SEVERAL banks in Tanzania have joined forces with the parastatal National Housing Corporation (NHC) to launch a housing finance scheme which is ostensibly designed to enable Tanzanians to own houses. However, observers remain skeptical about
the efficacy of the arrangements.
At the centre of the skepticism are the crucial issues of interest rates, affordability and lack of knowledge on housing finance among Tanzanians, all of which are major hurdles to be surmounted at the outset if the plan is to be effective and sustainable on the ground.
Under the proposed scheme, it would take less than a year for a person to acquire a newly-constructed house or apartment!
It is estimated that it takes ten years or more for an ordinary Tanzanian to construct a house using personal/family savings and/or other more 'traditional' ways and means!
Dispelling the skepticism, Nehemia Mchechu – a former banker and the incumbent NHC director general today – notes that such fears among Tanzanians stem from the fact that this is “a new thing in our communities.”
If more banks join forces to finance housing, Mchechu argued, this would dilute the competition in the financial sector – thereby automatically pushing lending rates and housing prices down!
Houses which would be constructed under the NHC-initiated programme would be sold on credit at prices ranging from Tsh25 million to 50 million (US$14-28m at current exchange rates) -– with a repayment period of 15 years!
To that end, Mchechu said, the Corporation has already started to construct houses of such prices, targeting mostly the middle class.
According to Mchechu, Tanzania has a demand for 200,000 housing units annually, but only 15,000 units are constructed. This has created a big deficit that has resulted in housing prices spiral.
Currently, Tanzania has a housing deficit of three million units.
The housing shortage has been increasing as Tanzania's population is growing. Studies have established that, between 1964 and 1969, there was a shortage of around 21,000 housing units in urban areas alone.
The number rose to 25,000 at the end of the second five-year development plan (1969-1974) – and to 300,000 in 1982! It is now estimated that the shortage in urban areas is above 1.2 million houses.
“Even if there were ten NHCs, this would never end the housing shortage problem in Tanzania,” the D-G said in Dar es Salaam recently.
Analysts point out that there are risks which a borrower under the housing scheme might face. Among these are increases in monthly expenses in repayments; depreciation in value, and over-valuation of the property involved due to low supply.
The general idea behind housing finance is to enable Tanzanians to refrain from using their meagre savings in constructing houses on their own and, instead, use the funds to repay the housing loan to the banks involved.
The scheme would also make it possible for people who buy houses to resell them at the ruling price – and make a killing at the marketplace!
But the great fear among Tanzanians has remained the loan repayment rates. As mortgage financing, the lending rates would range from 9-to-15 per cent, depending on the individual bank’s policy.
But – as Mchechu has already noted – if and when more banks join the programme, the cost of servicing the loans would fall, much to great relief all round!
“In five years to come, there will be stiff competition in this,” Mchechu bubbled with enthusiasm.
According to an analysis carried out recently, a Tsh25 million loan offered today to buy a house from NHC would translate into a repayment of more than Tsh60 million in fifteen years!
Under the proposed plan, NHC would construct 15,000 houses in different regions in Tanzania, with 10,000 of them to be sold to individuals.
Commenting on the scheme, Baraka Munisi - mortgage finance specialist – said most houses are currently sold at inordinately high prices because of great demand.
According to a recent report by Knight Frank, a real estate company, the outlook for housing finance is that housing prices will fall – “which is good for the consumers.”
In support of this outlook, Mchechu said the issue here would be the fall of supernormal profits which investors are currently grabbing from the market.
Lawrence Mafuru, NBC Limited chief executive officer and sitting chairman of the Tanzania Bankers Association (TBA), says interest rates (both deposit and loan rates) are the driving force behind banking's basic functions.
Although people say that interest rate are very high today, history shows that “there has been a major fall in interest rates!”
Noting that, 20 years ago borrowers were paying interest rates ranging from 30 and 45 per cent – due to a low level of banking services – and deposits were attracting no interest income, Mafuru said “today, interest rates have fallen to 9-to-15 per cent!”
However, borrowers’ behavior of defaulting has mainly forced the banks and other financial institutions to keep lending rates high.
The minister for Land, Housing & Human Settlements, Professor Anna Tibaijuka, says most banks in Tanzania have been hesitating to seriously go into mortgage financing, while overall lending rates remained high.
"Affordable lending rates and repayment periods are issues that need to be addressed urgently. Interest rates of 15-to-20 per cent are very high and inaffordable for mortgage seekers," she stressed during a ceremony at which the seven participating banks signed the Memorandum of Understanding with NHC.
The chief executive officer of Azania Bank, Charles Singili, said his bank started housing finance in 2002, and prospective borrowers are required to have 20 per cent of the total amount the house costs involved.
Noting that the bank’s mortgage portfolio stands at Tsh25.039 billion out of a total of Tsh118.9 billion portfolio issued by the bank as of October 2011, Singili said that, “in four years, Azania Bank issued loans amounting Tsh133.560 billion to 20,331 clients, out of whom 30 per cent used the funds to purchase plots and others to actually construct houses.
However, high interest rates; outreach; funding mismatch; affordability level; court injunctions and financial literacy have remained formidable challenges to the bank’s housing finance scheme.