Housing Finance in Cabo Verde

Macroeconomic Overview

Cabo Verde is an archipelago of 10 islands, of which nine are inhabited. It is 500km off the west coast of Africa with an estimated population of 520 500.[1] Politically the country is a stable multiparty democracy with a fair and effective election process, in which the two primary political parties’ alternate power regularly. Cabo Verde’s economy is mainly driven by tourism and although the country has efficient banking and telecommunication services it is also highly indebted, has high rates of unemployment (15 percent), poor infrastructure and a lack of maintenance of public infrastructure. The risk profile of the country is defined by it susceptibility to external shocks. In 2019, economic growth has been mainly driven by European tourism, trade and foreign investment with limited public investment and restrictive fiscal policy.[2]  The gross domestic product (GDP) growth was an estimated 3.9 percent in 2018, down marginally from four percent in 2017, although 2019 projections estimate a rate of 4.1 percent.[3]

The local currency, the Cabo Verdeans escudo, is pegged to the euro. The national fiscal policy is considered restrictive as it seeks to control the debt sustainability which is projected to over 130 percent of GDP in 2019. In an effort to curb spending, the government plans and has begun to reform the management of state-owned enterprises (SOEs), including those with heavy cost burdens such as the Cabo Verde Airlines (formerly TACV Cabo Verde Airlines), Imobiliária, Fundiária e Habitat, IFH (social housing company) and Electra (water and power).[4]  Support investment tax reforms have been introduced, including tax exemption during the start-up period of a business, as well as tax incentives for emigrants, to further encourage private and economic investment initiatives.

A crucial policy framework structuring the economic priorities for the country is the Sustainable Development Strategic Plan 2017-2021 (PEDS), intended to support and drive medium-term economic diversification, stimulate economic transformation and diversification, improve resilience to climate change, and strengthen regional integration within the Economic Community of West African States.[5] The plan aims to encourage development of the following sectors and platforms to diversify and solidify economic growth: tourism, air transportation, maritime infrastructure, commercial and industrial, finance, information and communications technology (ICT), and culture (investment from the diaspora).[6] This is being further supported through the introduction of an 18 month Policy Coordination Instrument (PCI) programme run and funded by the International Monetary Fund to enhance macroeconomic stability and underpin the authorities’ reform programme. The PCI is framed to continue building precautionary reserves; reinforce the resilience of the financial system; reform lossmaking SOEs; and advance structural transformations to support private sector-led growth. [7]

The inflation rate estimated at one percent in 2018 is projected to increase to 1.6 percent in 2019.[8] The central bank, Banco de Cabo Verde (BCV) has slowly undertaken an expansionary monetary policy, reducing reserve levels and the central bank lending rate in a bid to boost the rate of inflation and economic growth. There is limited data around the mortgage contribution toward the economy, and this is constrained by the performance of the finance sector, the lack of economies of scale, a necessary dependence on imports for construction materials, and recent economic performance.[9]

The core vulnerability for Cabo Verdean housing is degradation of existing stock, primarily in rural areas.  A National Institute of Statistics (INE) survey shows that 78.6 percent of households live in free-standing houses, compared to 20 percent that live in apartments. For building materials, 84.4 percent of residents live in units that are constructed out of reinforced concrete, while 50 percent of residents have cement floors and 48.8 percent have mosaic flooring.  The majority of the houses have three rooms or divisions. A few have five or more. There is, however, a discrepancy in the data as the survey does not represent the scale or proliferation of self-built informal housing, located on serviced land, fueled by rapid urbanisation.

[1] The World Bank (2019). Overview. https://www.worldbank.org/en/country/caboverde/overview (Accessed 29 September 2019).

[2] Coface (2019). Economic Studies and Country Risks – Cape Verde. https://www.coface.com/Economic-Studies-and-Country-Risks/Cape-Verde (Accessed 1 October 2019).

[3] African Development Bank Group (2019). Cabo Verde Economic Outlook. https://www.afdb.org/en/countries/west-africa/cabo-verde/cabo-verde-economic-outlook (Accessed 29 September 2019).

[4] Coface (2019). Economic Studies and Country Risks – Cape Verde.

[5] Nshimyumuremyi, A. (2018). African Economic Outlook Cabo Verde. Pg. 2.

[6] Government of Cabo Verde (2018). Institutional State Reform and Financial Sector. https://peds.gov.cv/caboverdef4dev/wp-content/uploads/2018/12/INSTITUTIONAL-STATE-REFORM-FINANCIAL-SECTOR-web.pdf. (Accessed 02 October 2019). Pg.6.

[7] International Monetary Fund (2019). Cabo Verde: Staff Report for the 2019 Article IV Consultation and Request for an Eighteen-Month Policy Coordination Instrument. Press Release.

[8] Coface (2019). Economic Studies and Country Risks – Cape Verde.

[9] Nshimyumuremyi, A. (2018). African Economic Outlook Cabo Verde.

Access to Finance

The Cabo Verdean finance sector is dominated by banks, which are liquid but risk averse.[1] The banking sector is highly concentrated,[2] with more than 85 percent of total financial sector assets, with two of seven licensed banks, Banco Comercial do Atlântico (BCA), and Caixa Económica de Cabo Verde, dominating the credit and deposit markets with a combined market share of almost 70 percent. Bank liabilities are primarily deposits from residents, migrants and government.[3] In June 2017, the BCV cut its policy rate by 200 basis points to 1.5 percent, which prompted a decline in commercial banks’ average lending interest rate from 6.5 percent to 4.5 percent at the end of 2018. This resulted in an expansion to credit to the economy by 7.5 percent.[4]

Banking institutions within Cabo Verde grapple with low asset quality, low profitability, and limited capital buffers. Despite improvements in the overall economic growth, the level of non-performing loans (NPLs) increased to 14.04 percent of total loans as of March 2019 from 12.86 percent in December 2018.[5] The average return on assets from 2011-2016 was only 0.3 percent, and capital was only 7.7 percent of total assets at the end of2016, varying across the banks, with some experiencing capital constraints.[6] In March 2017, the BCV had to respond to the insolvency of the state-owned bank, Novo Banco, which was established in 2010 to support micro, small and medium-sized enterprises (MSME) finance and low-income housing, resulting in the BCV revoking Novo Banco’s licence in June 2017. To diminish future risks, the BCV focused on strengthening banking supervision capacity, increasing the frequency of on-site audits, and urging banks and corporates to recognise and address NPLs while rebuilding capital buffers.[7]

In February 2018 the International Development Association initiated a five-year, US$15 million specialised project to aid in the diversification and access to finance for MSMEs in Cabo Verde.[8] The three outputs of the project are the Partial Credit Guarantee (PCG) Fund, Technical Assistance, and Improved Credit Information Systems (ICIS). The PCG Fund is intended to improve access to finance for MSMEs. The Technical Assistance is focused on generating and providing information to financial institutions supporting their loan applications, and includes the provision of accounting and auditing services, support for preparation of business plans and feasibility studies for new ventures. The ICIS output supports upgrading and expansion of the coverage and depth of information in the central bank’s credit registry.

The primary vehicles for finance access development are mainly geared toward supplying the MSME markets. Finance costs are on average high, with lending rates of approximately 10 percent for loans of up to one year. Following previous failed attempts at monetary easing, the BCV introduced more aggressive monetary stimulus measures in 2017, which saw the reduction of the benchmark interest rate from 3.50 percent to 1.50 percent. In general, the cost-to-income ratios, given the archipelago’s lack of economies of scale, are very high (an average of 69 percent over the past five years), indicating room for improvement in banking sector efficiency.[9]

With an approximate client base of 50 000 the microfinance sector remains small. The sector has limited penetration and visibility with only five registered microfinance institutions operating in the country and potential users predominantly unaware of the services offered by these bodies. Microcredit programmes in Cabo Verde are seen as a potential financial instrument for poverty alleviation and improving family income.[10] Programmes have been initiated using microfinance as a means of poverty reduction, income generation, self-employment and equality of gender promotion. A number of projects have been oriented to the creation of micro and small businesses providing self-employment and jobs for poor people and allowing families to have access to income sources they would otherwise not have, that have specifically target women clients.

BCA, the largest bank in the country, provides mortgages for up to CVE 30 million (US$307 607) for terms up to 30 years. BCA offers both fixed and variable rate mortgages: the nominal fixed rate is between eight and 11.5 percent and the nominal variable rate has a floor of 7.7 percent, is based on BCA index rate, and has a range of 3.5 percent.[11] This translates into an effective rate of 12.04 percent for a variable rate mortgage and 12.3 percent for a fixed rate mortgage, compared to the 15.11 percent offered for consumer loans. BCA also charges a fee equivalent to 3.5 percent of the mortgage value, which is not capped but is at a minimum CVE 20 000 (US$205). Caixa offers mortgages for up to 30 years and charges a fee of 1.26 percent of the mortgage, which must be at least CVE 10 000 (US$103).[12]

The nominal interest rate on mortgages is 10.75 percent, equivalent to an effective rate of 11.4 percent. For loans to purchase land, Caixa offers a nominal interest rate of nine percent on a sixty-month loan. Banco Interatlântico (BI) offers mortgages to purchase or construct a house at 90 percent of property value. Banco Internacional de Cabo Verde offers mortgages for terms up to 25 years, with a loan-to-value ratio of up to 70 percent. First-time home buyers are exempt from taxes on the interest portion of mortgage repayments.[13]

The credit market is inhibited by the absence of a credit bureau to regulate and monitor the sector, however there have been substantial legal and systematic reforms intended to strengthen the efficiency and private sector growth, providing an optimistic outlook for the financial sector.   

[1] World Bank (2017) Cabo Verde: Access to Finance for MSMEs (P163015). http://documents.worldbank.org/curated/en/825171511262268770/pdf/Project-Information-Document-Integrated-Safeguards-Data-Sheet-Cabo-Verde-Access-to-Finance-for-MSMEs-P163015-Sequence-No-00.pdf (Accessed 29 September 2019). Pg. 5.

[2] Banco de Cabo Verde (2016). Relatório de Estabilidade Financeira 2016. Pg.23.

[3] World Bank (2017). Cabo Verde: Access to Finance for MSMEs (P163015). Pg. 5.

[4] African Development Bank Group (2019). Cabo Verde Economic Outlook.

[5] Banco de Cabo Verde. (2019) Financial and Statistical Information on Banks. http://www.bcv.cv/vEN/supervision/Insurance/Paginas/Insurance.aspx(Accessed 29 September 2019).

[6] World Bank (2017). Cabo Verde: Access to Finance for MSMEs (P163015). Pg. 5.

[7] Nshimyumuremyi, A. (2018). African Economic Outlook Cabo Verde. Pg. 6.

[8] World Bank (2019). Access to Finance for Micro, Small and Medium-Sized Enterprises Project. https://projects.worldbank.org/en/projects-operations/project-detail/P163015?lang=en. (Accessed 02 October 2019).

[9] World Bank (2017). Cabo Verde: Access to Finance for MSMEs (P163015).

[10] Bernardino S., Freitas Santos J. and Vicente Z. (2018) Microcredit: Role of Entrepreneurial Ventures in Development of Cabo Verde. In: Carvalho L., Rego C., Lucas M., Sánchez-Hernández M. and Noronha A. (eds). Entrepreneurship and Structural Change in Dynamic Territories. Studies on Entrepreneurship, Structural Change and Industrial Dynamics. Springer, Cham.

[11] Banco Comercial do Atlântico (BCA) (2017). Folheto de Comissões e Despesas e Folhetos de Taxas.Caixa Pg. 37.

[12] Caixa Económica de Cabo Verde (Caixa) (2017). Precário: Entrada em Vigo: 02 de Maio de 2017. Pg.62.

[13] Banco Interatlântico. (n.d.) Crédito à Habitação BI Casa.

Affordability

Cabo Verde like many developing countries in the region is economically disparate with over 30 percent or 156 000 people living in absolute poverty. The unemployment rate sits on 12.2 percent as at 2018, with a monthly minimum wage of CVE 13 000 (US$ 133). [1]The profile of improvised Cabo Verdean’s is primarily rural as those living in poverty mainly rely on agriculture for their livelihoods. The lack of resource and the country’s narrow economic base means that poverty in Cabo Verde is primarily a structural problem. [2]

On average an apartment within the city centre costs Esc80 000 (US$820) per square meter, while purchasing outside the centre the per square meter average is Esc55 000 (US$564). These costs are lower than previous years, showing a positive shift toward more increased affordability.[3]  The rental market for a one-bedroom apartment in the city centre is Esc30 000 (US$307) and outside the city centre the average is Esc12 500 (US$128).[4] Housing affordability is, however, questionable with a minimum wage far below the available housing rates and a median net monthly income of only Ese25 086 (US$257). To rent a one-bedroom unit out of town would equate to roughly half of the median income.

Tenure is primarily found in rural areas. In urban areas, housing access relates predominantly to private rental accommodation or self-constructed housing units, in informal settlements, often on land that has not been serviced.

[1] National Directorate of Planning (2018). SDG Cabo Verde: Voluntary National Report on the Implementation of the 2030 Agenda for Sustainable Development. June 2018. Pg. 8.

[2] Provencher, K. (2016). Poverty in Cabo Verde.

[3] Numbeo (2019). Cost of Living.

[4] Trading Economics (2019). Cape Verde Unemployment Rate.

Housing Supply

A component of the PEDS is focused on an assessment of the housing situation within Cabo Verde, intended to review the basic and extended housing deficit as well as the definition of a new national housing policy. In Cabo Verde, only 1.4 percent of households live in non-traditional housing, which includes shanties. Most, 98.6 percent, live in independent housing or apartments. In general, households have electricity, piped water and sanitation facilities, and at least two out of three households occupy and own their own dwellings, (with the largest numbers among the poor); 72 out of every 100 poor households occupy homes that they own, as compared to 63 percent of non-poor households.

The problem of housing degradation means that, nationally, 49 out of every 100 households live in homes with roof problems and 52 out of every 100 have infiltration and moisture problems in their walls. This is particularly serious among the poor, where 64 out of every 100 people live in houses with roof infiltration problems and 65 out of every 100 dwellings have problems with infiltration and moisture in the walls. The costs of repairs is often beyond the means of most households.

Although the proliferation of informal housing is relatively low, the lack of maintenance and infrastructure in an environment in which 64 percent of the population is urban, with a two percent annual growth rate, is causing concerns. Increased demands for housing will be constrained by the lack of water or sanitation services. In response to this growing trend, UN Habitat and the Ministry of Environment, Housing and Territorial Planning initiated the Participatory Slum Upgrading Programme (PSUP) to strengthen community, city and national key stakeholders’ capacities in participatory slum upgrading. The PSUP has culminated in several national programmes, such as the Social Housing Programme and the National Programme on Urban Development and Empowerment of Cities. PSUP’s is a participatory development approach to slum upgrading, with the strategy formulation and policy review providing the opportunity to institutionalise the community-based prioritisation and planning of interventions. [1] The PSUP has to date mainly been used as a strategy and planning tool and has not, given the evidence available, culminated in any built developments.[2]

There have been attempts to encourage social and sustainable development goals. For example, in 2009 the Sistema Nacional de Habitação de Interesse Social (National System of Housing for Social Interests) was launched, informally known as Casa Para Todos(Houses for All) through the IFH. The programme was intended to reduce the national housing deficit, however, initially committing to the delivery of 8 400 housing units in the form of high density, three- to five-storey condominiums, throughout the country, this would equate to 20 percent of the quantitative housing deficit. The programme’s delivery target was, however, reduced to 6 010 units because of the reluctance of financial institutions to provide mortgages to low-income beneficiaries mainly working in the informal sector, who were meant to be primary beneficiaries of the programme.[3]  By 2017, only 5 695 were built, 3 453 for sale and 2 242 on social lease. After the IFH faced insurmountable financial constraints, it was agreed that the completed houses earmarked for low income users would be transferred to the municipalities for distribution between August 2018 and January 2019.[4]

A secondary component of the Casa Para Todos programme was the rehabilitation of approximately 16 000 houses across the country, to enhance existing housing units, including in informal settlements, mostly in relation to the actual structure of the house. The government coupled this with Operation Esperança (Operation Hope), financed through the Cabo Verde Solidarity Fund (2005 and 2009) in which approximately 3 127 homes were rehabilitated or upgraded, benefiting around 18 205 individuals. These programmes did not, however, look to promote, support or encourage tenure and the full impact is difficult to confirm as there is insufficient data on the impacts of these initiatives.  The current housing deficit is quantified to range between 40 000 to 60 000 residential units.[5]

In 2017, the Cabo Verdean government entered into an agreement with China, which was positioned to invest in the tourism sector of the country, to negotiate the development of housing for low income families.  The first phase of the project, set to break ground in September 2019, is intended to deliver 88 residential units. The successful delivery of the development will determine the rollout plan for further units.[6]

[1] My PSUP (2019). Cabo Verde. https://www.mypsup.org/countries/Cabo_Verde (Accessed 29 September 2019).

[2] UNHabitat (2019). Towards Sustainable Urban Development in Cabo Verde – An integrated vision.

[3] United Nations (2015). Report of the Special Rapporteur on adequate housing as a component of the right to an adequate standard of living, and on the right to non-discrimination in this context, on her mission to Cabo Verde. Pg. 9.

[4] Almeida, S. (2019). Hundreds of “class A” homes are expected to be distributed in the coming weeks. 27 July. Expresso Das Ilhas.

[5] Ibid.

[6] Walubengo, L. (2019). China steps in to ease housing challenge in Cape Verde. 18 September. CGTN Africa.

Property Markets

Cabo Verde has an efficient property registration system. Registering a property takes 22 days. This is more efficient than the regional average of 53.9 days, and costs 2.3 percent of the property value, below both the OECD (4.2 percent) and Sub-Saharan Africa (7.6 percent) rates.[1] The country has a functional deeds registry, which takes between two days to obtain an ownership certificate at a cost of Esc1 243 (US$13.75) and seven days to register a new public deed with the property registry at a cost of Esc24 150 (US$247.62). Act 9 Decree of law 10/2010 specifies the law governing the Conservatoria do Registo Predial (Land Registry), for which there is an electronic database, and which does not yet include all properties in Cabo Verde. The database can be checked for mortgages on the property, but there is no electronic record on cadastral information.

Most established estate agents offering rentals and properties at a wide variety of prices on Cabo Verde’s larger islands and cater predominantly for international demands, which are seen as a means of adding to the economy. To further grow this sector, permanent residence permits are issued to foreign nationals who acquire properties worth a minimum of €80 000 (US$94 000) in municipalities where GDP per capita is lower than the national average and for more than to €120 000 (US$141 000) where GDP per capita is higher than the national average. The policy includes the exemption of Single Property Tax for the property involved as well as a further 50 percent reduction in the tax due over the next 10 years.

There is little detailed information specifically on the affordable, low-cost and social housing market, development and distribution. Further the failures of the IFH have created tensions and mistrust around an effective delivery model. Property development and investment is dominated by, and caters to, the luxury and resort development portfolio. The housing market is therefore driven and dominated by the expatriate and tourism sector.

[1] World Bank Doing Business (2019).

Policy and Regulation

In 2012, the Millennium Challenge Corporation (MCC) (US government funding mechanism) partnered with Cabo Verde to implement a five-year, US$66.2 million programme intended to reduce poverty through economic growth. The programme combined infrastructure improvements with ambitious policy and institutional reforms to strengthen property rights and increase access to clean water and sanitation. The tenants of the programme recognise socio-economic opportunity that is generated through land tenure. As such the MCC supported the government in transforming the land management sector to fight poverty and drive growth. [1] The expectations were for growth within primarily the tourism sector, however, through the attribution of land tenure the expectation was also to create an environment for small business development.  The programme was completed in November 2017, included US$17.3 million to help the government establish a single, reliable source of land rights to facilitate private investment across the islands.[2]

[1] Millennial Challenge Corporation (2018). Land Rights Open Economic Opportunities in Cabo Verde.

[2] Millennial Challenge Corporation (2019) Cabo Verde Compact II.

Opportunities

Cabo Verde is faced with the challenge of building an economy with a high level of sustainable and inclusive growth to overcome key constraints, structural vulnerabilities, external dependence, unemployment, poverty, inequality in income distribution, and reduced opportunities for emigration and consequent drop in remittances, on which there is high reliance. The country is constrained by natural vulnerabilities, resource or tradable goods deficiencies and reliance on the European economy through its pegged currency. [1]Development opportunities are constrained by Cabo Verde’s small territorial, demographic and economic size, and its isolation from the African continent. Despite this, there has been an uptake in investment predominantly from China within the tourism sector.

The financial sector’s adversity to risk and the lack of competition has resulted in high interest and lending rates. Further, the high levels of debt and the tight fiscal policy of the state indicate a necessary frugality that is contrary to the public investment necessary to stimulate further investment and develop the necessary infrastructure and maintenance thereof to support development goals.

 

Given the geography and high cost of construction, due to a dependence on imports, a large-scale housing development is unlikely to be an effective solution for the housing deficit. It may be necessary to reinforce subsidies and funding support programmes for the refurbishment and maintenance of existing, degrading stock and a means of reinforcing the access to services in less formal settlements.  The core opportunities for housing development should also be focused or localised around the urban centres, where there is a growing demand for housing supply at this level. The resolution of property registration processes and increased of availability and affordability of title deeds will go a long way to increasing the investment and growth in the property sector, as well as supporting small business and home industry development.

[1] National Directorate of Planning (2018). Voluntary National Report on the Implementation of the 2030 Agenda for Sustainable Development. Pg. 8.

Availability of data on housing finance

There is a recognition and prioritisation of housing development in Cabo Verde; however, the nature of an archipelago in which general access is a crucial issue also translates into a lack of access to information. Survey data is mainly outdated and, although there is information available on the programmes and initiatives instituted, there is little verification on the outcomes. Increased growth and involvement from trading partners, from both China and the US, will have a positive impact on the availability of data and increased project indicator reporting.   

Websites

Banco de Cabo Verde http://www.bcv.cv/

Government of Cabo Verde  https://peds.gov.cv/

Mypsup https://Mypsup.org/