Private Sector cannot grow the Mortgage market. It’s the responsibility of Government

By Mutabazi Sam Stewart

The Housing Mortgage Market in Uganda is in its embryonic stage. Housing Mortgage is often interchangeably used with the term home loans as they are both used for the determination of accessing long term capitals for acquisition or building houses. The solitary variance is that a mortgage is a dedicated name by financial institutions to distinguish funds solely set aside for purposes of lending to clients to purchase or build houses and pay back over a long period of time. On the other hand a home loan is simply a loan that one can use to purchase a house. Mortgages tend to have a longer repayment period than home loans.  Some people term all these as Housing Finance, or finance (money) that is specifically dedicated to housing development and purchase.

The housing mortgage market in Uganda is less than 2% of the country’s GDP. This is very low even by Africa’s standards. Housing Finance Bank and Stanbic Bank are the only financial institutions providing mortgages. Even then, their terms are very restrictive and their interest rates are scandalous. Banks in Uganda are not equipped to commit their capital to long term ventures. Private sector is timid when it comes to large scale investments in real estate. So what is the alternative? The market needs to be organized and regulated by government to create a semblance of stability. This will attract genuine investors with long term perspective.

The situation has not been helped since government liberalized the economy including the real estate sector. Uganda operates a cash economy and as a result traders and government prefer liquid capital and not long term assets. Banks have need of high liquidity rates to meet customer demands on call. Therefore Money cannot be locked in long term financing which would earnestly affect the overall cash outlay for day today business. Majority of banks in country depend on customer deposits to lend and to give out loans on both short and long term arrangements. This could explain why most local banks could not withstand the pressure and had to close. Today, the only surviving locally owned bank in Uganda is Centenary Bank which is heavily patronized by the Catholic Church.

It’s therefore very critical to understand that Mortgage Market is not likely to grow without initial government support. The mortgage and real estate investment is a long term, capital intensive investment and not necessarily profitable in the short run. Private sector especially in developing countries are more interested in short term yet high yielding investments. Where liquidity is a problem, where private sector do not have the resources to commit for long term, it becomes the responsibility if government to commit resources for this noble cause. Banks do not have the luxury to commit their resources to long term liquidity risk when they have other means where they could easily earn money that is almost risk free and brings in returns in a very short time. When banks do not have enough liquidity, it threatens their very existence. By engaging in mortgages, banks would have seriously eroded their liquidity and in quintessence their profitability.

Financial Sector development (FSD) goes hand in hand with the level of development of a country and the finances available to spend or save. It encompasses pooling resources (capital accumulation) together to make it lump sum and sufficient to be deployed for big projects. FSD comprises a variety of financial institutions, markets and products  

An effervescent mortgage market necessitates a buoyant system with ample funds that can be devoted to long term development goals without apprehension about call back. The finances ought to be freely obtainable for those who need it though a very hassle-free procedure. Further, the financial institutions have to have the self-assurance that the mortgagee will be able to pay back in time and rendering to the contracted terms. This means that the borrowers should also have the sureness that they have the security from their fonts of income from where they shall be able to settle up the mortgage without disappointing the banks.

In an economy where the job market is uncertain and the banks lack the confidence that people who are seeking the mortgages may not pay back, the banks are likely tread carefully when giving mortgages.

Government, just as individuals and companies or financial institutions may not have sufficient funds to apportion to the mortgage market. Nonetheless, it has to ponder the paybacks it will reap when it makes that critical initial investment that can jumpstart the whole process leading to greater housing benefits in future.   Investing in housing and infrastructure generally is the best decision any government can make. The benefits of housing infrastructure to an economy are plentiful and beneficial to the entire population.

The government of Uganda for instance could decide to make a preliminary investment into the mortgage market of $500 Million. This money may perhaps be given to various reputable banks with strict guidelines and instructions on how it should be managed and disbursed to impending clients in need of mortgages. In a period of ten years, the fund would have bourgeoned many times and would have had a multiplier effect on the entire economy through creation of jobs, buying construction inputs not to mention decent housing and accommodation for a large number of people.

When government waits for the private sector to be the one to jumpstart  the mortgage system,  it will not only take longer to materialize, the market  will be difficult to standardize and will be money minded and not development oriented.

When it comes to investing in valuable infrastructure that support human development, the government must always be ready to do the heavy lifting.  The private sector is a lazy giant that knows no development of a country except the increase of itself. It’s high time the government of Uganda put the food where its mouth is.

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