Housing Finance Sources of Housing Finance in Uganda

• Commercial Banks
• Housing Micro-finance
• The Cash Loans Approach
• Community Self-Help Projects
• Non-Conventional Housing Finance
• Personal Financing
• Challenges of the housing Finance Sector in Uganda

Uganda’s housing finance sector has undergone both qualitative and quantitative transformation and growth over the last decade. The sector has, since 2002, registered substantial growth, expanding from one government-owned institute to 4 privately owned commercial banks and 1 Micro-Finance Deposit Taking Institution (MDI). The commercial banks’ mortgage portfolio has also grown, increasing from UShs 32.4 billion (US $ 1.9 million) in 2002 to UShs 190 billion (US $ 109 million) in 2007. The sector is however small in comparison to the increasing housing needs of country and it has principally been serving middle and high income earners. The lower income earners who constitute over 80% of the population have for a long time been left out of this bracket which is a reflection of the relatively weak foundations made by consecutive governments in building a sound housing industry for the mainly poor rapidly growing population. The average mortgage loan size issued by commercial banks is between UShs 60 million (US $ 34,000) and 80 million (US $ 46,000), an amount too high for the low income earners.

Absence of adequate housing finance for the last 30 years and the weak foundations made by consecutive governments in building the country’s housing industry have greatly crippled the formal private sector to such an extent that their contribution to housing delivery has been relatively insignificant. The housing finance sector is still facing a major challenge of lack of long-term funding schemes within the domestic banking system and nascent capital markets.

Out of 5.2 million households in the country, only 0.68% can access mortgage loans through commercial banks, 19.95% can access housing micro-finance loans through Micro-finance Deposit Taking Institutions, 7.2% can access loans from Micro Finance Institutions and Savings and Credit Cooperatives, 10.3% can only access loans through Savings and Credit Cooperatives only and 62.3% have no access to financial services. Housing demand in Uganda has been constrained by inadequate financial resources for both real estate developers and end buyers. The low income levels of most Ugandans have also constrained the demand side of housing.

Habitat for Humanity-Uganda is one of the Non Governmental Organizations [NGOs] that have been at the forefront of providing low-cost houses for the rural poor. It has built 4,500 houses in the last 2 decades through its 43 grassroots affiliates in 19 districts. Through initiatives pioneered by Stromme Foundation and Habitat for Humanity Uganda, Micro Finance Institutions will be starting a housing micro-finance product where they will lend to low income earners up to UShs 8 million (US $ 4,600), payable between 2 to 5 years.

Sources of Housing Finance in Uganda

Commercial BanksCommercial banks finance mainly residential property and a few commercial property developments. Financed residential property developments which are offered by all the 5 commercial banks include: (i) house construction, (ii) house completion, (iii) home improvement, (iv) purchasing of houses, (v) equity release and (vi) refinancing mortgage. Granting of loans is negotiable depending on the credit rating of the mortgagee and the quality and value of the houses to be built or purchased. All loans offered have set repayment periods

Securing loan financing of residential property development is premised on the borrowers’ income. For those employed in the formal sector (public or private), who wish to secure mortgage loans, employment should be on permanent basis for the period in which one will repay the loan. An individual is also expected to make monthly installations not exceeding 40% of confirmed monthly gross pay.

All institutions offer secured mortgage loans for residential houses between UShs 10 million and UShs 200 million, though Development Finance Company of Uganda [DFCU] Bank can finance up to UShs 1 billion for home completion. Mortgages are given financing to cover 80% of the costs required to meet an individual’s housing needs. Development Finance Company of Uganda [DFCU] and Housing Finance Bank [HFB] also provide up to 80% of the costs for big developers in instances where the construction of houses is jointly financed by the real estate developer, the prospective buyer and the mortgage provider. This approach has encouraged developers to go for bigger and better planned projects and eventually better quality housing units.

The East African Development Bank (EADB) has also undertaken the provision of structured loans though not directly through mortgages. They part financed the construction of up to 29 housing units constructed.
Housing Finance Bank [HFB] holds the largest market share (55%) of housing finance in the country. Its main source of funds has been through the sale of a pool of houses to civil servants that were owned by the state. In 2004, 50% equity investment of HFB was acquired by National Social Security Fund [NSSF]. This has enabled National Social Security Fund [NSSF] use Housing Finance Bank [HFB] as a driver for its lending into the housing industry.

Development Finance Company of Uganda [DFCU] is the second largest player in the housing finance sector. Its source of long-term funds has been through international credit institutions; Proparco (US $ 7 million), Norfund (US $ 3 million) and the local pension’s scheme, National Social Security Fund [NSSF] (US $ 40 million). This was done through the Uganda Mortgage Finance Program and also covering two other banks; Stanbic and Orient.
Housing Micro-financeHousing micro-finance is on the whole a new product in the country’s housing finance sector. It employs a 2- way approach in which individuals can either access cash loans for home improvement or they can actually first get skills on how to build a house and through loaned construction materials, they build their own houses.
Through Micro finance Deposit taking Institutions (MDIs), micro Finance Institutions (MFIs), Savings and Credit Cooperatives (SACCOs) and other support programs, housing micro-finance is expected to grow considerably due to a combination of significant donor funding and government support.

The Cash Loans Approach
Uganda Microfinance Limited (UML) is the only Micro-finance Deposit taking Institution (MDI) in the country directly offering loans to the housing industry.
They have been in the housing micro-finance sector for the last 5 years, issuing home improvement loans only until 2006 when they introduced the home building loans. All their loans are secured and they do not exceed Ugandan Shillings (UShs) 50 million (United States Dollar (US $) 29,000), payable within 2 years at an interest rate of 36% per month. As it was noted above, other Micro-finance Deposit taking Institution (MDIs) and Micro Finance Institutions (MFIs) like Pride Microfinance and Women’s Finance Trust have been providing loans that have indirectly gone towards home improvement.
Other initiatives in the pipeline include the introduction of housing micro-finance products in Micro Finance Institutions (MFIs)  by two Non Governmental Organizations (NGOs).These are:

• Stromme Foundation, a wholesale lending institution is one of these Non Governmental Organizations (NGOs). It plans to introduce a tripartite arrangement in which it will select one Micro Finance Institution (MFI)   from the 19 it finances to start issuing housing micro-finance products to its clients. The third party; National Housing Construction Company (NHCC) will provide planned sites in which low cost houses will be built from the loans issued by the Micro Finance Institution (MFI). Loans will range between Ugandan Shillings (UShs) 6 and 8 million (United States Dollar (US $) 3,500 and 4,600), repayable within a period of 2 – 3 years. Stromme Foundation will also consider setting up a housing micro insurance scheme to cater for the vulnerable. The project is expected to begin in 2 – 5 years.
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• Habitat for Humanity Uganda (HFHU) is the other Non Governmental Organization (NGO) and it directly issues home improvement loans to low income earners through two of its branches in Luweero and Masindi District. The loans are disbursed in cash at an average loan amount of Ugandan Shillings (UShs) 1.4 million (United States Dollar (US $) 805), payable within 2 years at an interest rate of 2% per month. The UGAFODE – HFHU partnership started in late 2007, where it (HFHU) injected Ugandan Shillings (UShs) 330 million (United States Dollars (US $) 190,000) as a housing micro-finance fund to start the “UGAFODE home improvement loans product”. Habitat for Humanity Uganda (HFHU) also offers technical assistance on how to effectively manage this product. Before embarking on the above housing micro-finance initiatives, Habitat for Humanity Uganda (HFHU) used to employ a product-led approach in which it would design and construct low cost houses for the poor at about Ugandan Shillings (UShs)  2.5 million (United States Dollars (US $)  1437). Using the commodity index system, the poor would gradually pay for these houses within a 10 year period in a revolving fund.

Unfortunately, repayments made were inconsistent and poor. As a result, Habitat for Humanity Uganda (HFHU) adopted strict rules of repossessing building materials which improved on repayments, though not satisfactorily. This factor and the imperative need for more creative innovations in providing housing to the poor created a strong impetus for Habitat for Humanity Uganda (HFHU) to move from a housing provider to a housing micro-finance supporter.

Community Self-Help Projects
Four self-help projects have been undertaken in Uganda to provide low-cost housing for the poor. They have all had a Public-Private approach and donor support.

Non Conventional Housing Finance
Through rotating credit societies, saving clubs and Savings and Credit Cooperatives (SACCOs) which are under the Ugandan Government’s program of “Prosperity for All”, the poor (who are unable to access the above means of housing finance) have been able to finance small scale businesses and in some cases they have enabled the construction of houses.

In Uganda, Savings and Credit Cooperatives (SACCOs) have a relatively wide institutional outreach into the rural areas. They have great potential as rural financial intermediaries though most of them have weak financial positions and their inability to operate strictly on commercial principles further minimizes their chances of becoming sustainable. Since many poor individuals cannot provide conventional collateral to ensure compliance with loan repayment responsibilities, Savings and Credit Cooperatives (SACCOs) issue loans on a revolving fund mechanism in which they do group lending where the borrower is not only responsible for the repayment of his loan, but also for the outstanding loans of other group members.

Personal Financing
Self financing through personal savings forms a key element in housing finance in Uganda as institutional frameworks for lending are not fully developed. This process is faced with many pitfalls because it takes a long time as savings may not be available for housing but used to meet other pressing needs such as medical and school fees. As a result investments may be undermined over time as materials that are bought may waste away, be stolen or construction could be abandoned representing large losses. A number of households frequently sublet rooms and run small businesses out of their homes meeting both domestic financial needs in an effort to provide for longer term economic expansion. Personal finance of housing includes three components: self-financing from personal savings, contributions from family and remittances and finance from extended from social security sources (ie. pension, gratuity, medical benefits) and contributions from saving groups/ Savings and Credit Cooperatives (SACCOs).

Challenges of the housing Finance Sector in Uganda
Commercial banks have in the past mainly concentrated on financing the demand (mortgage) side. This is so because mortgages provide more definite security, given that it is tied to the income of the mortgagee as well as the physical asset itself. Also, the current systems in place do not allow for developers to prove the effectiveness of demand for their products, making it more difficult for them to receive financing.
The other major challenge with regard to financing housing in Uganda is the lack of long-term funding schemes within the domestic banking system and nascent capital markets. Though government has channeled funds through NSSF to HFB and DFCU Bank to support the mortgage financing industry, the lack of long-term funds has stalled the provision of affordable mortgage finance and in turn limited the supply of housing.

The sector is however small in comparison to the increasing housing needs of country and it has principally been serving the middle and high income earners. The lower income earners who constitute over 80% of the population have long been left out of this bracket which is a reflection of the relatively weak foundations made by consecutive governments in building a sound housing industry for the mainly poor and rapidly growing population.

The sector has principally been serving the middle and higher income earners. The average mortgage loan size issued by commercial banks is between UShs 60 (US $ 34,000) and 80 million (US $ 46,000), an amount too high for the low income earners. Absence of adequate housing finance for the last 30 years and the weak foundations made by consecutive governments in building the country’s housing industry have greatly crippled the formal private sector to such an extent that their contribution to housing delivery has been relatively insignificant.

The housing finance sector is still facing a major challenge of lack of long-term funding schemes within the domestic banking system and the nascent capital markets. Out of 5.2 million households in the country, only 0.68% can access mortgage loans through commercial banks, 19.95% can access housing micro-finance loans through Micro-finance Deposit taking Institutions, 7.2% can access loans from Micro Finance Institutions and Savings and Credit Cooperatives, 10.3% can only access loans through Savings and Credit Cooperatives only and 62.3% have no access to financial services.