The housing crisis in Addis Ababa presents a daunting challenge for its residents, as affordable homeownership remains out of reach for many, and even renting has become prohibitively expensive. Housing costs have become the largest financial burden for most renters in the city, and the situation has only worsened with escalating rent prices and inflation.
Available studies show these residents spend a staggering 65 percent of their monthly income on rent, which is more than a double of the international standard. A spending on housing of a total of 28 percent of one’s gross monthly salary is considered healthy. In Ethiopia, especially in cities like Addis Ababa, the situation is far from ideal and creates a significant financial burden for residents.
Recently the city administration introduced a trend of offering temporary relief and stabilizing housing costs in the short term. It passed a law that restricts landlords from raising rent more than once a year. This legislation introduces an annual cap on rent hikes, providing some respite for tenants. The City Administration has also implemented temporary measures that prevented landlords from increasing rent prices for several months.
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While these initiatives are intended to stabilize housing costs and alleviate the ongoing crisis, their effectiveness on the ground remains uncertain. Although these initiatives aim to bring stability to housing costs and offer temporary relief, their practicality remains is unclear. More importantly, they play insignificant role in addressing the problem in the long-term.
The emergence of new mortgage banks in Ethipia offers a glimmer of hope for residents who dream of owning a home. However, doubts linger about their ability to fully meet these aspirations.
Ovid Betoch Bank is among the upcoming mortgage banks joining the industry. It obtained permission from the National Bank of Ethiopia (NBE) in December 2023 to sell shares and plans to commence operations within six months according to Abiy Girma, the vice board chairperson of Ovid Betoch Bank.
Abiy noted that the challenges facing mortgage banking in Ethiopia are not without precedent.
Three years ago, Goh Betoch Bank emerged as the country’s first mortgage bank. Yet, recent financial reports indicate a deviation from its original mission. In the fiscal year 2021/2022, Goh Bank lent 298.5 million birr, a figure that increased to 1.32 billion birr in 2022/2023. However, less than half of the loans granted by the bank were allocated for mortgages.
Eshetu Fantaye, a retired bank executive who conducted the feasibility study of Goh Bank, observed a shift in its business model away from its initial focus on mortgages. Instead, Goh Bank now operates more like a commercial bank, predominantly lending to businesses rather than homebuyers. He suggests that the challenges within Ethiopia’s mortgage banking sector may have compelled Goh Bank to redirect its focus toward commercial lending.
Eshetu highlights that Goh Bank’s original plan was to provide 1,600 mortgages in its first year. However, he believes the bank has abandoned this objective in favor of extending credit to businesses and functioning more akin to a diversified commercial bank.
According to its most recent financial statement, only 49.2 percent of the bank’s loans are allocated for mortgages, with a significant portion (35.5 percent) dedicated to import-export trade. Smaller proportions are directed towards domestic trade (3.6 percent) and personal/consumer loans (11.7 percent).
Girum Tsegaye, the CEO of Goh Betoch Bank, acknowledges the formidable challenges posed by a shortage of long-term finance available for lending to homebuyers. He explains that the bank’s deposits are predominantly short-term, while housing loans inherently require long-term commitments, creating a mismatch in funding sources.
Subsequently, Goh Bank has been compelled to limit its mortgage loans and focus on attracting more deposits to address liquidity shortages.
Girum emphasizes that mortgage banking in Ethiopia is exceptionally difficult due to the scarcity of long-term funding options. He notes that mortgage banks can only access long-term funds through means such as accumulated pension funds, insurance premiums, long-term loans, or low-interest loans from abroad. However, these avenues are currently unrealistic and challenging to pursue.
The CEO argues that diverting pension funds to banks would significantly impact the government budget, making it unlikely for such funds to be allocated. Even if they were, the allocation would likely occur through competitive bidding at high interest rates. Similarly, he says insurance companies would offer funds at competitive rates, further complicating the situation. Obtaining loans from abroad also presents significant hurdles, often rendering it an unattainable option.
Eshetu, a seasoned banking expert who previously held positions at Ahadu Bank, Buna Bank, CBE, and Awash Bank, asserts that the limited development and success of mortgage banking in Ethiopia can be attributed to regulatory challenges and funding constraints.
A major obstacle identified by Eshetuis the absence of specific regulations governing mortgage banks.
The Ethiopian Central Bank currently lacks a separate law for mortgage banks and does not recognize Mortgage Banks as distinct from commercial banks. This lack of regulatory clarity hampers the sector’s growth, which require different rules and treatment compared to their commercial counterparts.
Eshetu points out several regulatory challenges, including the 20 percent bond requirement imposed by the central bank. Commercial banks are mandated to purchase treasury bonds equivalent to 20 percent of their loan and advance disbursements. These bonds mature in five years and offer an interest rate two percentage points higher than the minimum savings rate, which stands at 9 percent—significantly lower than the average lending rate.
Banks must also invest at least one percent of their outstanding loans and advances to the Development Bank of Ethiopia (DBE). Consequently, banks have only 79 percent of their liquidity available for lending.
While this may not significantly affect commercial banks, Eshetu says these measures cause a major liquidity constraint.
The 40:40:20 ratio for credit allocation is another regulatory hurdle faced by mortgage banks. According to the law, commercial banks must allocate their loans in the following proportions: 40 percent for short-term loans (up to one year), 40 percent for medium-term loans (up to five years), and 20 percent for long-term loans (over five years).
Eshetuargues that this ratio poses challenges for mortgage banks, as their lending typically involves longer repayment periods. He says over 80 percent of mortgage bank loans necessitate long-term commitments.
For instance, Goh Bank provides loans to homebuyers who save 30 percent of the house’s value, with the bank extending the remaining 70 percent as a mortgage loan. These loans span a 30-year repayment period to facilitate manageable installments. This exemplifies the long-term nature of mortgage lending. However, Eshetuasserts that the current regulatory framework does not align with the realities of mortgage banking, where borrowers require extended repayment periods.
While the current regulatory system allows commercial banks to avoid liquidity crises by focusing on short-term loans, it proves inadequate for mortgage banks. “Mortgage loans, by nature, require long-term commitments, often exceeding ten years for repayment. As a result, the existing system falls short in effectively supporting mortgage banking,” Eshetu said.
Additionally, the NBE imposes limitations on commercial banks’ investments in non-banking businesses, capping them at 10 percent of their total capital.
Eshetu argues that the current regulatory frameworkis detrimental to mortgage banks success. While commercial and retail banks benefit from regulations that focus on lending to businesses, mortgage banks are hindered from investing in non-banking ventures like real estate companies. This inability to engage in these businesses, according to him, leaves mortgage banks struggling to survive.
“Unlike commercial banks, which receive assistance from the central bank during times of crisis, mortgage banks face frequent liquidity shortages due to their need for substantial funds and their long-term lending nature.”
He asserts that the central bank should not only serve as a last resort but also provide regular liquidity support to mortgage banks, acknowledging their unique requirements as lenders for extended periods and facing immense demand for housing loans.
The demand for housing, particularly in the capital city, is staggering. In previous years, over one million housing demands were recorded, with seven million demands registered from 2004 to 2015 in Addis Ababa alone. Meeting this enormous demand requires significant funding, which mortgage banks struggle to secure due to their limited capital.
“Mortgage banks might lend all their available funds in one year and then have to wait upto 10 years to get it back,” Eshetu said. “This affects their liquidity in the meantime.”
Eshetu highlights the absence of employer-assisted housing finance in Ethiopia, proposing a mandatory law that would require employers to save a portion of their employees’ salaries for mortgage housing. This model, akin to a pension system, would enable the accumulated savings to be used for building houses for employees.
To address the land shortage issue persisting for decades, he suggests adopting multiple systems for building and owning houses, moving away from strict government control.
Eshetu criticizes recent housing projects, such as the 70/30 project introduced by the City Administration, which allows developers to sell 70 percent of housing units while reserving the remaining 30 percent for the government.
He argues that these projects lead to high land prices and ultimately fail to achieve their intended goals. The ambitious integrated housing development, he believes, failed for the same reason. Instead, he advocates for an independent market system for buying houses, reducing government control over land and housing markets to prevent mismanagement and maladministration, as evidenced by temporary suspensions of land services in Addis Ababa in recent years.
The exorbitant land prices further exacerbate the challenges faced by mortgage banks, rendering homeownership unattainable for most individuals. Eshetu cites an example where one square meter of land sold for a staggering 600,000 birr in a recent lease deal. Consequently, the cost of purchasing a 200 square meter plot would amount to 120 million birr, making it financially unattainable for the majority of people, even if a skyscraper were built on it.
Abiy, the CEO of Ovid Bank, acknowledges the difficulties but outlines strategies to mitigate liquidity shortages. Ovid Bank plans to allocate a significant percentage of its loans for house financing (70-80 percent) while 20-30 percent would go to other business activities, such as short and medium term business loans. It also plans to source funds from financial and real estate companies owned by its organizers to ensure liquidity in accordance with the law. In addition, collaboration with international financiers is also on the bank’s agenda to secure additional financial resources.
Abiy supports the need for regulatory reforms, recognizing that the current framework treating mortgage banks as commercial banks hampers their development. However, he is optimistic about the government’s preparation of a new proclamation specifically for mortgage banking, which he hopes will address the challenges faced by the industry.
Echoing Abiy’s sentiments, Eshetualso emphasized the necessity of separate regulations tailored to mortgage banks and specialized treatments to thrive in the financial landscape.
The pressing issues faced by mortgage banks in Ethiopia call for urgent reforms, if the housing shortage is to be solved anytime in the near future. Industry leaders like Eshetu and Abiy recognize the need for specialized treatment, separate regulations, and long-term funding options to overcome the challenges hindering the growth and viability of mortgage banks.
