IFN Monthly Article on Nigeria: August 2019 Issue

Could Islamic Financing have a place in Nigeria’s 1 million annual housing target?

Nigeria has a housing deficit of an estimated twenty million housing units and counting. With a population growth rate of c.2.5%, this housing gap is increasing by 900,000 units every year. Despite efforts at all levels of government aimed at bridging this deficit, they are yet to make a dent.

Several issues bedevil the housing sector: lack of long-term funds at affordable rates, the ability (or otherwise) to refinance or securitize mortgage pools through mortgage backed securities, the cost and time involved in securing or transferring title of properties for collateral. The result is a nascent Nigerian mortgage space: as at Q1’19, total financing from mortgage institutions accounted for 0.46% of GDP. In comparison, mortgage finance as a percentage of GDP is 22.06% in South Africa. In addition, credit to the Nigerian real estate sector as a proportion of total banking credit steadily declined from a peak of 5.29% in December 2015 to 3.92% by March 2019 as lenders pulled back due to concerns over the relatively long credit cycle.

Mortgage adoption in Nigeria is also alarmingly low due to the high interest rate environment, short-mortgage durations and the low income levels (minimum wage is currently c.$83 per month). At the moment, lending rates typically hover around 25% per annum. There is also the very real aversion to interest-based finance by certain segments of the population. This combination of circumstances has resulted in Nigeria recording a low home ownership rate. According to the Centre for Affordable Housing Finance Africa (CAHF), only 25% of Nigerian households own their dwelling, compared to 56% and 73% for South Africa and Kenya respectively.

Islamic Finance could play a very welcome role in unlocking the potential of the mortgage sector. It addresses some of the factors inhibiting what could arguably be the spark that would drive the Nigerian economy to double digit growth and supply millions of jobs in the process.

Over the past four years, the assets of the non-interest banking industry, though small, have more than doubled while non-interest investment management funds have also expanded in size and number. Given the asset-backed nature of Islamic Finance and its penchant for real estate and other physical assets, funding for real estate is gradually rising.

Nigerian Islamic Financial Institutions (IFIs) are currently poised to expand their mortgage offerings in a market where demand currently outstrips supply. With the availability of Shari’ah compliant mortgages, aspiring homeowners who had hitherto shunned interest-yielding mortgages are embracing this alternative. In the no distant future, the growth of IFIs should drive meaningful expansion in mortgage assets.

In addition, the growth of the domestic Sukuk market should pave the way for Shari’ah compliant mortgage-backed Sukuk which could significantly extend the maturity profiles of mortgages and make them more accessible.

With over a million homes needed to be built each year just to maintain status quo, there is definitely a need for the Islamic finance sector to demonstrate the useful contribution it can make to this critical sector of the economy and vital social need – shelter.