Housing Finance in Djibouti

Introduction

Djibouti is in the Horn of Africa and is one of the world’s least developed countries. It borders the Gulf of Aden and the Red Sea, between Somalia and Eritrea. The country is small in geographical terms and its population is among the smallest of mainland Africa at an estimated 888 017 in 2018. One of Djibouti’s key assets is its strategic location at the intersection of maritime trade; the country is located along one the busiest shipping routes providing a crucial connection between Africa, Europe and Asia.[1] The country’s deep-water port makes it ideal as a refuelling and transhipment centre. This is especially crucial for landlocked Ethiopia, which accounts for 80 percent of Djibouti’s port undertakings.

The strategic location of Djibouti port has made it attractive to international investors in shipping. For instance, Dubai shipping company DP World signed a 30-year concession with Djibouti Government to manage the Doraleh Container Terminal at the port of Doraleh. However, following many years of disagreements between DP World and the Djibouti Government, in 2018 the government unilaterally cancelled the 30-year concession and nationalised the port.[2] This unilateral contract cancellation will have wide implications for the government, both in monetary terms and international reputation. Generally, unilateral contract cancellation by a state has the effect of discouraging foreign direct investment (FDI) into the country due to weak contract enforcement. Notably, the Court of International Arbitration ruled that the rights of DP World were breached by Djibouti when the country cancelled the concession. In addition, the tribunal fined Djibouti US$385 million plus interest as well as US$148 million in legal costs and unpaid royalties.[3] These are significant costs, especially for a country ranked as one of the poorest in the world.

The cancellation of the DP World port concession needs to be seen through the lens of the Chinese expansionist agenda also known as the Belt and Road Initiative (BRI). The BRI was proposed by China in 2013 and is aimed at transcontinental connectivity and co-operation, linking a number of continents to China.[4] Chinese companies were the major beneficiaries of the cancelled DP World port concession. The Dalian Port Corporation of China has built the largest free trade zone in Djibouti funded by China at a cost of US$3.5 billion.[5] The free trade zone covers 48 square kilometres and is one of the many new port and trade facilities under construction in Djibouti.[6]

An African Development Bank (AfDB) report observes that Djibouti’s impressive growth rate is driven by construction, transport and storage. The GDP in 2018 was US$ 1.19 billion equating to a GDP per capita (PPP) of US$ 3 139.[7] The country has undertaken major construction projects since 2014 and has been a major beneficiary of FDI and foreign loans. According to the AfDB, these FDIs and foreign loans have helped contain the country’s inflation to between six percent in 2017 and eight percent over the 2017 and 2018 period, among the lowest inflation rates in Africa. Djibouti’s gross domestic product (GDP) growth rate rose from 4.1 percent in 2017 to 5.6 percent in 2018, a growth attributed to normalisation of relations with neighbouring country, Ethiopia. Despite its size, it has exposure to multiple development challenges including unplanned housing and a shortage of basic amenities.

The World Bank foresees a positive economic outlook for the country in the medium term, thanks to the government strategy of positioning Djibouti as a regional trade, logistics and digital hub.[8] In addition, the World Bank expects the country’s GDP growth to increase by seven percent in 2019 and accelerate to eight percent in 2020-2023. This would represent one of the highest GDP growth rates in Sub-Saharan Africa. Nevertheless, the economy has not grown in tandem with poverty reduction rates. For instance, the World Food Programme (WFP) observes that the country has a 79 percent poverty rate, with 42 percent of the population exposed to extreme poverty.[9] Some regions in Djibouti have poverty rates of over 70 percent, resulting in mass migration to urban slums.[10] As a result, there are strong migratory pressures on the already overstretched infrastructure.

The Central Intelligence Agency (CIA) World Fact Book estimates the country’s population to be 888 017 as at July 2018, mainly comprising 60 percent Somali, 35 percent Afar and others at five percent.[11] The country’s GINI index (2017) was 41.6 while the Human Development Index (HDI) for the country (2017) was 0.476.[12] The United Nations Development Programme (UNDP) HDI report states that Djibouti’s HDI falls below the HDI average for countries in the low human development group, and below the average of 0.699 for Arab states. However, the UNDP report does not provide a plausible explanation as to why the country on average performs below its peers on the HDI. The country’s slum dwellers are estimated at 140 000 (2018).[13] This means that close to 50 percent of urban dwellers live in slum conditions and the country is in significant need of more decent affordable housing.

 

[1] World Bank (2018). Economic Transformation in Djibouti: Systematic Country Diagnostic. http://documents.worldbank.org/curated/en/437351549918326165/pdf/djibouti-scd-english-version-final-approved-vlogo-02062019-636852600790519539.pdf (Accessed 18 September 2019). Pg. viii.

[2] Africa Logistics Network (2018). Djibouti Government ends DP World’s contract of Doraleh Container Terminal. 19 March 2018. https://www.africalogisticsnetwork.com/notizia-reviews/djibouti-government-ends-dp-worlds-contract-of-doraleh-container-terminal/ (Accessed 18 September 2019).

[3] Quartz Africa (2019). A strategic port in the Horn of Africa is at the centre of a $500 million lawsuit. 10 May 2019. https://qz.com/africa/1591342/djibouti-ordered-to-pay-dubais-dp-world-533-million/ (Accessed 29 Sept 2019).

[4] World Bank (2018). Belt and Road Initiative. 29 March 2018. https://www.worldbank.org/en/topic/regional-integration/brief/belt-and-road-initiative (Accessed 18 September 2019).

[5] Reuters (2018). Djibouti commissions $3.5 bn Chinese-built free trade zone. 5 July 2018.   https://www.reuters.com/article/djibouti-trade/djibouti-commissions-3-5-bln-chinese-built-free-trade-zone-idUSL8N1U149S (Accessed 18 September 2019).

[6] AfDB (2019). African Economic Outlook 2019. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2019AEO/AEO_2019-EN.pdf Pg.146. (Accessed 17 September 2019).

[7] Trading Economics (online ) https://tradingeconomics.com/djibouti/gdp (Accessed 8 September 2019).

[8] World Bank (2019). Djibouti’s Economic Update – 2019. https://www.worldbank.org/en/country/djibouti/publication/economic-update-april-2019 (Accessed 8 September 2019).

[9] World Food Programme (online). Djibouti. https://www.wfp.org/countries/djibouti

(Accessed 8 September 2019).

[10] World Bank (2019). Documents and Reports. http://documents.worldbank.org/curated/en/713441554358897696/Concept-Project-Information-Document-Integrated-Safeguards-Data-Sheet-Djibouti-Integrated-Slum-Upgrading-Project-P162901

https://www.wfp.org/countries/djibouti (Accessed 19 September 2019). Pg. 4.

[11] CIA (online). The World Fact Book. Djibouti. https://www.cia.gov/library/publications/the-world-factbook/geos/dj.html (Accessed 8 September 2019)

[12] UNDP (2018). Human Development Indices and Indicators: 2018 Statistical Update. Djibouti. http://hdr.undp.org/sites/all/themes/hdr_theme/country-notes/DJI.pdf

(Accessed 8 September 2019). Pg. 2.

[13] Early Warning System (2019). Djibouti Integrated Slum Upgrading Project (WB-P162901). https://ewsdata.rightsindevelopment.org/projects/p162901-djibouti-integrated-slum-upgrading-project/ (Accessed 8 September 2019).

Access to Finance

Djibouti has a small financial services market which was liberalised in 2006, paving way for the entry of new financial institutions.[1] The country’s banking penetration is quite low but there has been a remarkable expansion of money transfer companies.[2] The banking sector has been highly profitable with a very low non-performing loans book. However, the sector is highly concentrated with two out of 11 banks accounting for 85 percent of the total banking sector assets. Further, most of the financial enterprises in Djibouti are state-owned, thereby distorting free markets and curtailing dynamic private investments.[3] Of the 11 banks, 8 are conventional banks while three are Islamic banks, which lend loans under Sharia law.[4] 

According to the Central Bank of Djibouti, the financial system comprises two currency exchanges, seven companies for change and transfer of funds, and nine funds transfer companies. Although no specific data has been accessed on mortgage rates in Djibouti, the effective (general) lending rates stand at 1.8 percent.[5] Notably, considering the country is 94 percent Muslim, the subject of interest rates is rarely discussed and documented, with a focus more on Islamic banking. The country’s financial inclusion is estimated at 20 percent in 2019, largely boosted by Sharia compliant banks.[6] In March 2018 the country introduced a register for sureties,[7] which has greatly boosted confidence in loan transactions involving securities/collaterals. The 2019 index of financial freedom notes that, although credit is available on market terms, the high cost of credit and minimal financing instruments discourage entrepreneurs. 

An International Monetary Fund (IMF) Technical Assistance Report states that Djibouti’s financial sector is dominated by commercial banks, which control 94 percent of the total assets of the financial system and 80 percent of total loans in the country.[8] The report also finds that first, although the country has only three Islamic banks, the banks control 20 percent of the banking sector assets. Second, there are three microfinance institutions (MFIs) (one specialised credit institution and two social security and pension funds), but the MFIs account for only one percent of total lending in the country. Third, the Central Bank of Djibouti has created a National Sharia Committee to monitor Islamic financial products. According to the IMF, total lending more than tripled between 2006 and 2016, reaching Fdj 135 million (US$3 500 000). Islamic banking is therefore seen as significantly contributing to financial inclusion in the country, as evidenced by its tremendous growth since its inception in 2006.[9]

 

[1] Oxford Business Group (2018). The Report: Djibouti 2018. https://oxfordbusinessgroup.com/djibouti-2018/financial-services (Accessed 8 September 2019).

[2] Myfinb (2019). Djibouti. https://myfinb.com/djibouti/ (Accessed 8 September 2019)

[3] Heritage Foundation (2019). 2019 Index of Economic Freedom. https://www.heritage.org/index/country/djibouti (Accessed 8 September 2019).

[4] Central Bank of Djibouti (online). http://banque-centrale.dj/index.php/etablissements-bancaires/ (Accessed 8 September 2019).

[5] World Bank (2018). World Development Indicators. http://data.worldbank.org/data-catalog/world-development-indicators (Accessed 18 September 2019).

[6] Standard Media (2019). Djibouti’s Financial Inclusion is Estimated at Around 21 Percent https://www.standardmedia.co.ke/ktnnews/video/2000170549/-djibouti-s-financial-inclusion-is-estimated-at-around-21-percent (Accessed 8 September 2019)

[7] Central Bank of Djibouti (2019). Instruction No 2018-02. http://banque-centrale.dj/wp-content/uploads/2018/11/InstructionNo2018.pdf (Accessed 8 September 2019).

[8] International Monetary Fund (2019). Djibouti; Technical Assistance Report – Financial Soundness Indicators Mission. IMF Staff Country Reports 19/234, International Monetary Fund. https://ideas.repec.org/p/imf/imfscr/19-234.html (Accessed 8 September 2019).

[9] Gulf Times (2019). Islamic finance seen a big opportunity for Djibouti. 10 April 2019. https://www.gulf-times.com/story/628347/Islamic-finance-seen-a-big-opportunity-for-Djibouti (Accessed 8 September 2019).

Affordability

The 2018 CIA World Fact Book states that over 75 percent of the national population lives in urban areas, mainly in Djibouti City. The country’s unemployment rate in 2018 stood at 11.12 percent, placing it as the 36th highest unemployment rate globally.[1] Djibouti’s unemployment is significantly high compared to the Sub-Saharan average unemployment rate of 6.1 percent.[2] In addition more than 42 percent of the population live in extreme poverty, with the population located mostly in urban slums.

With such unemployment and poverty rates, decent housing is far from the reach of most Djiboutian, especially in view of both current rental and house purchase costs. For instance, according to Numbeo, renting a one-bedroom apartment on average costs Fdj89 512 (US$41 225) a month and Fdj54 837 (US$25 255) in the city centre and outside the city centre respectively.[3] Renting a three-bedroom apartment goes for Fdj171 830 (US$79 136) and Fdj 78 374 (US$21 824) in the city centre and outside the city centre respectively. Purchasing an apartment on average costs Fdj 120 000 (US$674) per square metre both in the city centre and outside the city centre. Although poverty and unemployment rates are high, Djibouti has a stable inflation rate of eight percent and a stable foreign exchange rate. The stable inflation and foreign exchange rates have been credited to the practice of pegging the Djibouti franc to the US dollar at a fixed rate.[4]

[1] The Global Economy (2019). Unemployment rate – Country rankings. https://www.theglobaleconomy.com/rankings/Unemployment_rate/ (Accessed 8 September 2019).

[2] World Bank (2019). Unemployment, total (% of total labor force) (modelled ILO estimate)  https://data.worldbank.org/indicator/sl.uem.totl.zs?most_recent_value_desc=true (Accessed 18 September 2019).

[3] Numbeo (2019). Cost of Living in Djibouti. https://www.numbeo.com/cost-of-living/in/Djibouti-Djibouti (Accessed 6 September 2019).

[4] AfDB (2019). African Economic Outlook 2019. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2019AEO/AEO_2019-EN.pdf (Accessed 18 September 2019). Pg. 146.

Housing Supply

Djibouti has been adversely affected by regional conflicts and drought, which have led to massive immigration from neighbouring countries such as Yemen and Somalia⁵. Refugees from neighbouring countries have continued to exert significant pressure on already overburdened infrastructure. In effect, the World Bank contends that Djibouti infrastructure has to serve not only its citizens living in extreme poverty but also 60 000 refugees, asylum seekers and immigrants from multiple countries who are mainly undocumented⁵.

More than one-third of the urban population in Djibouti live in slums and lack access to basic infrastructure. The rapid foreign and domestic migration into Djibouti cities has created an acute shortage of affordable housing. According to a World Bank report, the urban growth pressures have not grown in tandem with land management practices or urban service delivery.[1] This has led to illegal and unplanned occupation of peripheral lands, with negative implications for infrastructure costs. However, the construction of temporary housing dates back to the colonial period when the French entrenched the practice.

Significant and deliberate efforts have been made by the Government of Djibouti to provide affordable housing with donor support. For instance, the president announced a proposed social housing project that would provide 20 000 housing units, a step towards the achievement of a Zero Slum Djibouti City.[2] This project was to be funded by a number of donors including China, Saudi Arabia, Morocco and Qatar. Evidence suggests that 400 units were under construction in 2018 and the project is yet to be completed. According to the World Bank, 2013 housing diagnostic, 3 000 to 3 500 housing units are needed annually but there are no policies in place to address this need.

 

[1]World Bank (2019). Concept Project Information Document. http://documents.worldbank.org/curated/en/713441554358897696/pdf/Concept-Project-Information-   Document-Integrated-Safeguards-Data-Sheet-Djibouti-Integrated-Slum-Upgrading-Project-P162901.pdf (Accessed 8 September 2019)

[2] Embassy of the Republic of Djibouti Washington, DC (2019). Djibouti seeks public and private solutions to social housing shortfall.

https://www.djiboutiembassyus.org/article/djibouti-seeks-public-and-private-solutions-to-social-housing-shortfall (Accessed 19 September 2019).

Property Markets

The country has simplified the process of transferring property and increased transparency by reducing registration fees and implementing strict timelines for registering sale agreements with the tax authority, while also requiring all land titles to be registered at the Land Registry.[1] These developments will make land transactions more secure and strengthen contract enforcement, especially collateralisation of land.

Registering property in Djibouti takes 24 days and costs 5.7 percent of the property value. This process involves five procedures according to the World Bank Doing Business report.[2] According to the World Bank Doing Business 2019 report. Djibouti has a functional digitised Land Registry which allows lenders to be able to view property registration details from a publicly available government source. This digitisation of the Land Registry contributed to the country’s doing business rank for 2019.

 

[1] World Bank (2019). Doing Business: Measuring Business Regulations. https://www.doingbusiness.org/en/data/exploretopics/registering-property/reforms (Accessed 6 September 2019).

[2] The World Bank (2019). Doing Business 2019: Training for Reform – Djibouti. http://documents.worldbank.org/curated/en/502291541087486903/Doing-Business-2019-Training-for-Reform-Djibouti (Accessed 6 September 2019).

Policy and Regulation

The World Bank Doing Business 2019 report ranks Djibouti among the economies with notable improvements in doing business.[1] The report notes that only Djibouti and India were able to make it to the top 10 improvers in the world for two consecutive editions of the report. The World Bank observes that the country made 11 key positive reforms in 2019, such as implementing strict deadlines, registering the property sale agreement with the Tax Authority, and the digitisation the country’s Land Registry. Importantly, the report states:

The country also made substantial enhancements to the process of resolving commercial disputes by adopting a new civil procedure code that regulates voluntary conciliation, mediation proceedings and case management techniques, including time standards for key court events. Enforcing contracts is easier following the creation of a dedicated division within the court of first instance to resolve commercial cases. With regards to resolving insolvency, Djibouti established equal treatment of creditors in reorganization proceedings and increased creditors’ participation by granting them the right to approve the appointment of the insolvency representative and the sale of substantial assets of the debtor in the course of insolvency proceedings.[2]

Although Djibouti has been credited for instituting major reforms in favour of doing business, observers contend that the overall regulatory framework is short on transparency and clarity, hampering entrepreneurial decision-making[3]. In addition, the World Bank report finds that the regulatory reforms have not led to the growth of a modern labour market in the country. According to the World Bank 2013 housing diagnostic, Djibouti housing policies mainly focused on high-end housing at the expense of the low-end market.

 

[1] World Bank (2019). Doing Business 2019. https://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf (Accessed 6 September 2019). Pg. 58.

[2] World Bank (2019). Doing Business 2019. https://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf (Accessed 6 September 2019). Pgs. 12-13.

[3] Heritage Foundation (2019). 2019 Index of Economic Freedom. https://www.heritage.org/index/country/djibouti (Accessed 6 September 2019)

Opportunities

A number of opportunities are available for housing investors in Djibouti. First, Djibouti City is host to military bases of the United States, China, France and Japan.[1] The personnel working in these bases have significantly higher than average disposable incomes for the country and are increasing overall aggregate demand. The government estimates that 2 500 to 3 000 units are needed in the country annually,[2] creating a huge demand for housing with significant investment prospects for housing investors.

The inflation rate has remained stable through the years. Low inflation rates raise savings levels with regard to new investments. In effect, consumer spending priorities shift from basic needs such food and clothing in favor long-term investments such as housing. Investors may consider public-private partnerships and bilateral partnerships with the Djibouti government in its effort to achieve its Zero Slum policy. The Zero Slum memorandum of understanding includes provisions for the creation of bilateral partnerships between construction, engineering and property development companies, and professional organisations. This opportunity has been used by the World Bank through its International Development Association.[3]

Islamic banks in Djibouti currently control about 20 percent of total banking sector assets. The banks have been providing loans to housing investors, creating major opportunities for construction funding. For instance, one of the leading Islamic banks, Salaam African Bank, is financing up 70 percent of property value whether for individual owners or to home developers.[4] The bank states on its website that this finance is available only for construction of residential properties. In addition, the bank has made provisions for individuals to partner and co-borrow together. Saba African Bank is also providing construction loans to both individuals and developers.[5] In sum, although Islamic banks are not the only real estate financiers in the country, Djibouti has fast become a major hub for Islamic banking in the region, creating new opportunities for developers.

The Djibouti International Free Trade Zone (DIFTZ) inaugurated in 2018 is Africa’s biggest trade zone and it is estimated it will create more than 35 000 new jobs on average a year.[6] Importantly, the government has allowed foreign workers at the DIFTZ to make up to 70 percent of total employees in the first five years and 30 percent thereafter. The expected immigration of expatriates with higher disposable incomes than the locals should create higher demand for decent housing in the country. Importantly, Djibouti is well-aligned with the Belt and Road Initiative which has attracted other major investments, such as the Ethiopian-Djiboutian electric railway that was completed in 2017, which will generate further investment opportunities coupled with demand for housing.[7]

[1] Africa.com (2019). 5 Top Opportunities for Investment in Djibouti. https://www.africa.com/djibouti-top-5-opportunities-for-investment/ (Accessed 6 September 2019).

[2] Embassy of the Republic of Djibouti in Washington, DC (2019). Djibouti seeks public and private solutions to social housing shortfall.

https://www.djiboutiembassyus.org/article/djibouti-seeks-public-and-private-solutions-to-social-housing-shortfall (Accessed 19 September 2019).

[3] Development Aid (2018). World Bank supports efforts to upgrade Djibouti slums. 12 November 2018.

https://www.developmentaid.org/#!/news-stream/post/33662/world-bank-supports-efforts-to-upgrade-djibouti-slums

[4] Salaam African Bank (2019). Own your dream home today. http://www.banksalaam.com/retail-home-financing/ (Accessed 19 September 2019).

[5] Saba African Bank (2019). Real Estate Finance for Business. http://www.sabafrican.com/finance?n=MTc= (Accessed 19 September 2019).

[6] The Maritime Executive (2018). Djibouti Inaugurates Africa’s Largest Free Trade Zone. 5 July 2018. https://www.maritime-executive.com/article/djibouti-inaugurates-africa-s-largest-free-trade-zone (Accessed 19 September 2019).

[7] Council on Foreign Relations (2018). China’s Strategy in Djibouti: Mixing Commercial and Military Interests. 13 April 2018. https://www.cfr.org/blog/chinas-strategy-djibouti-mixing-commercial-and-military-interests (Accessed 19 September 2019).

Availability of data on housing finance

Djibouti has acute data shortages in the housing and housing finance sectors, including such key indicators as number of homeowners and the number of mortgages in the country, among others. A major reason for this is, unlike most countries, is that Djibouti does not have an official government department or entity responsible for the collection, collation or dissemination of official statistics. When government agencies would ordinarily be expected to keep credible data, such as the National Investment Promotion Agency [1], scant information is publicly available. In addition, since English is not an official language in Djibouti, official government documents and reports are mainly available in French, limiting broader access and engagement.

International investors must therefore rely heavily on data sources from international organisations such the World Bank, IMF, AfDB and United Nations agencies. The data collected by these organisations is periodical and mainly depends on the nature of the report. In the case of the World Bank and IMF, the sources cited were in most cases internal documents cleared for public disclosure and available online. The World Bank Doing Business report is produced annually and was a great source of data and insights on Djibouti.

Additional Sources

World Bank (2019). Doing Business 2019: Training for Reform. Washington, DC: World Bank. World Bank. https://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf (Accessed 8 September 2019).

Websites

National Investment Promotion Agency http://www.djiboutinvest.com

Central Bank of Djibouti http://www.banque-centrale.dj/en/

Salaam African Bank. http://www.banksalaam.com/

AfDB. https://www.afdb.org/

Myfinb. https://myfinb.com/djibouti/