Equipment 61,200

Total 1,762,294

47

Computer Software

The computer software includes the latest technological advancements in underwriting system,

computer operating systems, sensitive data protection and security suites, and information

technology data, and communication sharing software system.

Table 7.6: Computer Software

Activity Description Unit Unit Cost (US$) Total Cost (US$)

Loan Origination/Underwriting software 4 10,200 40,800

Accounting 1 22,800 22,800

Payroll & HRM 1 22,800 22,800

Microsoft Office Suite - - 30,000

Banking Software 3 10,200 30,600

Computer Information Security Suites - - 12,000

Email System, Voicemail, Data back-up, etc. - - 9,000

TOTAL 168,000

Furniture and Fittings

This section reflects the furniture and fittings that would be required at start-up based on the

needs of the proposed staff with emphasis on staff status and designation. The type and quality of

these furniture and fittings will speak the strong corporate image envisaged of the new business

outfit.

Table 7.7: Furniture and Fittings

Activity Description Set Set Cost (US$) Total Cost (US$)

Head of Nigerian Office 1 9,600 9,600

Senior Officers 5 7,800 39,000

Support staff 6 3,800 22,800

Reception 1 11,600 11,600

Meeting & Conference Rooms 2 18,000 36,000

Office Improvement – Office/Space

modifications, Art works, Paintings, etc.

LOT - 200,000

Others LOT - 30,000

TOTAL 349,000

Office Equipment

The office equipment includes the latest developments in office solutions, fully integrated color

photocopiers/fax/scan/printers and classical audio-visual systems for conferences and meetings

both at remote and on-site locations.

48

Table 7.8: Office Equipment

Activity Description Units Unit Cost (US$) Total Cost (US$)

Photocopiers 5 5,400 27,000

Safe 5 1,440 7,200

Filing Cabinet 10 300 3,000

Projector & Screen (Audio-visual System) 3 5,200 15,600

Others LOT - 8,400

TOTAL 61,20

Office Space

A major expenditure is expected for office space at prime commercial locations in Abuja or

Lagos. Targeted at 500 square meters, it is based on space requirements to run a business outfit

of the nature under consideration with projected continuous growth and increased space

requirements during each successive year. The office will be fully serviced, with air-conditioners

and other amenities. In line with the practice in Nigeria, a minimum of two years rent will be

required to be paid at the time of leasing the office space.

Table 7.9: Office Space

Activity Description Area

(Sq Meters)

Cost

(Sq. Meters) US$

Total Cost

(US$)

Lease 500 300 150,000

Service Charge 500 150 75,000

Agency and legal fees (10%) 15,000

TOTAL (One year) - - 240,000

TOTAL (Two years) - - 480,000

Vehicles

The vehicular requirement for the company is based on staff status, business needs and projected

corporate image. Vehicle leasing will be considered in the event of extra business needs as field

operations continue to expand.

Table 7.10: Vehicle

Activity Description Units Unit Cost (US$) Total Cost (US$)

Head of Office 2 65,000 130,000

Senior Officers & Protocol 3 50,000 150,000

General Utility Vehicles & Protocol 3 40,000 120,000

TOTAL - 400,000

49

Telecommunications

The telecommunication equipment promises the latest in the industry as would be required for

the success of an SMI in Nigeria. It will include a VSAT satellite system with advanced

telecommunication and mobile computing equipments like iPhone, iPads, Blackberry, Voice

over Internet Protocol (VoIP) and Fax-to-Email systems.

Table 7.11: Telecommunications

Activity Description Units Unit Cost (US$) Total Cost (US$)

Telephones Lines 10 180 1,800

Telephone boxes, PBX, VoIP 15 98 1,470

Cell Phones – iPhones, GSM 10 250 2,500

Facsimile Machines (Fax-to-Email System) 8 340 2,720

VSAT - - 21,600

Internet Access LOT - 42,000

Domain Access, Website Design and Hosting - - 14,400

Contingency – - - 5,924

TOTAL 92,414

Table 7.11: Payroll Costs US$ (total remuneration & benefits including housing allowance)

Year Number Per Yr Yr 1 Yr2 Yr3 Yr4 Yr5

Head of

Office 1 460,000

460,000

552,000

662,400

794,880

953,856

Senior

Officers 8 120,000

960,000

1,152,000

1,382,400

1,658,880

1,990,656

Support Staff 12 12,000 144,000 172,800 207,360 248,832 298,598

Total 1,564,000 1,876,800 2,252,160 2,702,592 3,243,110

A 20% annual increase is included in successive years to cover increases in remuneration and

new staff additions.

Table7.12: Depreciation

Asset Depreciation Rate (%)

Vehicles 25

Computer Hardware 33

Furniture & Fittings 25

Office Equipment 25

50

VIII. PROPOSED FUNDING FOR THE OPERATION

Two approaches to funding are envisaged. One is where the entire funds for the secondary

mortgage operations in Nigeria are borrowed annually, up to a cumulative borrowing of

US$500million by the fifth year (Scenarios 1 to 4 below). The second is a combination of equity

and borrowed funds.

The funding and profit and loss projections are premised on intermediated funds, borrowed

annually, with a total borrowing of US$500 million for the first five years (scenarios 1, 2, 3 and

4). Scenario 5 starts with an equity contribution of US$40 million plus annual borrowings from

the second year with a cumulative borrowing of US$500 million by the fifth year.

Table 8.1: Estimated Funding and Borrowing Requirements (US$ million)

Borrowing Requirements Equity

(Yr 1)

Borrowed Fund

Yr 1 Yr2 Yr3 Yr4 Yr5

Scenario 1 50 50 100 100 200

Scenario 2 100 100 100 100 100

Scenario 3 150 50 100 100 100

Scenario 4 135 65 100 100 100

Scenario 5 40* - 100 100 150 150

* Equity

8.1 Profit and Loss Statement

Taking into account the estimated cost of running an office in Nigeria and the various scenarios

of sourcing operating funds, the profit and loss statements are summarized below Table 8.2 and

Table 8.3 and detailed Annex 1.

Table 8.2: The Profit and Loss Statements with an initial Borrowed Fund of US$150 million

Item Yr 1 Yr2 Yr3 Yr4 Yr5

US$

Borrowed Funds (Current)

150,000,000

50,000,000

100,000,000

100,000,000

100,000,000

Borrowed funds (Cumulative)

150,000,000

200,000,000

300,000,000

400,000,000

500,000,000

Net Income (earnings)

428,846

1,466,296 3,287,286 5,023,489 6,658,918

Cumulative earnings

428,846

1,895,142

5,182,428 10,205,917 16,864,835

51

Table 8.3: Profit and Loss Statements with an initial Equity of US$40 million

Item Yr 1 Yr2 Yr3 Yr4 Yr5

Initial Equity Fund 40,000,000

Borrowed Funds (Current) 100,000,000 100,000,000 150,000,000 150,000,000

Borrowed funds

(Cumulative)

100,000,000 200,000,000 350,000,000 500,000,000

Net Income (earnings) 408,596 2,592,796 4,413,786 7,296,739 10,078,918

Cumulative earnings 408,596 3,001,392 7,415,178 14,711,917 24,790,835

Return on Equity 1% 6% 11% 18% 25%

8.2 Analysis of the Funding Scenarios

Scenario 1: It assumes an initial borrowed fund of US$50 million in the first year, US$50

million in the second year, US$100 million each for the third and fourth year and US$200

million in the fifth year. A total borrowing of US$500 million over the first five years is

assumed.

The Secondary Mortgage Institution (SMI) will operate at a loss of US$1.86 million in the first

year and will incur additional loss in the second year. It will commence profitable operations in

the third year with a total leveraged fund of US$200 million while the accumulated losses can be

recovered in the fourth year, with a cumulative profit of about US$1million. By the fifth year, an

annual profit of US$6.65 million would be realized, with a cumulative profit of US$7.6 million

for the five years.

Scenario 2: It assumes an initial borrowed fund of US$100 million in the first year and

additional US$100 million each year for the next four years. A total borrowing of US$500

million over the first five years is assumed.

The Secondary Mortgage Institution (SMI) will operate at a loss of US$888,904 in the first year.

It will commence profitable operations in the second year with a total leveraged fund of US$200

million and the accumulated losses can be recovered in the same second year, with a cumulative

profit of about US$406,392. By the fifth year, an annual profit of about US$6.5 million would be

realized, with a cumulative profit of US$14.86 million for the five years.

Scenario 3: It assumes an initial borrowed fund of US$150 million in the first year, US$50

million in the second year and additional US$100 million each for the next three years. A total

borrowing of US$500 million over the first five years is assumed.

The Secondary Mortgage Institution (SMI) will operate at a profit of US$428,846 in the first

year. It will continue profitable operations in the second year with a profit of about US$1.5

52

million and further annual profitable operations. By the fifth year, an annual profit of about

US$6.5 million would be realized, with a cumulative profit of US$16.86 million for the five

years.

Scenario 4: It assumes an initial borrowed fund of US$135 million in the first year, US$65

million in the second year and additional US$100 million each for the next three years. A total

borrowing of US$500 million over the first five years is assumed.

The Secondary Mortgage Institution (SMI) will operate at a marginal or insignificant (in relation

to the capital employed) profit of US$84,821 in the first year and this is a break-even level of

leveraged funding. It will realize profitable operations in the second year with a profit of about

US$1.5 million and further annual profitable operations. By the fifth year, an annual profit of

about US$6.5 million would be realized, with a cumulative profit of US$16.5 million for the five

years.

Scenario 5: It assumes an initial equity fund of US$40 million in the first year and a borrowed

fund of US$100 million each for the second and the third year. Additional US$150 million is

borrowed for each of the fourth and the fifth year. A total borrowing of US$500 million over the

first five years is assumed. The assumed capital of US$40million is the minimum equity funding

that guarantees profitable operation in the first year.

The Secondary Mortgage Institution (SMI) will operate at a profit of US$408,596 in the first

year. It will continue profitable operations in the second year with a profit of about US$2.5

million and further annual profitable operations. By the fifth year, an annual profit of about

US$10 million would be realized, with a cumulative profit of US$24.79 million for the five

years.

For this scenario with an equity capital of US$40 million, the return on equity amounts to 1%,

6%, 11%, 18% and 24% respectively for the first five years of operation.

8.3 Viability of the Scenarios

The scenarios were evaluated in terms of being able to ensure that the operation does not lead to

losses in the first year. Since Shelter Afrique is currently operating profitably, it is not advisable

for it to initiate a new product or lending window that will lead to losses, as the overall

profitability of the institution will be weakened.

Scenarios 1 and 2, with initial leveraged funds of US$50 million and US$100 million

respectively, will result in losses at the end of the first year; therefore they are not considered to

be viable. Scenario 4, with leveraged funds of US$135 million will lead to a break-even

operation wherein a little increase in the operating expenses or a small shortfall in income could

result in losses. Scenario 4 is also not considered to be viable.

53

Scenario 3 requires initial leveraged funds of US$150 million and offers a good potential for

profitable operation in the first year with substantial growth in profits in the subsequent years.

Similarly Scenario 5, with an initial equity of $40 million will lead to profitable operation in the

first year and substantial profits in the subsequent years. Scenarios 3 and 5 are therefore

considered viable. It should be noted here that initiating the operations with equity of less than

US$40 million would lead to losses in the first year of operation.

8.4 Recommended Scope of Operation

To ensure that the SMI operation is run profitably from inception, we recommend the following

minimum levels of funding at the commencement of operations:

C. A leveraged funding of at least US$150 million; or

D. Equity funding of at least US$40 million; or

A combination of equity and debt with a total operating fund of about US$150 million will also

ensure profitable operations from the first year.

8.5 Risks

A major risk envisaged in undertaking the SMI operation is inability to raise funds up to the

recommended minimum threshold to operate profitably. Such will lead to losses that will

undermine the sustainability of the investment. If the promoters are not reasonably sure of

raising the required minimum capital, they may reconsider undertaking the operation.

8.6 Conclusion

The huge demand for housing finance in Nigeria cannot be significantly addressed with the own-

funds of Shelter-Afrique or any other current player in the Nigerian market. However, SHAF or

any other entrant can play a great role in the market if it is able to intermediate and mobilize

funds for its planned secondary market operations in Nigeria.

Analysis of the cost of setting up and operating an office in Nigeria shows that the venture would

be an expensive one, with minimum annual operating cost of not less than US$3 million. The

costs of facilities and personnel are high therefore a large volume of operations is required to

operate profitably in Nigeria.

To operate with intermediated funds of less than US$150 million or equity of less than US$40

million would result in losses. Therefore, if Shelter-Afrique is risk-averse towards mobilizing

over US$150 million it may not worth it to launch a secondary mortgage operation in Nigeria.

On the positive side, with leveraged fund of US$150 million or an equity fund of about US$40

million (or a mixture of the two with a total fund of about US$150 million) plus further

borrowings in subsequent years, a secondary mortgage operation in Nigeria will be a very

profitable venture. In fact, with cumulative borrowed funds of about US$500 million over a five

54

year period, the operations would generate profits of over US$6.5 million per annum from the

fifth year while contributing immensely towards housing sector development in Nigeria.

The experience of Cagamas of Malaysia amplifies the fact have also been demonstrated by other

countries that a secondary mortgage market can succeed through large leveraging capacity and

not necessarily through own equity. Shelter-Afrique can follow that lead in launching a

secondary mortgage operation in Nigeria.

The initial fund raising exercise could target the US$200 million projected for the first two years

with an underwriting for US$150 million to ensure that the minimum take-off amount is realized.

8.7 Actions for Implementation

The following activities are envisaged for implementation of the SMI in Nigeria:

Road shows to mobilize stakeholders (players in the Nigerian mortgage industry) and

potential fund providers. These could take place in Lagos and Abuja.

Direct consultations with potential fund providers

Engagement of Financial Advisory Firm for fundraising

Fundraising and commencement of operations

8.8 Plan of Action for Implementation

Table 8.4: Plan of Action for Implementation

Activity Time-line Road Show/Sensitization of Stakeholders July-September 2011

Preparation for Fund raising October – December 2011

Fund raising January – March 2012

Commencement of Operations April 2012

55

Table 8.5: Annual and Cumulative Profit and Loss Projections (US$)

Initial Fund

(Borrowed) Profit and Loss

Yr 1 Yr2 Yr3 Yr4 Yr5

Scenario

1

US$50million

Annual 1,864,654 827,204 993,786 2,729,989 6,658,918

Cumulative 1,864,654 2,691,858 1,698,072 1,031,917 7,690,835

Scenario

2

US$100million Annual 888,904 1,295,296 3,116,286 4,852,489 6,487,918

Cumulative 888,904 406,392 3,522,678 8,375,167 14,863,085

Scenario

3

US$150million

Annual 428,846 1,466,296 3,287,286 5,023,489 6,658,918

Cumulative 428,846 1,895,142 5,182,428 10,205,917 16,864,835

Scenario

4

US$135

million

Annual 84,821 1,466,296 3,287,286 5,023,489 6,658,918

Cumulative 84,821 1,551,117 4,838,403 9,861,892 16,520,810

Scenario

5

US$40 million

(equity)

Annual 408,596 2,592,796 4,413,786 7,296,739 10,078,918

Cumulative 408,596 3,001,392 7,415,178 14,711,917 24,790,835

56

REFERENCES

1. Annelle Sheline (2010). Mortgage market targets LE 10 Billion by 2013. Daily News Egypt.

2. CBN (2008), Annual Report 2008

3. CBN (2009) Annual Report, 2009

4. Commissioner for Housing, Lagos State (2009), Housing Provision.

5. EFInA and Fin Mark Trust (2010), Overview of the Housing Finance Sector in Nigeria, August.

6. Federal Housing Authority Act.

7. German-Arab Chamber of Industry and Commerce (2007). Further boost for mortgage finance

market. Discussion, June 2007.

8. Hassanein, A. A. G. and El-Barkouky, M. M. G. (2008). A Suggested Mortgage System Model

for Egypt. Oxford Business & Economics Conference Program. June 22-24, 2008, Oxford, UK.

ISBN : 978-0-9742114-7-3

9. Koti Reddy T. (2011) A Study on Indian Mortgage Industry. Indian Journal of Commerce &

Management Studies Vol–II. Issue -1 January 2011; ISSN – 2229-5674.

10. Lamoreaux P. (2003) Developing Secondary Mortgage Markets. In See, February 4, 2003.

Manager Housing Finance Group, International Finance Corporation

11. Michael J. Lea (2000), “Pre-requisitives for a successful secondary mortgage market: The Role of

the Primary Mortgage Market” in Housing Finance International, Cardiff, UK.

12. Mortgage Institutions Act, FGN

13. Nasir Imam (2008) Nigeria‟s 16 million Housing Deficit still rising, Daily Trust, Online Edition,

29 December 2008.

14. Nigerian Stock Exchange (NSE) Arrival Report, 2008

15. Report of the Vision 2020 National Technical Working Group on Housing, July 2009, FGN.

16. Report on Urban and Rural Development, July 2009, FGN

17. Roland Igbinoba (2009) Real Foundation for Housing and Urban Development, The State of

Lagos Housing Market, Lagos.

18. Rshaidat, S. S. The Expansion of the Secondary Mortgage Facility in Jordan. Developing

Housing Finance. Senior Coordinator, Infrastructure Department Housing and Urban

Development Corporation (HUDC), Jordan

19. Sahar Nasr et al (2008). Access to Finance and Economic Growth in Egypt. The World Bank. 185

pages. Access to Finance Seminar, Cairo, Egypt, March 17, 2008.

http://siteresources.worldbank.org/INTEGYPT/Resources/Access_to_Finance.pdf

20. Struyk, J. (2006). Update on Egyptian mortgage lending. Housing Finance International, 9-13.

21. The National Housing Bank of India (NHB); http://www.nhb.org.in/index.php)

22. The Egyptian Company for Mortgage Refinancing; http://www.ECMR-online.com

23. Verma R. V. (2009) Liquidity and Funding Issues including Secondary Mortgage Facilities.

Housing Finance in South Asia, Jakarta. May 27‐29, 2009. National Housing Bank, India.

24. World Bank IIFC, Nigeria Financial System strategy 2020.

25. World Bank Report, 2008

a

Annexes

Annex 1A: The Profit and Loss Statements with an initial Borrowed Fund of US$150 million

Notes Item Yr 1 Yr2 Yr3 Yr4 Yr5

Borrowed Funds

(Current)

150,000,000

50,000,000

100,000,000

100,000,000

100,000,000

Borrowed funds

(Cumulative)

150,000,000

200,000,000

300,000,000

400,000,000

500,000,000

1 Cost of fundraising

4,500,000

1,500,000

3,000,000

3,000,000

3,000,000

Fresh Operating fund

(Net Borrowed)

145,500,000

48,500,000

97,000,000

97,000,000

97,000,000

2 Cumulative Operating

fund

145,500,000

194,000,000

291,000,000

388,000,000

485,000,000

3 Operating Income

(lending)

13,131,375

17,508,500

26,262,750

35,017,000

43,771,250

4 Interest Expense (cost of

funds)

9,000,000

12,000,000

18,000,000

24,000,000

30,000,000

Net Interest Margin

4,131,375

5,508,500

8,262,750

11,017,000

13,771,250

Operating Expense

3,011,404

3,120,704

3,593,214

4,150,511

4,808,582

5 Provision for risk assets

(lending) 691,125 921,500 1,382,250 1,843,000 2,303,750

Net Income (earnings)

428,846

1,466,296 3,287,286 5,023,489 6,658,918

Cumulative earnings

428,846

1,895,142

5,182,428 10,205,917 16,864,835

Notes

1. At 3%

2. Excludes retained earnings (assumes full appropriation of net income)

3. Assumes 95% of funds is lent out at 9.5% interest

4. Funds borrowed at 6%

5. At 0.5%

b

Annex 1B: Profit and Loss Statements with an initial Equity of US$40 million

Notes Item Yr 1 Yr2 Yr3 Yr4 Yr5

Initial Equity Fund 40,000,000

Borrowed Funds (Current)

100,000,000

100,000,000

150,000,000

150,000,000

Borrowed funds (Cumulative)

100,000,000

200,000,000

350,000,000

500,000,000

1 Cost of fundraising

3,000,000

3,000,000

4,500,000

4,500,000

Fresh Operating fund (Net

Borrowed)

40,000,000

97,000,000

97,000,000

145,500,000

145,500,000

2 Cumulative Operating fund

40,000,000

137,000,000

234,000,000

379,500,000

525,000,000

3 Operating Income (lending)

3,610,000

12,364,250

21,118,500

34,249,875

47,381,250

4 Interest Expense (cost of

funds)

-

6,000,000

12,000,000

21,000,000

30,000,000

Net Interest Margin

3,610,000

6,364,250

9,118,500

13,249,875

17,381,250

Operating Expense

3,011,404

3,120,704

3,593,214

4,150,511

4,808,582

5 Provision for risk assets

(lending) 190,000 650,750 1,111,500 1,802,625 2,493,750

Net Income (earnings)

408,596

2,592,796

4,413,786 7,296,739 10,078,918

Cumulative earnings

408,596

3,001,392

7,415,178

14,711,917 24,790,835

Return on Equity 1% 6% 11% 18% 25%

Notes

1. At 3%

2. Excludes retained earnings (assumes full appropriation of net income)

3. Assumes 95% of funds is lent out at 9.5% interest

4. Funds borrowed at 6%

5. At 0.5%

c

Annex 1 C: Profit and Loss Statements with an initial Borrowed Fund of US$50 million

Notes Item Yr 1 Yr2 Yr3 Yr4 Yr5

Borrowed Funds (Current) 50,000,000 50,000,000 100,000,000 100,000,000 200,000,000

Borrowed funds (Cumulative) 50,000,000

100,000,000 200,000,000 300,000,000 500,000,000

1 Cost of fundraising 1,500,000 1,500,000 3,000,000 3,000,000 6,000,000

Fresh Operating fund (Net Borrowed) 48,500,000 48,500,000 97,000,000 97,000,000 194,000,000

2 Cumulative Operating fund 48,500,000 97,000,000 194,000,000 291,000,000 485,000,000

3 Operating Income (lending) 4,377,125 8,754,250 17,508,500 26,262,750 43,771,250

4 Interest Expense (cost of funds) 3,000,000 6,000,000 12,000,000 18,000,000 30,000,000

Net Interest Margin 1,377,125 2,754,250 5,508,500 8,262,750 13,771,250

Operating Expense 3,011,404 3,120,704 3,593,214 4,150,511 4,808,582

5 Provision for risk assets (lending) 230,375 460,750 921,500 1,382,250 2,303,750

Net Income (earnings) (1,864,654) (827,204) 993,786 2,729,989 6,658,918

Cumulative earnings (1,864,654) (2,691,858) (1,698,072) 1,031,917 7,690,835

Notes 1. At 3%

2. Excludes retained earnings (assumes full appropriation of net income)

3. Assumes 95% of funds is lent out at 9.5% interest

4. Funds borrowed at 6% 5. At 0.5%

d

Annex: 1 D: Profit and Loss Statements with an initial Borrowed Fund of US$100 million

Notes Item Yr1 Yr2 Yr3 Yr4 Yr5

Borrowed Funds (Current) 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000

Borrowed funds (Cumulative) 100,000,000 200,000,000 300,000,000 400,000,000 500,000,000

1 Cost of fundraising 5,000,000 3,000,000 3,000,000 3,000,000 3,000,000

Fresh Operating fund (Net Borrowed) 95,000,000 97,000,000 97,000,000 97,000,000 97,000,000

2 Cumulative Operating fund 95,000,000 192,000,000 289,000,000 386,000,000 483,000,000

3 Operating Income (lending) 8,573,750 17,328,000 26,082,250 34,836,500 43,590,750

4 Interest Expense (cost of funds) 6,000,000 12,000,000 18,000,000 24,000,000 30,000,000

Net Interest Margin 2,573,750 5,328,000 8,082,250 10,836,500 13,590,750

Operating Expense 3,011,404 3,120,704 3,593,214 4,150,511 4,808,582

5 Provision for risk assets (lending) 451,250 912,000 1,372,750 1,833,500 2,294,250

Net Income (earnings) (888,904) 1,295,296 3,116,286 4,852,489 6,487,918

Cumulative earnings (888,904) 406,392 3,522,678 8,375,167 14,863,085

Notes

1. At 3%

2. Excludes retained earnings (assumes full appropriation of net income)

3. Assumes 95% of funds is lent out at 9.5% interest

4. Funds borrowed at 6%

5. At 0.5%

e

Annex 1E: Profit and Loss Statements with an initial Borrowed Fund of US$135 million

Notes Item Yr 1 Yr2 Yr3 Yr4 Yr5

Borrowed Funds (Current) 135,000,000 65,000,000 100,000,000 100,000,000 100,000,000

Borrowed funds (Cumulative) 135,000,000 200,000,000 300,000,000 400,000,000 500,000,000

1 Cost of fundraising 4,050,000 1,950,000 3,000,000 3,000,000 3,000,000

Fresh Operating fund (Net Borrowed) 130,950,000 63,050,000 97,000,000 97,000,000 97,000,000

2 Cumulative Operating fund 130,950,000 194,000,000 291,000,000 388,000,000 485,000,000

3 Operating Income (lending) 11,818,238 17,508,500 26,262,750 35,017,000 43,771,250

4 Interest Expense (cost of funds)

8,100,000

12,000,000

18,000,000

24,000,000

30,000,000

Net Interest Margin 3,718,238 5,508,500 8,262,750 11,017,000 13,771,250

Operating Expense 3,011,404 3,120,704 3,593,214 4,150,511 4,808,582

5 Provision for risk assets (lending) 622,013 921,500 1,382,250 1,843,000 2,303,750

Net Income (earnings) 84,821 1,466,296 3,287,286 5,023,489 6,658,918

Cumulative earnings 84,821 1,551,117 4,838,403 9,861,892 16,520,810

Notes

1. At 3%

2. Excludes retained earnings (assumes full appropriation of net income)

3. Assumes 95% of funds is lent out at 9.5% interest

4. Funds borrowed at 6%

5. At 0.5%

f

ANNEX 2: Nigeria; Total and Annual Population Growth rates Disaggregated by States (1991 – 2006)

STATES 1991 POPULATION 2006 POPULATION % ANNUAL GROWTH

Akwa-Ibom 2,409,314 3,920,208 2.57

Anambra 2,796,475 4,182,032 2.21

Bauchi 2,861,887 4,676,465 2.59

Edo 2,172,005 3,218,332 2.17

Benue 2,753,077 4,219,244 2.32

Borno 2,536,003 4,151,193 2.59

Cross River 1,911,596 2,888,966 2.26

Adamawa 2,102,053 3,168,101 2.24

Imo 2,485,635 3,934,899 2.46

Kaduna 3,935,618 6,066,562 2.34

Kano 5,810,470 9,383,682 2.54

Katsina 3,753,133 5,792,578 2.35

Kwara 1,548,412 2,371,089 2.31

Lagos 5,725,116 9,013,534 2.43

Niger 2,421,581 3,950,249 2.58

Ogun 2,333,726 3,728,098 2.49

Ondo 2,249,548 3,441,024 2.31

Oyo 3,452,720 5,591,589 2.55

Plateau 2,104,536 3,178,712 2.25

Rivers 3,187,864 5,185,400 2.57

Sokoto 2,397,000 3,696,999 2.34

Abia 1,913,917 2,833,999 2.16

Delta 2,590,491 4,098,391 2.45

Enugu 2,125,068 3,257,298 2.32

Jigawa 2,875,525 4,348,649 2.26

Kebbi 2,068,490 3,238,628 2.41

Kogi 2,147,756 3,278,487 2.30

Osun 2,158,143 3,423,535 2.46

Taraba 1,512,163 2,300,736 2.28

Yobe 1,399,687 2,321,591 2.65

Bayelsa 1,121,693 1,703,358 2.28

Ebonyi 1,453,882 2,173,501 2.21

Ekiti 1,535,790 2,384,212 2.37

Gombe 1,489,120 2,353,879 2.45

Nasarawa 1,207,876 1,863,275 2.34

Zamfara 2,073,176 3,259,846 2.43

FCT 371,674 1,405,201 4.90

Nigeria 88,992,220 140,003,542 2.43

Source: Compiled from Census Figures for 1991 and 2006 by National Population Commission.

g

Annex 3: Primary Mortgage Institutions in Nigeria.

1 ABBEY BUILDING SOCIETY LIMITED

2 ACCESS HOMES & MORTGAGES LIMITED

3 ACCLAIM HOME SAVINGS & LOANS LTD

4 ACCORD SAVINGS & LOANS LTD

5 ADAMAWA SAVINGS & LOANS LIMITED

6 AG HOMES SAVINGS & LOANS LIMITED

7 AKWA SAVINGS & LOANS LIMITED

8 ALLWELL SAVINGS & LOANS LIMITED

9 AMEX SAVINGS & LOANS LIMITED

10 ANAMBRA HOME OWNERSHIP CO. LIMITED.

11 ASO SAVING & LOANS PLC

12 BENHOUSE BUILDING SOCIETY LIMITED

13 CENTAGE SAVINGS & LOANS LIMITED

14 CITIHOMES SAVINGS & LOANS LIMITED

15 CITY CODE SAVINGS & LOANS LIMITED

16 CONFLUENCE SAVINGS & LOANS LIMITED

17 CONSOLIDATED ESTATE BUILDING SOCIETY

18 COOP SAVING & LOANS LIMITED

19 CORNERSTONE BUILDING SOCIETY LIMITED

20 CREDENCE SAVINGS & LOANS LIMITED

21 CYMON SAVINGS & LOANS LIMITED

22 DALA BUILDING SOCIETY LIMITED

23 DELTA BUILDING SOCIETY LTD

24 DIAMOND BUILDING SOCIETY LIMITED

25 ESTAPORT BUILDING SOCIETY LIMITED

26 EURO - BANC SAVINGS & LOANS LIMITED

27 FBN MORTGAGES LIMITED

28 FHA HOMES SAVINGS & LOANS LTD.

29 FIRST AMALGAMATED BUILDING BUILDING SOCIETY LTD.

30 FIRST CAPITAL SAVINGS & LOANS LIMITED

31 FIRST GENERATION HOMES (SAVINGS & LOANS) LIMITED

32 FOKAS SAVINGS & LOANS LTD.

33 FUTUREVIEW MORTGAGES LIMITED

34 GATEWAY SAVINGS & LOANS LIMITED

35 GLOBAL TRUST SAVINGS & LOANS LTD.

36 GT HOMES LIMITED

37 GUARDIAN TRUST SAVINGS & LOANS LIMITED

38 HAGGAI SAVINGS AND LOANS LIMITED

39 HALLMARK HOMES SAVINGS & LOANS LTD

h

40 HARVARD TRUST SAVINGS & LOANS LTD.

41 HOME FOUNDATION SAVINGS & LOANS LTD.

42 HOME TRUST SAVINGS & LOANS LIMITED

43 HOMEBASE MORTGAGE LIMITED

44 HORIZON BUILDING SOCIETY LTD.

45 IMANI SAVINGS & LOANS LTD.

46 INFINITY TRUST SAVINGS & LOANS LIMITED

47 INTEGRATED HOMES SAVINGS & LOANS LIMITED

48 INTERCONTINENTAL HOMES LIMITED

49 JIGAWA SAVINGS & LOANS LIMITED

50 JUBILEE-LIFE SAVINGS & LOANS LIMITED

51 JUBILLEE BUILDING SOCIETY

52 KEBBI STATE HOME SAVINGS & LOANS LTD.

53 KOGI STATE SAVINGS & LOANS LTD.

54 LAGOON HOMES SAVINGS LOANS LTD.

55 LAGOS BUILDING & INVESTMENT COMPANY LIMITED

56 LEVERAGE HOME SAVINGS & LOANS LTD

57 LIVINGSPRING SAVINGS & LOANS LTD.

58 MAGNET SAVINGS & LOANS LIMITED

59 MAYFRESH SAVINGS & LOANS LIMITED

60 METRO MORTGAGES LIMITED

61 MIDLAND MORTGAGES LIMITED

62 MORTGAGE GUARANTY SAVINGS & LOANS LIMITED

63 MORTGAGES PHB LIMITED

64 MULTIBANC SAVINGS & LOANS LTD

65 MUSTARD SEED MORTGAGE LIMITED

66 MUTUAL ALLIANCE SAVING & LOANS LIMITED

67 NEW CAPITAL SAVINGS & LOANS LIMITED

68 NEW PRUDENTIAL BUILDING SOCIETY LIMITED

69 OASIS SAVINGS & LOANS LIMITED

70 OCEANIC HOMES (SAVINGS & LOANS) LIMITED

71 OMEGA SAVINGS & LOANS LIMITED

72 OWNERS HOME SAVINGS & LOANS LIMITED

73 PACIFIC SAVINGS & LOANS LIMITED

74 PASSWORD SAVINGS & LOANS LIMITED

75 PEAK SAVINGS & LOANS LIMITED

76 PERSONAL TRUST SAVINGS & LOANS LIMITED

77 PLATINUM SAVINGS & LAONS LIMITED

78 POST SERVICE SAVINGS & LOANS LIMITED

79 REFUGE HOME SAVINGS & LOANS LIMITED

i

80 RESORT SAVINGS & LOANS LIMITED

81 ROYAL SAVINGS & LOANS LIMITED

82 SAFE TRUST SAVINGS & LOANS LIMITED

83 SAKKWATO SAVINGS & LOANS LIMITED

84 SKYE BUILDING SOCIETY LIMITED

85 SKYFIELD SAVINGS & LOANS LIMITED

86 SOLID TRUST SAVINGS & LOANS LIMITED

87 SPRING MORTGAGE LIMITED

88 STALLION HOME SAVINGS & LOANS LIMITED

89 STB BUILDING SOCIETY LIMITED

90 SUBURBAN TRUST SAVINGS & LOANS LIMITED

91 SUNTRUST SAVINGS & LOANS LIMITED

92 SUPREME SAVINGS & LOANS LIMITED

93 TARABA SAVINGS & LOANS LIMITED

94 TMC SAVINGS & LOANS LIMITED

95 TRANS ATLANTIC MORTGAGES LIMITED

96 TRINITY SAVINGS & LOANS LIMITED

97 UNION HOME SAVINGS & LOANS LIMITED

98 UNITED MORTGAGE LIMITED

99 WEMA SAVINGS & LOANS LIMITED

100 YANKARI SAVINGS & LOANS LIMITED

101 YOBE STATE SAVINGS & LOANS LIMITED

Source: Central Bank of Nigeria

j

Annex 4: Evolution of the U.S. Housing Finance System

Period/Era Institutions Products Risks/Shocks

Era of Exploration

Terminating Building Societies

(since 1775)

Permanent Building Societies

(1850)

Mortgage companies (1870s)

Life insurance companies (active in

the early 1900s)

Non-amortizing; variable rate;

semi-annual payment

6-11 year loan term and 50-

60% maximum LTV

MBBs by mortgage companies

(1870s – 1890s)

Deposit/investment certificates

(1890s)

Peer enforcement and deposit-

based funding

-Localized risk management (e.g.,

50mile radius rule)

-Recession in 1890s led to demise

of mortgage companies; agency

problem in pooling

Significant growth in 1920s and

stock market crash in 1929

Era of

Institutionalization

1930s - 1960s

Creation of HOLC and RFC to

liquidate bad loans/banks (1933)

Creation of FHLB (1934) and

Fannie Mae (1938) to increase

liquidity

Creation of FHA, FDIC, FSLC, and

private mortgage insurance

companies (1934) for credit

enhancement

Privatization of Fannie Mae and

creation of Ginnie Mae (1968)

Fully amortizing loans with

leveled monthly payments

Fixed interest rate and longer

than 20-year loan term

Maximum LTV up to 80%

Underwriting guidelines set by

Fannie Mae (1954)

Great Depression (1930s)

National Housing Act (1934) and

Housing Act (1949)

Regulation Q (1966)

Rising interest rates and inflation

(1960s)

Era of

Securitization

1970s - 1980s

Creation of Freddie Mac (1970)

New investors into the market:

mutual funds, pensions, foreign

investors (1980s)

S&L Debacle (1980s) and creation

of RTC (1989)

Introduction of ARMs (1981)

MBS issuance: first PC by

Freddie Mac (1971), Ginnie

Mae tandem plan (1974-76),

first private MBS by Bank of

America (1977)

First CMO issuance (1984)

and a big increase in MBS

issuance (1982–1986)

Market for interest rate swaps

(1980s)

First and second oil shocks

(1970s)

Interest rate hike and mismatch of

asset-liability duration of S&Ls

(1980s); removal of interest rate

ceilings (1980s)

Oil patch default ramp-up (1980s)

FIRREA (1989) and Basle I

(1980s)

Era of Automation/

Computerization

1990s to Present

Creation of OFHEO (1992)

Minimum and Risk-Based Capital

Rules for GSEs

HUD affordable housing goals for

GSEs (1992)

Globalization of MBS markets

(ongoing)

IT revolution - AUS, mortgage

score, AVM (since mid-1990s)

Refi booms (mid-1990s to

early 2000s)

HELOC, second mortgages,

and other affordable products

(1990s to present)

California default ramp-up (early

to mid-1990s)

Expansion of credit derivatives

markets (mid-1990s)

House price index-based hedging

market

Source: U.S. Department of Housing and Urban Development/Integrated Financial Engineering, Inc. (2006).

Evolution of the U.S. Housing Finance System - A Historical Survey and Lesson for Emerging Mortgage Markets.

k

Annex 5: Milestones of the USA National Housing Bank for Period 1988 - 2008

FINANCIAL YEAR ACTIVITY

1988-89

Refinance Schemes for housing loans

Schemes for Land Development & Shelter Projects

Scheme for Equity Participation in Housing Finance Companies (HFCs)/ Building Materials

Companies

1989-90

Home Loan Account Scheme

Housing Finance Companies (NHB) Directions, 1989

Raised Loan of US$25M (first tranche) under USAID Govt. Housing Guaranty Program

1990-91 Notified as a Public Financial Institution

1991-92 Received a Loan Assistance of Yen 2,970 Billion from OECF (now JBIC)

Scheme for Financing Housing Infrastructure

1992-93 Refinance Schemes for Slum Redevelopment Projects

1994-95 Launched the issue of Unsecured Bonds

Guidelines for Prudential Norms for HFCs

1997-98 Golden Jubilee Rural Housing Finance Scheme (GJRHFS)

Issued Tax Free Bonds to finance GJRHFS

Drawn from Asian Development Bank US$20M in 1997-98 and US$30M in 1998-99

1999-2000 Agreement for Cooperation with Canada Mortgage and Housing Corporation for introducing

Mortgage Insurance and New Products in the Country

2000-01

First Residential Mortgaged Backed Securitization Issue in the Country

Guidelines for Entry of HFCs into Insurance Business

Refinance Scheme for reconstruction of dwelling units in the earthquake affected areas in Gujarat

2001-02 Credit Enhancement of Bonds floated by HFCs

2002-03 Liberalized Refinance Scheme for Housing Loans

2004-05 First time provided Corporate Guarantee for RMBS

New Window of lending to Micro Finance Institutions

2005-06 Fraud Management Cell set up to disseminate information on frauds committed on housing loans

2006-07

NHB RESIDEX was launched (first official residential housing price index).

New Products Developed for un-served and underserved segments of Society

Reverse Mortgage Loan for Senior Citizens

Productive Housing in Rural Areas (PHIRA)

i.e. Scheme for composite loans (housing and production) to rural families

Refinance for Top-up loan for Indira Awas Yojana Beneficiaries

Equity Participation in New Rural Housing Finance Companies

Occasional Papers & Discussion Papers Series launched

2007-08

Rural Housing Fund was created with Rs.1,000 Crores (US$233.26 M) allocation

Rural Housing Microfinance was launched

NHB-UNESCAP Study on pro-poor housing finance: 7 Asian Countries initiated

MOC with UNHABITAT signed for water and sanitation projects for housing

Home Loan Counseling: Diploma program put in place (IIBF)

Source: National Housing Bank; http://www.nhb.org.in/AboutUs/about_us.php#bod