Why low-income earners can’t easily access housing loans in Tanzania

By The Citizen Reporter

Dar es Salaam. Although housing is central to the achievement of the Sustainable Development Goals (SDGs) yet in Tanzania, the housing sector is strongly determined by income as mortgage financing tends to favour middle as well as high-income persons. The Citizen has learnt.

This has left the majority (low-income earners) to continue building incrementally, step by step, by self-financing. Yet housing is a productive investment and can shift credit usage away from consumption, increasing income-earning potential, through home-based enterprises.

A recent study by the Centre for Affordable Housing Finance in Africa (CAHF) dubbed ‘Housing finance in Africa yearbook’ has revealed that while some institutions house projects targeted low-income earners should ideally be priced between Sh10 million ($4,313) and Sh20 million ($8,626).

However, the cost of building materials, combined with value added tax (VAT), doubles the cost of low-cost housing to at least Sh40 million ($17,250) and up to Sh55 million ($23,720), making it far less affordable to the majority.

The report disclosed that land and infrastructure-related costs hike housing prices even further. Although the scope of financing is continuously increasing, it is still unaffordable for most households.

For instance, CAHF which is an independent body that supports and grows housing markets in Africa, indicated that it is estimated that only 3 percent of the population could afford a mortgage, and this creates tremendous demand for housing microfinance products.

Although the study acknowledged the state-led delivery approach for affordable housing was increasingly being overtaken by private housing market participants, still, 70 per cent of housing in Tanzania is self-built, and many dwellings are built incrementally using self-help savings.

In fact, over 400 financial institutions operate in the country and are regulated by the Bank of Tanzania yet only 34 financial institutions are licensed mortgage providers.

According to the study, five lenders CRDB Bank, Stanbic Bank, Azania Bank, NMB Bank and Commercial bank of Africa (CBA), account for approximately 70 per cent of outstanding mortgage debt.

And again, lack of long-term funding by banks to facilitate the provision of mortgage products diminish the process, normally mortgage loans are set to amortize over a set period of time, ranging from 20 to 30 years; but in Tanzania, mortgage regulations impose a maximum term of 20 years. Alhaj Juma Salumu, a real estate expert said: “In fact these banks have limited capacity to engage in mortgages due to financial constraints which are mainly due to lack of long-term funding as banks’ deposits are short term while mortgage products are long term.

This apparent funding mismatch limits the ability of banks to actively engage in mortgage financing. Moreover, it is said that the number is expected to increase even further as more lenders continue to launch their mortgage loan products.

But Mr Mohamed Mgunda, a student from Ardhi University is of the view that high interest rates, coupled with a depreciating of the country’s currency, demand for mortgage loans may dampen and a long shadow may be cast over the growth prospects of the market.

The central bank’s mortgage update indicates that demand for housing and housing loans remains extremely high as it is constrained by inadequate supply of equitable houses and high interest rates charged on housing loans.

Most lenders offer loans for home purchase and equity release while a few offer loans for self-construction which continue to be expensive beyond the reach of the average Tanzanian.

While interest on mortgage loans improved from 22 – 24 percent in 2010 to 15 – 19 this year, market interest rates are still relatively high hence negatively affecting affordability. Additionally, cumbersome processes around issuance of titles (especially unit titles) continue to pose a challenge by affecting borrowers’ eligibility to access mortgage loans.

“Nevertheless, the development of a stable and effective mortgage finance market cannot only significantly lead to financial deepening, but also make ownership of suitable housing more affordable through longer amortization periods and help real estate developers liquidate their unsold housing stock,” he said.

According to him, it is therefore crucial to note that the anticipated acceleration of Tanzania’s mortgage finance market is, for the most part, dependent on the strength of the overall economy; the efficacy of the legal system to support registration of properties and enforcement of rights; and the willingness and capacity of mortgage lenders to accept risks and offer mortgage loans.

The government has also made concerted efforts to streamline property registration processes, strengthen the capacity of the judiciary to resolve disputes, and encourage land development by improving titling. As a matter of fact, proper titling encourages investments in the housing sector.

“However,” says Mr Mgunda, “…there is still a need for new initiatives and solutions to address, among other things, the hovering interest rates and the rapid depreciation of the shilling that could lead to low demand for mortgage loans, despite the government taking steps towards promoting housing affordability and the increase in the number of banks providing mortgage financing.”