Housing Finance in Burundi

Introduction

Burundi’s prospects of returning to normalcy¹, particularly in the Capital Bujumbura, are promising, following months of political tensions and uncertainty surrounding the re-election of the incumbent President for a third term in 2015. The re-election was perceived as illegal and unconstitutional, by several civil society organisations, the opposition and some in the ruling party.

A Regional Security Mission, commissioned by the Secretariat of the East Africa Community (EAC), early July 2016, concluded that the security situation in Burundi was now “satisfactory” to host EAC activities. This followed suspension of the activities in the run-up to the highly contested June 2015 elections.

However, uncertainty on the policy direction, created by the now year-long political crisis, had a profound effect on the socio-economic development of the country. According to the Central Bank of Burundi, the economy registered a growth rate of -4.1% in 2015, compared to 4.7% in 2014, following a contraction in fixed investments, reduced capital flows and dampened consumption growth². The demand for mortgage finance receded by more than 700 basis points, between 2014 and 2015, because of the recession. The economy is expected to grow at an average rate of 3.5% in 2016.

The regression of the weighted average index of industrial production was estimated at -23.9% in 2015³. This was attributed to the decline in production of the food industry (-24.7%), chemical products (-11.7%) and building materials (-60.7%). The decline in production of building materials suggests that fewer housing construction projects were undertaken in the year⁴ The Inflation rate stood at 5.5% in 2015 against 4.4% in 2014 mainly due to the rising food prices.

Budget support from development partners (grants and donations), which typically constitutes about 52% of the total budget, declined from BIF 707.8 billion (US$457.4) Burundian Francs in 2014 to BIF 679.8 billion (US$439.3) in 2015⁵ Burundi’s GDP per capita is estimated at US$315.2, positioning the country as the poorest in the World, according to the IMF. For the last five years, Burundi has consistently been ranked as low human development country, with Human Development Index of 0.4 in 2015, up from 0.389 in 2014.

The structure of the economy remains rural and agrarian, with over 90% of the population engaged mainly in agriculture. The urbanisation rate was estimated at 12% in 2015, compared to an average of 37% in Sub-Saharan Africa. Agriculture, particularly agribusiness, is central to the urban growth strategy of the country, and the overall goal is to support higher agricultural productivity to respond to the growing local demand, and encourage trading of agricultural surpluses to promote non-agricultural activities (for example, tourism) in urban areas.

The impact of the political crisis on the capitalisation of the banking sector was insignificant, with an overall solvency ratio of 18.4% at the end of 2015, sufficiently above the regulatory standard of 12%⁶. However, the sector recorded a decline in assets, deposits were modest and credit growth was poor.

Total assets decreased by 7.7%, as a result of slow economic activity. The volume of loans issued decreased at an annual average rate of 3.9%. The volume of deposits increased marginally at 4.5%, from BIF 950 million (US$613 893) at the end of 2014 to BIF 993 million (US$641 680) by December 2015. NPLs increased at an average 46.3%, throughout the year. The NPL ratio stood at 15%, at the end of 2015.

To ensure liquidity and to maintain stability of the banking sector, in Q4 of 2015, the Central Bank of Burundi, implemented an accommodative monetary policy, to ease refinancing conditions and provisioning of bad debts (NPLs) of productive investments in the industrial sector. In 2016, the monetary policy will focus on; (i) increasing frequency and volume of interventions in the money market to provide banks with the liquidity needed to finance the economy and (ii) strengthening macro-prudential supervision to establish financial stability and curb any possible risk.

Access to Finance

According to the National Financial Inclusion Strategy (2015 – 2020), whose preparation was informed by updated (2014) statistics from the National Survey on the Status of Financial Inclusion (2012), the level of financial inclusion in Burundi is still low but improving. 25.9% of Burundi’s adult population has a savings account with a formal financial institution. Gender equality in financial inclusion is also improving. Women account for 34.3% of the adult population with an account with a formal financial institution.

Access to financial services, as evidenced by the growing number of institutions in the financial sector is improving. The financial sector comprises ten banks, two financial establishments⁷, 27 MFIs and the RNP (National Postal Service), compared to nine banks, 22 MFI and the RNP in 2011. In the same period, the number of access points for financial services (branches of financial institutions), increased from 492 to 698. MFIs represent the highest percentage (41%) of access points for financial services, compared to 38% for banks and 20% for the RNP⁸. The number of ATMs stands at 75.

MFIs account for 65% of all users of financial services and products. This is attributed to the flexible requirements for opening up an account with an MFI, compared to a banks and other financial institutions. The banks and financial institutions require higher minimum deposit amounts than the MFIs. It is possible to open a current account at an MFI with a deposit of BIF 5 000 (US$3.23), while the minimum deposit at a bank is BIF 50 000 (US$32.3). Similarly, account maintenance fees are estimated at BIF 3 000 (US$2) per month in the banks, compared to BIF 200 to 800 (US$0.13 to 0.52) per month in the MFIs.

BFIs, offer loans at interest rates of 16% to 19% per annum, calculated on declining balance. At the MFIs, there is a great variance in interest rates. They range between six% and 48% per annum⁹. Outstanding loans, at the end of 2015, were estimated at BIF 828.7 billion (US$535.5 million), compared to BIF 565.8 billion (US$365.6 million) in 2014 and BIF 479.5 billion (US$309.8 million) in 2013. MFIs offer the same loan products as the banks, though they have, over the years, developed more specific products to meet the needs of their clientele. Loan products, offered by both MFIs and BFIs include (i) overdraft and line of credit, (ii) personal and consumer loans, (iii) housing and real estate loans, (iv) agricultural loans, and (v) commercial and business loans.

In 2015, there was a significant decline in housing and real estate loans, receding to 9.6% of the total portfolio of BFIs, compared to 17.5% in 2014. The political crisis contributed to the low demand for housing and real estate loans, among prospective borrowers, and also, banks were reluctant to grow their mortgage portfolio, as part of efforts to halt accumulation of impaired loans, given the high risk of lending in a politically uncertain economy.

Three banks (the Burundi Bank of Commerce and Investment, Eco Bank Burundi and KCB Bank) and the two Financial Institutions (the Fund for the Promotion of Urban Housing and the National Bank for Economic Development), offer housing and real estate loans. Housing and real estate loans range between BIF 500 000 (US$323) and BIF 50 000 000 (US$32 310), for a tenor of between 4 and 20 years, at high interest rates of between 16 and 19%. Medium-term mortgages (maturing in two to seven years) account for 61% of the total stock of loans granted by the institutions, up from 63% in 2014. Long-term mortgages (15 to 20 years) increased from 37% in 2014, to 39% in 2015.

In the last six years, the housing finance market has grown at an average rate of about 70% per annum, increasing from BIF 30.5 billion in 2009 to BIF 80 billion in 2014 and BIF 295 billion in 2015. Presently (2016), the number of mortgages issued is estimated at, about 6 000 mortgages compared to 1 600 mortgages in 2014. Though growing, the housing finance sector is still characterised by unmet demand, particularly among lower-middle and low income earners, who constitute over 90% of the population.

The largest housing finance provider is the Fund for the Promotion of Urban Housing (FPHU), and accounts for nearly three-quarters of the market, catering for only middle and high income earners. FPHU was established in 1989, with a share capital of 100 million BIF, to finance housing at affordable conditions. FHPU would provide affordable finance to (i) the SIP (Société Immobilière Publique), a public building society (or a financial institution) charged with implementing and managing all government housing operations, including the improvement or development of urban and peri-urban housing and (ii) the ECOSAT, charged with land development and the construction of houses for civil servants and the private sector with low incomes. This way, prospective homeowners would access an affordable house on the market from ECOSAT, and affordable finance to mortgage it from SIP.

FHPU would mobilise and collect savings, through home saving accounts, supplementary pension funds and deposits, to fund the operations of the SIP and ECOSAT. However, the civil war (1993 to 2005), which forced seven Central and East African countries to place a trade embargo and other economic sanctions on Burundi, as way of initiating peace talks, to end the war¹⁰, had a severe impact on the operations of FHPU, particularly, in financing its partner institutions. The embargo and economic sanctions, raised the cost of houses delivered by ECOSAT (following an increase of over 10% on the cost of building materials, most of which were imported). Worse still, several Burundians who had benefited from SIP’s mortgages, to buy houses from ECOSAT, could not comfortably pay them back (their salaries were devalued (by about two-thirds), after the local currency depreciated, and their mortgages were destroyed in the war). Since then, FHPU, and its partner institutions, have been operating in a precarious economic situation, unable to mobilise long and affordable funds, to effectively implement their mandates. By and large, the lack of long-term funding schemes within the financial sector has constrained growth and development of the Burundi’s housing finance sector.

Housing Affordability

Like in all East African Countries, affordability of housing is still the most pressing constraint to the growth of the housing finance sector in Burundi. The low affordability is largely a consequence of the low purchasing power of the population. The devaluation of the local currency against the US$ by 30% between June and December 2015 further limited the already fragile purchasing power of households to access housing finance.

The political crisis compounded the situation. Several households lost their jobs (especially in urban areas) narrowing their income opportunities. For example, the significant drop in the turnover of the hospitality industry, estimated at about 80%, forced a good number of hotels to close or lay off staff. Poverty levels, estimated through the proxy indicator of “share of food expenditure from households’ monthly budget”, have been evidently high. According to the World Food Program, 67% of households’ expenditures is presently dedicated to purchasing of food. The other major expenses are related to the acquisition of energy for cooking food (wood or other), medical expenses, clothing, soap and hygiene, among others.

Only 5.3% of Burundians earn between US$2 and US$20 a day. The informal private sector is the principal provider of employment, with a share of more than 75%. In this sector, the average monthly wage is about BIF 160 000 (US$103.4). This is too low for banks to lend against.

Civil servants have a guaranteed monthly salary, and are eligible for housing finance but their salaries are too low for banks. Efforts have been made to revise civil servants’ salaries, and in 2010 the government raised salaries of individuals in selected ministries. But the increments are insufficient, because they have not kept up with inflation. For example, an increment in the salary of a civil service from 30 000 BIF in 1993 to 100 000 BIF in 2010, translated into a 233% increase in nominal wage, but a 58% decline in purchasing power, adjusting for inflation¹¹.

Monthly salaries for teachers, the military and the police range between BIF 30 000 (US$19.3) and BIF 175 000 (US$113.1) below the minimum BIF one million required by banks to offer mortgage finance. Judges earn between BIF 115 000 (US$74.3) and BIF 270 000 (US$174.50), also below the minimum. The only government officials whose salaries are eligible for housing finance are ministers and members of parliament who earn between BIF 1.5 million (US$969.3) and BIF 3 million (US$1 938.6).

Housing construction costs in the middle income suburbs of Bujumbura are estimated at BIF 184 000 (US$119) per m². Therefore a house of 120m² will cost BIF 22 080 000 (US$14 286). Such a house can only be afforded by ministers and members of parliament.

Housing Supply

Most households live in their own homes, particularly in rural areas. Findings of the 2008 Household Survey showed that 96.2% of households own homes and 3.8% rent, most of these in urban areas. However, the quality of housing is poor. According to the 2008 Survey, 70% of homes are built with adobe brick or wood walls, 30% of the houses are covered with tiles or sheets and nearly 70% with straw or other plant leaves.

In Burundi, however, it is hard to find a medium to large scale real estate developer, capable of constructing more than 1 000 units annually. In Bujumbura City, no housing estates over 300 units are in development. The planned modestly sized housing project, including 200 units for civil servants, is not planned in the short-term, because of the recent tense political environment, following a highly contested presidential election.

In addition to the absence of well-established medium to large private real estate developers, the high cost of construction is expected to further contribute to the lack of affordable housing on the market. Burundi imports almost all construction materials. Imports include cement, bricks, pipes and iron sheet. Nonetheless, local production of cement has been scaled up to respond to the high demand. Burundi Cement Company (BUCECO) is almost reaching its installed capacity of 100 000 tones per year, to meet high local demand. The company doubled its production in its first two years of operations¹², to 70 500 tons of cement in 2012 compared to 34 500 tons in 2011. On average, a 50-kg bag of BUCECO cement costs US$25, about US$5 less than the imported product.

Presently, the supply side of the housing market is not able to keep up with demand, leading to an annual shortage of 20 000 units¹³. Population projections suggest that the number of households in the main cities of Bujumbura, Gitega Ngozi and Rumonge are expected to grow significantly in the period 2008 – 2025¹⁴. This will translate into an annual demand of 10 000 new houses.

Recently, foreign business consulting and project financing companies, such as Biz Planners from Singapore, have expressed interest in delivering affordable housing for lower middle and middle income earners. Biz Planners signed a memorandum of understanding with the government to develop medium sized housing projects of between 1 000 and 5 000 units. However, to date, this project has not been embarked upon, and it is unlikely to start in the short-term, because of the generally uncertain political environment. The few housing projects that have been embarked upon by private developers (notably Agglobu Ltd) comprised 27 three bedroom houses, built in the west of Bujumbura City, priced between US$205 000 and US$225 000 each.

Two government programmes on urban development, the villagisation and lotissement projects, are helping address land scarcity, and it is envisaged that they will, in the medium to the long term, gradually help tame the high demand for housing and land in urban areas. Both initiatives, which are implemented by the SIP and ECOSAT, use peri-urban land to promote new residential areas.

The villagisation project targets the poorest households, giving them both land and a house with a water connection and solar panels. The houses don’t have windows and a bathroom, making them generally cheaper to deliver. Once a household acquires one, they are supposed to incrementally build the windows and the bathroom. Each house is 40m², on 70m² stands. Hence, there are about 20 houses per km². This increases spatial expansion and reduces densities.

The lotissement project targets middle-income households. The project uses either public or private land, demarcates it in plots of 400m², services it (road and water connections), before allocating the plots to the middle income households. When land is public, middle income households, pay for the costs of demarcating and servicing the land.

When the land is private, the project negotiates with owner to service their land in return for a portion of the land. After servicing the land, the owner retains 40%, while the project retains the balance. The land is demarcated into plots of 400m², before they allocated to middle-income households. Middle-income households are charged a fee for servicing the land. Fees are in the range of BIF 5 000 and 7 500 per m², for a parcel of 400m².

Property Markets

Property markets are still underdeveloped, with some activities contracted to real estate agencies in neighbouring countries. There is no evidence of independent local firms offering valuation services. The country lacks professionals in the construction sector. As a result, several houses, including hotels, are of low quality and lack innovation in design.

Government’s policy of encouraging local and foreign investors to invest in the housing sector should lead to the development of the property market. Presently, registering property requires five procedures, takes 64 days and costs 3.2% of the property value. The number of days to transfer property has decreased by from 94 days in 2012 to 24 in 2016 due to the creation of a one-stop shop for property registration.

Nonetheless, the high cost of owning a property (a house costs about US$20 000), has increased the demand for rentals (by about 30%) in Bujumbura, particularly among modest income earners that migrated to urban areas to seek employment. The high demand contributed to an increase in rental fees, from US$300 in 2014 to US$430 in 2015, and yet disposable income of the modest income households stagnated at about US$350 during the last two years.

The demand for rentals targeting the rich, and expatriates, has on the other hand been low, following a significant drop in the number expatriates who were living in the country, after the country showed signs of increasing stability, about a decade ago. Also, the recent political crisis (2015) forced more expatriates out of the country, further stifling the demand for rentals. Owners of apartments that were occupied by expatriates have reduced the rental fees from about US$2 000 per month to about US$500. Despite the low monthly rental fees, these houses are still not appealing to modest income earners, as they prefer to live in less organised and humble suburbs.

Housing Policy and Regulations

Since mid-2015, following the finalisation and launch of the long awaited comprehensive study that would inform the formulation of the National Urban Planning and Housing Policy was finalised and launched, minimal efforts or none, have been embarked upon to adopt the recommendations of that study in the development of the National Urban Planning and Housing Policy. The lack of progress was attributed to priority given to stabilising the security situation, stifling resources to Ministries and Agencies charged with urban planning.

The study, titled, “Strategies for Urbanisation and Economic Competitiveness in Burundi”, recommended the formulation of an urban policy to assist in aligning regulatory and policy frameworks and creating a clear framework for implementation of urban priorities. Other recommendations include (i) enhance spatial management, urban planning and land and property rights management and (ii) strengthen institutional delivery capacity and enforcement.

Housing Sector Opportunities

The main investment opportunities in Burundi’s housing and housing finance sector are (i) increasing access to long-term and affordable finance for construction and mortgage financing and (ii) building medium sized housing estates of about 1 000 units, annually. The pension and insurance sectors, which can mobilise long-term funds for housing, should be reformed. There is a need for more competition in banking. There is a need to attract more organised real estate developers, both local and foreign, to address the housing shortage.

These opportunities are however dependent on the conduciveness of the political economy. The formulation of the policy, and its implementation is still dependent on the stability of the economy.