[PPT] - Scoping study: Overview of the housing finance sector in Zambia PowerPoint Presentation

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Scoping study: Overview of the housing finance sector in Zambia

Study commissioned by

FINMARK TRUST

May 2013, Lusaka

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Section I - Introduction

Section II – Context Section III – Housing Finance Value Chain Section IV – Conclusions and Recommendations

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Section I - Introduction

Commissioned by FinMark

ark Trust t and Centr ntre for Affordab able le Housin ing g Finance nce in Africa (CAHF)

Aims to provide a comprehe

ehens nsive ve overview view of the housin ing g finance nce sect ctor

r in Zambia; updating earlier research

commissioned by FinMark Trust in 2007 and 2009

Part of a series of studies commissioned by FinMark Trust on

the state of housing finance across Africa.

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Scope, objectives and methodology

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Scope

Review housing finance mechanisms used, including in informal sector
Show how housing finance operates within wider financial market
Define the housing finance value chain

Objecti ctives ves

Assess market potential
Reveal the gaps and niches available to providers
Make recommendations on how to extend the value chain across all

socio-economic groups Metho thodolo logy gy

Research conducted in April-May 2012
Interviews held in Lusaka, Mpongwe and Solwezi
Semi-structured interviews, focus group discussions and quantitative

data from secondary sources

SECTIO ION N I

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Section I - Introduction

Section II – Context

Section III – Housing Finance Value Chain Section IV – Conclusions and Recommendations

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Market growth, risk and regulatory environment
Housing market demand and supply

Section II – Context

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Market growth, risk, environment

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Marke ket t growth wth - Macro-eco cono nomy my and demogr graphic aphics

Has been significant market expansion
Prolonged economic growth, and population expansion
Economy still dominated by informal sector

Marke ket t risk - Count ntry ry, credit it availab ability lity/ / cost, other r lendin ing g options

Country risk has reduced and credit conditions have improved, (although

credit costs are still high, and availability of credit limited

Domestic secondary markets immature and provide only limited source of

long term credit Regula gulato tory ry envi viron

nment

ment

Platform has been created for encouraging greater intermediation
Uncertainty after recent regulatory changes

SECTIO ION N II

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Housing market

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1 1 Home owner nership has expanded anded, although limited supply of suitable housing product and affordability constraints present asset and market risk 2 2 Lend ndin ing g risk limits the potential of achieving lower lending rates 3 Self-buil uild dominates tes the e new w build market et, providing a sustainable option to reduce housing (finance) costs 4 Geogra graph phical cal variance nces, suitable products and market limited to the main urban areas 5 5 Rural al and informal al areas as are gene neral ally y not provided, excluding majority of the population 6 6 Financial institutions are cautio tious us about t lendin ing g on se self-bui uild

SECTIO ION N II

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Housing market demand and supply

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Demand and

Different studies project housing nee

eed at betwe ween n 1.3 to 2 million taking into account existing stock, new construction and demographic change

Total households increased from 1,844,741 in 2000 to 2,635,590

in the 2010 census (representing a 33.4 per cent increase). This is a new w household hold formatio ion n of 62,000 00 per annum over the same period. Supply

Housing

sing su supply y has s tradition

nal

ally y been en below w the rate of new ew househo hold d formation,

n, (11,100

,100 per annum um betwe ween n 1990 90 and 2000 00 cens nsus uses); 2010 census data is not available

Most housing construction is incremental ‘self-build’ in urban

and peri-urban. The latest Urban Development Plan for Lusaka indicated the urban area increased by around 50% between 2000 and 2007. This would equate to around 1,200 ha / 9,000 plots per annum, (based on 800 sq.m plot size and 60% coverage)

SECTIO ION N II

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Housing market demand and supply

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Afforda dabili ility ty

This disjoint between demand and supply is due to a lack of

affordability between housing costs and real incomes

In Avondale, a medium cost area in Lusaka, average house prices

are above ZMW 500,000 ($100,000). This would require re a monthly hly repaym yment ent of ZMW W 6,300 00 ($1,26 260) 0) based on the most competitive mortgage rates, (15% interest, 90% LTV, 15 year term)

This is not affordable based on a median

n monthl hly y income me for t the medium um cost secto ctor of around nd ZMW 2,000 00 ($400 400). ). This results in most people undertaking self-build construction

SECTIO ION N II

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Section I - Introduction Section II – Context

Section III – Housing Finance Value Chain

Section IV – Conclusions and Recommendations

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Section III – Housing Finance Value Chain

Housing finance sector analysed through the Housing Finance

Value Chain, (HFVC);

Considers the supply-side actors, and the linkages that exist

between wholesale financiers, retail financiers, and end-users.

Considers the extent of existing access to the market.

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The Value chain

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13 SECTIO ION N III

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Supply side actors

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1 1 Flow of c capital al between wholesale financiers and retail financiers is limited; 2 2 A nu number ber of po potentia ntial providers rs, (banks / building societies / MFI) – competition ought to contribute to lower interest costs; 3 Traditiona tional provider ers tend nd to compete ete for the same space, (Served Zone); 4 The HFVC expand ands down to m middle and lower income me groups ps through MFIs and intermediary micro-lenders, although access is restricted; 5 5 These providers have a better ter unders rsta tand nding ng of t the market t segme gment nt, reducing risk through group lending and cooperatives.

SECTIO ION N III

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Main actors wholesale and retail

15 Categor tegory Type e of FI Prod

duc

ucts Main in actors tors - Wholes

lesal

ale Public Finance

Local government, DBZ, NATSAVE, ZNBS, ZLCHF

Wholesale finance (Private markets)

Development banks (DBZ, Shelter Afrique)
Capital markets (LuSE, Badex)

Main in acto tors rs - Reta tail Residential mortgage providers

Building societies
Commercial banks
Residential mortgages
Home improvement

loans Formal housing microfinance

Microfinance institutions
Home improvement

loans Consumer and micro- enterprise lenders

Microfinance institutions
Consumer loans
Individual micro loans

Other microfinance micro-lenders

Networks of Savings and

Credit Associations (SACCOS)

Micro loans

(group loans) ROSCAS

Individual savings groups
Micro loans

Individual micro- lenders

Kaloba
Micro loans

(secured)

15 SECTIO ION N III

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Finance products/ costs

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Most borrowing for housing finance is based on consumer

finance rather than secured lending;

Borrowing rates commercial banks (2011) average around 21%;

MFIs upwards of 35%

Most competitive mortgage terms 15%, 90% LTV, 20 yr tenor
Rates between secured and unsecured lending is not always that

significant, suggesting that financial institutions do not differentiate between risk

Rates offered between secured and unsecured, and payroll and

non-payroll based lending is significant

SECTIO ION N III

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Affordability & Access matrix

17 Provi

vider

der Produ

duct

cts Acces ccess barri rriers ers Inter teres est t rate tes Avera erage ge term rm Security Income level Residential mortgage providers Mortgages Title, terminal benefits, pension ZMW6,000+ 19% (banks) 21% (building societies) 5 years Home Improvement Loans, (HILs) Terminal benefits, pension < ZMW6,000 35% (2.5% per month) 2 years MFIs

Home

improvement loans (HILs),

Payroll deduction,

capital pledge, 3rd party guarantee, group pressure ZMW2,000 to ZMW10,000 35% - 80% 2 years Payroll/ consumer loans

Payroll deduction,

capital pledge, 3rd party guarantee, group pressure <ZMW6,000 50% to 100% 0.5 years Micro- enterprise loans Capital pledge, 3rd party guarantee, group pressure Household goods ZMW2,000 to ZMW5,000 50% to 100% 0.5 years

17 SECTIO ION N III

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Affordability matrix

18 Provi

vider

der Produ

duct

cts Acces ccess barri rriers ers Inter teres est t rate tes Avera erage ge term rm Security Income level

Intermedi

ary money lenders - SACCOS ROSCAS

Housing

microloans, microloans, rotating savings None - group pressure Any 10 – 13 % pa (housing microloans), up to 30% regular microloans 8 years (housi ng) 1 month regular loan Individual informal money lenders - Shylocks Emergency loans Collateral (real estate, motor vehicles and household goods). Any 100%+ From 1 week

18 SECTIO ION N III

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5 1 .9 1 6 .8 1 0 .8

7.7

5 .2 3 .3 2 .2 1 .3 0 .7 0 .2 % sh a re of p e r ca p it a in come , (2 0 0 6 )

Household distribution by inc om e dec iles, ranked ac c ording to share of per c apita inc om e, (eac h dec ile approx. 280,000 households)

So cio -e conomic gro ups

Re

t a il m o rt g a ge f ina nc e s e c t o r

Re

gu la r inc

me

e a r nings , e xpe nd it u re in e xc e s s

f $1,000 /

m onth

19% int e

r e s t , 5 y r te rm, up to 80% L TV

M
s

t l y s e lf -buil d c

ns

t ruc tion

S erved Zone 80,000 households, (3%)

H o m e

improv e me nt , c

n

s ume r a n d mic ro

e

nt e r pr is e

I r r e

gula r , info rma l o r in c

me

, e xpe nd it ure be tw e e n $400 to $1, 000 / month

Se

lf -bu ild c

ns

t ruc tion a nd s ho rt

te

r m lo a ns

35%+ int e

r e s t , 2 y r t e rm, uns e c u re d

E nablem ent Zone 150.000 households, (6%)

Sa

v ing a s s

c

ia t io ns / c r e d it c

op

e r a t i v e s

I r r e

gula r , info rma l inc

me

, e xpe nd it u re be low $400 / mo nth

Se

lf -bu ild , gr oup hous ing a n d s w e a t e q uity

13% int e

r e s t , 5 y e a r t e rm

E m powerm ent

Zone

2.6 m households, (91%)

10th

H CU , L SR, L CU

9th

M S R, LCU

8th

L

w

co s t ur b an

7th

Low c ost

urban

6th

S m all sc ale

rural

5th

S m all sc ale

rural

4th

S m all sc ale

rural

3rd

S m all sc ale

rural

2nd

S m all sc ale

rural

1st

S m all sc ale

rural

Abbreviations HCU, High Cost Urban LS R, Large S c ale Rural LCU, Low Cost Urban

Access based on income

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19 SECTIO ION N III

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Housing finance access - Served zone

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Served group; approx. 80,000 households, representing 3% of the

households

These have monthly income earnings in excess of ZMW 5,000 / $1,000,

and would be able to borrow upwards of ZMW 80,000 / $16,000, (assuming 15% interest over five yrs).

These have potential access to housing finance products, including

conventional mortgages, although may not presently have a housing finance product

However, due to housing / finance costs and entry restrictions, access

tends to be limited to self-build construction, or borrowers need to have a much higher equity contribution

Tend to be in formal sector employment and are either employers or are

higher level managerial / administrative employees. They generally have regular and ascertainable monthly incomes

SECTIO ION N III

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Housing finance access - Enablement zone

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Enablement group; approx. 150,000 households, representing 6% of the

households

These have monthly income earnings of between ZMW 2,000 / $400 to

ZMW 5,000 / $1,000 and would be able to borrow from ZMW 35,000 / $7,000, (assuming 35% over two yrs)

These have access to finance products, but not the lower interest rate

available on secured lending due to housing costs and entry barriers, access tends to be limited to new medium cost areas, and mostly through self-build with cyclical loans

Include formal sector employees, in employment groups other than the

higher level managerial and administrative group. They generally have regular and ascertainable monthly incomes. Will also include individuals involved in informal sector employment, although financial access will be more limited

SECTIO ION N III

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Housing finance access - Empowerment zone

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Empowerment group; approx. 2.6m households, representing 91% of the

households

These have monthly income earnings of below ZMW 2,000 / $400, and

would be able to borrow below ZMW 35,000 / $7,000

This group is excluded from access to products offered by most service

providers found on the HFVC. Where finance is available, it is through credit unions and community based support groups

Includes households mostly involved in informal sector employment
In summary, universal access to affordable housing finance is limited

to a small segment, restricting the remaining population group to consumer cyclical consumer borrowing and self-build construction

SECTIO ION N III

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Enableme

lement nt

New medium density suburb, no title deeds Self-employed irregular income, small-scale unregistered contractor, Savings

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Housing market zones - profiles

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Served

ved

Low density suburb, title deeds Formally employed, financially stable Small-scale contractor built Multiple financing - savings, loans from commercial banks and MFIs

Empowe

wermen ment

High density, non-secure tenure Irregular informal income, Expenditure below $400 per month, Self-build and informal builder Savings

SECTIO ION N III

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Section I - Introduction Section II – Context Section III – Housing Finance Value Chain

Section IV – Conclusions and Recommendations

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Section IV – Conclusions and Recommendations

By segment: Served zone
By segment: Enablement and Empowerment zones
By sector: Housing and Land markets
By sector: Finance

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Sector – Served Zone

DISCUSSION

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1 Considerable room for expansion

Together with the Empowerment Zone comprising only 10% of the

market, but around 50% of per capita income

Real growth in the Served Zone presents an opportunity for lenders
Reasonable interest amongst the private market to expand

2 Required intervention of public and tertiary sectors

Continued macro reforms to the finance sector as a whole, to

reduce interest costs, and increase access to long term credit lines

Creating an enabling environment by removing barriers, to make

mortgage lending more feasible.

3 Required micro-reforms for the housing finance sector

How to reduce market risk and therefore interest rates
Improving the understanding of potential customers and risk profile
Tailoring suitable products to meet target market

4 Housing market diversification and supply

Housing of suitable size, quality and cost to provide an affordable

product

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Sector – Enablement & Empowerment Zones

DISCUSSION

SECTIO ION N IV 27

2 Private sector to be a source of commercially viable housing finance across the whole market

For the Enablement Zone, strengthening HFVC linkages, and requiring

public lenders to focus on excluded groups with the capacity to borrow

For the Empowerment Zone, promoting strategic partnerships between

public, private and tertiary spheres; using intermediary micro-lenders as a conduit

For Both, development of alternative products and services

3 Land tenure, planning and building regulation reform

A sustainable route for lower income groups to gain access to secured

products

1 Under-served potential of the Enablement and Empowerment zones

Over 90% of the market
Empowerment Zone comprising around 50% of per capita income
Within a context of economic growth and expanding population

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Sector - Housing and land markets

DISCUSSION

SECTIO ION N IV 28

1 A clear vision and strategy

For housing to provide clarity and improve investor confidence

2 One of the existing public sector institutions to lead on housing reform

To lead reform and to provide an advocacy platform for housing.

3 Streamline land tenure

To make the transfer process quicker and affordable to low-income

earners

4 Responsive planning and building regulation

To incorporate all urban areas, (including informal), and more

proportionate development control

5 ZDA incentives on private investment

Ensure incentives on private housing investment in housing are

conditional on the provision of some low cost housing 6 Construction product innovation

Projects financeable

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Sector – Finance

DISCUSSION

SECTIO ION N IV 29

1 Funds of apex institutions

Focusing on housing lending

2 Strengthening linkages between the HFVC

To improve the flow of capital between levels, and improving

access to the secondary markets 3 Enforcing the Building Societies Act 4 Creation of strategic partnerships between private, public sector actors and the tertiary sector

Matched funding to expand housing finance capacity in the

tertiary sector, and on-lending to lower income groups 5 Build capacity in the housing finance sector

Support institutions, (credit ratings and insurance)

6 Market research for financial product innovation

Lifecycle studies

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Contact details

Russell Drummond Knight Frank Zambia russell.drummond@zm.knightfrank.com Bezant Chongo PlaNet Finance Southern Africa bchongo@planetfinance.org Patience Mususa People’s Process for Housing & Poverty in Zambia pmususa@googlemail.com