Housing Finance in Ethiopia

Introduction

As the second largest country in Africa, Ethiopia has a population of 105 million, with a GDP growth rate of 8.2 percent driven by public investments in agriculture and infrastructure. The population density in Ethiopia is 108 per square kilometre and 20.6 percent of the population is urban. The poverty rate has fallen from 44 percent in 2000 to 23.5 percent in 2015/16. The current account deficit declined in 2016/17 to 8.2 percent of GDP from 9.1 percent the previous year, reflecting lower drought-related imports and lower public sector capital goods imports. However, export revenues were mainly unchanged despite significant volume growth, as global agricultural commodity prices remained low. Foreign direct investment growth was 27.6 percent due to investments in the new manufacturing industrial parks and privatisation inflows. International reserves at the end of 2016/17 stood at US$3.2 billion.

More than 70 percent of Ethiopia’s population is still employed in the agricultural sector, but services have surpassed agriculture as the principal contributor to GDP. According to the UN’s Human Development Report (2017) the country has a very low human development ranking of 174 out of 190 countries and Human Development Index rating of 0.448.

Since 2004/05, the government has focused on developing housing, upgrading slums, providing infrastructure and promoting small urban enterprises. The Growth and Transformation Plan for 2015-2019 continues to target infrastructural development with the view of the country being classified as “middle income” by 2025,[1] while the construction sector plays an immense role in Ethiopia’s economic growth. Real estate and other construction contributed 12.5 percent to GDP, according to information obtained from the Ministry of Construction.

[1] NBEAR (2018). National Bank of Ethiopia (2018). Annual Report for 2016/17.

Access to Finance

Banks, insurance companies and microfinance institutions are the major financial institutions operating in Ethiopia. The number of banks stood at 18, insurance companies at 17 and microfinance institutions (MFIs) at 35 at the end of June 2017. Of the 18 banks, 16 are private and two are state-owned. Based on number of branches and capital accumulation, the five major banks in the country are Awash Bank, Dashen Bank, Abyssinia Bank, Wegagen Bank and United Bank.

The Ethiopian financial sector has remained well capitalised and profitable. The Commercial Bank of Ethiopia (CBE) opened 956 new branches in 2016/17, raising the total number of branches to 4 257. About 33 percent of bank branches were located in Addis Ababa. The share of private banks in the total branch network rose to 66.6 percent from 61.8 percent last year. Following a significant capital injection by CBE, the total capital of the banking industry increased by 81.1 percent and reached ETB 78.0 billion (US$3.36 billion) by the end of June 2017.[1]

The share of private banks in deposit mobilisation increased to 33.6 percent from 32.2 percent last year due to the opening of new branches. CBE alone mobilized 66.1 percent of the total deposits. Consequently, total outstanding borrowing of the banking system stood at ETB 32.9 billion (US$1.20 billion), slightly higher than ETB 31.2 billion (US$1.14 billion) a year ago. Of the total borrowing, domestic sources accounted for 89.1 percent and foreign sources the remaining balance. Commercial banks and the Development Bank of Ethiopia disbursed ETB 109 billion (US$4.69 billion) in fresh loans, which was 23.8 percent higher than a year ago. Of the total new loans, about 55.6 percent was provided by private banks and 44.4 percent by the two public banks.

Total outstanding credit of the banking system, including to the central government, increased by 30.4 percent and reached ETB 365.6 billion (US$13.4 billion) at the end of June 2017. Excluding central government, credit to industry accounted for 40.2 percent followed by international trade (16.2 percent), domestic trade (13 percent), housing and construction (11.8 percent) and agriculture (6.2 percent). The share of private sector in outstanding credit was ETB 231.2 billion (US$8.5 billion) (or 63.2 percent), reflecting 29.1 percent year-on-year growth.

MFIs generally offer services to informally self-employed poor people and also formal employed low income households. The number of MFIs remained at 35 at the end of June 2017, while their total capital and total assets increased significantly by 20.8 percent and 35.1 percent, to reach ETB 10.7 billion (US$392.8 million) and ETB 49.6 billion (US$1.8 billion), respectively. Their deposit mobilisation and credit allocation also expanded remarkably. Compared to last year, their deposits surged by 42.8 percent and reached ETB 26.3 billion (US$965.4 million) while their outstanding credit went up by 28.5 percent to ETB 32.4 billion (US$1.19 billion). The Amhara, Dedebit, Oromiya, Omo and Addis Credit and Savings institutions were the major MFIs, accounting for 83.7 percent of the total capital, 93.1 percent of the savings, 88.6 percent of the credit and 89.9 percent of the total assets of the MFIs sector. Most of the MFIs operating in the city have been in business for almost 10 years, indicating relatively adequate experience with financial services, including diversification of loan portfolios to include housing microfinance loans. An Addis Credit and Savings institution is one of the major MFIs. After realising the potential lucrative market in the country, the MFI diversified its loan portfolio in 2006 to include housing microfinance loans. The MFI offered small loans suitable for significant housing improvement, the addition of a new room, and for new house construction.

Recently, government banks like the Commercial Bank and the Development Bank have joined the mortgage market but only in the commercial construction sector. The same is true of the emerging private bank sector. There is limited involvement in residential mortgages by public and private banks because of the perceived high risk and shortage of experience. In recent years, MFIs have become increasingly important players, as they are viewed as effective mechanisms for poverty reduction. The loan policies of MFIs indicate that preference should be given to poor rural farmers and microeconomic activities of rural and urban communities with small cash requirements. MFIs therefore offer a potential source of finance for poor and low income earners. The World Bank’s 2018 Doing Business Report showed that almost 94 739 individuals and 7 656 firms were recorded on the public credit registry, but representing just 0.2 percent of the population.[2] As a result, Ethiopia continues to underperform with respect to getting credit and is ranked 173rd out of 190 countries. A major player in the mortgage market is CBE which has grown since the introduction of the Integrated Housing Development Programme’s (IHDP) current project in the capital of Addis Ababa, in which it plays an important role in the provision of mortgage finance. Mortgage rates for the 40/60 development scheme are estimated at 14 percent over a 10-year period with a 40 percent downpayment. The 40/60 housing scheme is designed for the middle income group that can afford to save 40 percent and above of the money needed to build the house and get the remaining balance as a credit from the CBE.

[1] NBEAR (2018). National Bank of Ethiopia (2018). Annual Report for 2016/17.

[2] The World Bank – Doing Business (2018). Ease of Doing Business in Ethiopia.http://www.doingbusiness.org/data/exploreeconomies/ethiopia (Accessed 5 Sept 2018).

Affordability

In Ethiopia a major challenge is providing affordable housing for low income earners with an annual per capita income of less than US$1 025 and with limited access to housing finance. Following the market-led adjustments implemented post 1991, subsidised interest rates were removed, which significantly increased lending rates. This increased from 4.5 percent for co-operatives and 7.5 percent for individuals to 18 percent for both, severely reducing the opportunity for low income households to secure a home loan. A key challenge to housing affordability is the absence of a diversified and flexible housing finance sector.

Traditional construction techniques involve the use of bricks, blocks and cement, which are expensive, inefficient, and time-consuming. There are few factories producing construction materials, and locally available inputs are in short supply.

The government’s IHDP has compounded the housing affordability issues for lower income residents. In June 2016, the CBE and the Ministry of Urban Planning and Housing revealed that the condos in the new 40/60 scheme were an additional ETB 4 919 (US$180.5) per square meter from their original price. This price increase was due to rising construction and labour costs, which have forced the Ministry of Urban Development, Housing and Construction and Addis Ababa Savings & Houses Development Enterprise to re-evaluate their prices, taking into account the current market, land, water, electricity and building design prices. The cost of two- , three- and four-bedroom condos currently valued at ETB 614 693 (US$22 566), ETB 636 974 (US$23 384) and ETB 829 690 (US$30 459) respectively will increase accordingly by the square meter of the apartments. The apartments are 124.97m2, 129.5m2 or 168.68m2 in size. The increased costs of construction, and thus the down payments as well as mortgages, have placed additional financial burdens on the poor. As a result, many beneficiaries from low income groups have rented out their units to more affluent citizens. In turn, the unit owners tend to stay in their original substandard dwellings or have returned to another precarious housing type.

Housing Supply

Ethiopia’s Federal Housing Corporation (FHC) has announced plans to build 1 673 homes in Addis Ababa at an estimated cost of around ETB 1.2 billion (US$44 052 860). According to the FHC information, about half of the housing is to be offered to state officials, and the remainder are for rental houses to employees of businesses.

The existing housing stock, particularly in Addis Ababa, is generally of poor quality, with many settlements congested and unplanned. Using the UN-Habitat slum definition, 80 percent of Addis Ababa is a slum with 70 percent of this comprising government-owned rental housing. Only 30 percent of the total housing stock is in fair condition, while the remaining 70 percent is in need of total replacement or significant upgrading. According to estimates by the Ministry of Works and Urban Development, the housing deficit in Addis Ababa alone is about 300 000 units. The housing deficit is not just measured by the large number of units that are required today but also in the quality of the housing stock and the extremely small sizes of most available dwelling units.

Access Capital research details four categories of new residential developments in Ethiopia: (a) government-initiated condominium buildings; (b) residential neighbourhoods initiated by developers; (c) owner-built housing dwellings; and (d) new home activity driven by housing cooperatives. In addition, there are two other major categories of housing units in Addis Ababa: kebele-rental housing (very old stock), mainly for those on low incomes, and informal settlements.[1]

1. Government-built condominiums

Recently, the government implemented a new housing project in Addis Ababa which is divided into four different groups based on payment modalities: 10/90, 20/80, 40/60 and housing association. The payment modality for the last one necessitates 100 percent direct payments, while the others incorporate 10, 20 and 40 percent down payment mixed with a long-term mortgage plan.

The IHDP was implemented in Addis Ababa and other cities. It was planned in two phases. In phase one 947 376 people registered for housing and the government built 270 146 houses, however of the available stock only 182 000 houses were allocated. There are still 88 146 condominium units under construction at 18 sites. The new condominium houses that are being built will be 18 storey buildings. According to the latest figures available in the 40/60 housing programme, 154 000 of the 160 000 people registered under the scheme are saving money each month toward acquiring a home. Out of these, 17 600 have paid the full amount and more than 29 000 have paid 40 percent of the total cost. Those who have paid in full will have priority when the condominium units are handed over to the homeowners. The cost of this housing scheme per square meter is ETB 4 918 (US$180.5).[2]

2. Private sector real estate developers

The National Urban Development Policy emphasises the role the private real estate development sector can play in providing housing for the high income group under the framework of free market principles. The private real estate housing sector is concentrated in Addis Ababa and its surrounding towns (Legetafo, Burayu, Sululta and Sebeta), and other major urban centres such as Dire Dawa, Adama, Bahir Dar, Hawassa and Mekelle. According to data from the Ethiopian Investment Commission, close to 117 companies took an investment licence to invest in 56 different projects, and 99 percent of them are owned by Ethiopians or in joint ventures with foreign investors. Some were still fully owned by foreigners. Out of the existing 56 real estate projects to date, 43 are located in Addis Ababa.

The real estate companies focus exclusively on building houses for the upper and middle class. The price of houses is different based according to location. The average price in square meters is between ETB 15 000 (US$550) up to ETB 60 000 (US$2 202) based on the location. The private real estate sector has managed to construct a considerable number of houses but significantly below the expected output.[3]

In Addis Ababa, between 2005 and 2017, housing supply by real estate developers was only 4.8 percent, compared to 58.1 percent by the government and 37.1 percent by individuals (cooperative and lease).

3. Owner-built housing construction

Self-built housing was the most common type of housing delivery approach before the introduction of the IHDP. While limited now, this building approach is still active in older residential neighbourhoods. “Costs for owner-built construction are generally higher and this segment of the market tends to include the full range of housing units from modest homes constructed over extended periods to large and luxurious homes often built by razing or replacing older properties.”[4]

4. Housing cooperatives

This is the primary mode of housing construction in Addis, constituting over half of the city’s total formal sector housing stock. They are recognised as legal entities by the government, and allocated land on which to design and construct their developments. The city administration up to the end of 2017 has registered more than 500 housing cooperatives. Between 14 and 24 members are allowed in a housing cooperative. Many cooperative members are middle income (per capital income between US$1 026 and US$4 035), based on employer associations such as Ethiopian Airlines or other state-owned companies.

[1] Access Capital Research (2010). Sector Report-Real Estate. https://www.ethioconstruction.net/ (Accessed 9 Sept 2018).

[2] Addisbiz.com (2017). Current Status of 40/60 Condominiums in Addis Ababa, Ethiopia.

[3] Housing in Ethiopia, Social Inclusion and Energy Management for Informal Urban Settlements; EiABC, Krems,3 March 2017.

[4] Access Capital Research (2010).

Property Markets

According to the World Bank’s 2018 Doing Business Report, Ethiopia ranks 161 out of 190 economies on the ease of dealing with construction permits. Regarding registering property, seven procedures are required; it takes 52 days and costs 6.1 percent of the property value. As such, Ethiopia stands at 133 in the ranking of 190 economies on the ease of registering property.[1]

Ethiopia has a federal system of government constituted by nine regional states and two city administrations, with a dual land tenure system (for urban and rural land). Land in Ethiopia is the property of the state and can generally be acquired only on the basis of a lease. Private ownership of land is prohibited. Once acquired through a lease, land cannot be mortgaged or sold, but the lease value of the land (the down payment and annuity paid) and the fixed assets on that land may be mortgaged or transferred to third parties.

Land administration is delegated under the constitution to the regions (for rural land) and to city governments and municipalities (for urban land). Accordingly, regional governments and municipal administrations are authorised to lease rural and urban land under their respective laws. In the city suburbs, the government reserves what it calls a land bank for investors, which, having compensated the landholders, it provides to investors engaging in real estate development. An investor who acquires land under a lease has to enter into a land lease agreement with the government and obtain a lease-holding certificate issued in its name. The minimum lease downpayment is 10 percent of the total lease payment. The remaining balance of the lease amount is to be paid in equal annual installments over the payment term. Interest is to be paid on the remaining balance, in line with the prevailing interest rate on loans offered by the CBE.

The lease contracts normally include provisions to regulate when construction will start, how long it will take to completion, the payment schedule, grace period, rights and obligations of the parties, as well as other relevant details. The downpayment of the lease price must be paid prior to signing the contract. The duration of an urban land lease for real estate development is 60 years for Addis Ababa and 70 years for other cities and towns in Ethiopia.[2]

The new lease prices range from ETB 1 686 (US$61.9) per square meter designated as central market place to ETB 191 (US$7) that are grouped as expansion place in the city. The rate for central market district zone will be applicable in most areas of the city that are considered to be main business areas that entertain high levels of business activity. The expansion zone is classified into four levels and covers areas that are considered to be in the outskirts of the city, where the city is expected to expand in the future.

[1] The World Bank – Doing Business (2018).

[2] Access Capital Research (2010).

Policy and Regulations

The slums and housing problems in Ethiopia are the result of accumulated deficits of policies and practices over several years.
The Federal Ministry of Works and Urban Development is the lead agency entrusted with the responsibility of providing housing. In recent years urbanisation has resulted in unprecedented levels of growth with the development and expansion of Addis Ababa and other cities. The urban development policy and strategies have the objectives of promoting the role of urban areas in the overall national development. The policy and strategy is further articulated in the IHDP. This has provision for affordable and low cost housing, empowering urban residents through property ownership, job creation, income generation as well as improving the quality of the urban environmental through infrastructural development and the urban renewal programme. The IHDP is subsidised by the government to support low income earners.

A number of policies govern the housing sector, including the following:

• Urban Development Policy (2005): Formulated by the Council of Ministers of the Federal Democratic Republic of Ethiopia to link together the small- scale efforts made by regional governments and cities since 2000.
• The Federal Rural Land Administration and Land Use Proclamation No.456/2005: Enacted for the purpose of ensuring tenure security,
  strengthening property rights of farmers, sustainably conserving and developing natural resources, establishing a land database, and establishing an efficient land administration in the country.
• Expropriation of Landholdings for Public Purposes and Payment of Compensation and Council of Ministers Regulation No.135/2007: The Federal Constitution vests in the government the power to expropriate private property in the public interest, provided it pays compensation prior to acquisition and in an amount commensurate with the value of the seized property.
• Ethiopian Building Proclamation 624/2009 formal sector: A legal document outlining the building regulations and requirements, for use by local authorities to ensure building standards are maintained in their jurisdiction. Parts of Ethiopia are located in an earthquake zone and a code exists to ensure buildings resist maximum predicted earthquake loads. The codes are only used and enforced in buildings developed in the formal sector.
• Regulation No.15/2004: Outlines the establishment of the Addis Ababa City Government Housing Development Project office and outlines its duties and responsibilities.
• Regulation No.12/2004: Outlines the condominium regulations for Addis Ababa city, regulating further details to Proclamation No.370/2003.
• Proclamation 624/2009 Ethiopian Building proclamation: Outlines the minimum national standard for the construction or modification of buildings or alteration of their use in order to ensure public health and safety.

Opportunities

The Ethiopian government has been addressing the public’s ever-increasing demand for housing by employing various condominium housing schemes that have mainly benefited low and middle income citizens. Through the construction of 100 000 cost-effective houses with necessary facilities and infrastructure in the capital, the government has made a significant contribution towards benefiting the urban poor, women and civil servants. In addition to the government’s involvement, private real estate developers have been playing a growing role in the sector.

Capitalising on the favourable policy climate, real estate companies have made significant a contribution in satisfying the demand of middle and high income citizens for apartments and other high-end houses. Furthermore, the Ethiopian government has paved the way for European and Chinese entrepreneurs to become involved in the country’s infrastructural development and industrial growth. Despite the risks of bringing in foreign companies, the Ethiopians are quite grateful for the assistance and business potential offered by global players.

Additional sources

Addisbiz.com Ethiopian Business Portal (2017). Current Status of 40/60 Condominiums in Addis Ababa, Ethiopia. https://addisbiz.com/tag/40-60- condominium/ (Accessed 5 Sept 2018).

African Economic Outlook (2018). Ethiopia 2017. AfDB, OECF, UNDP.

African Union for Housing Finance (2015). Financing Housing in Africa. Issue 41: March 2015.

CSA (2016). Federal Democratic Republic of Ethiopia Demographic and Health Survey, Addis Ababa, Ethiopia. October 2016.

Delz, S. (2014). Ethiopia’s Low Cost Housing Program: How Concepts of Individual Home-Ownership and Housing Blocks Still Walk Abroad. ETH Zurich.

The Economist Intelligence Unit (EIU) (2016). Country Report: Ethiopia. (August 2015).

Everline Auma (2014). The International Journal of Business & Management (ISSN 2321 – 8916),Vol 2 Issue 10.

Ethiopian Civil Service University. Land Administration Law. www.ecsu.edu.et/content/land-administration-law (Accessed 5 Sept 2018).

Federal Democratic Republic of Ethiopia (2010). Ministry of Works and Urban Development. Housing Development Programme: 2006-2010 Plan Implementation Report.

The Global Economy.com. Ethiopia Unemployment Rates. www.theglobaleconomy.com/Ethiopia/Unemployment_rate/ (Accessed 5 Sept 2018).

International Monetary Fund (IMF). The Federal Republic of Ethiopia. http://www.imf.org/en/Countries/ETH (Accessed 5 Sept 2018).

IMF (2017). The Federal Democratic Republic of Ethiopia: Selected Issues. IMF Country Report No. 15/326 (4 September 2015).

Ministry of Urban Development, Housing and Construction (2015). Housing Development:The Ethiopian Experience. Study on Africa’s Market Dynamics Regional Workshop. Addis Ababa (17-19 February 2015).

National Bank of Ethiopia (NBEAR) (2017). Annual Report for 2015/16. http://www.NBE.gov.org.et (Accessed 5 Sept 2018).

NBEAR (2018). Annual Report for 2016/17. http://www.NBE.gov.org.et (Accessed 5 Sept 2018).

OECD.org. Ethiopia. http://www.oecd.org/countries/ethiopia/  (Accessed 5 Sept 2018).

TAK-IRDI (2016). Assessment of the Role the Private Sector Plays in GTP II. TAK-Innovative Research and Development Institution, Addis Ababa, Ethiopia.

Tesfalem.T (2017). Factors Affecting Housing Delivery of Condominium Project in Addis Ababa:The Case of Gulele Housing Development Project, Addis Ababa, Ethiopia.

Trading Economics (2018). Ethiopia Exports. tradingeconomics.com/ethiopia/exports (Accessed 5 Sept 2018).

USAID/Ethiopia (2016). Opening Doors: A Performance Evaluation of the Development Credit Authority (DCA) in Ethiopia, Addis Ababa.

The World Bank – IBRD IDA. The World Bank in Ethiopia. http://www.worldbank.org/en/country/ethiopia (Accessed 5 Sept 2018).

Websites

http://www.acsi.org.et
http://www.addisbiz.com
http://www.addisfortune.net
http://www.AllAfrica.com
http://www.combanketh.com
http://www.csa.gov.et
http://www.ethiomedia.com
http://www.ethiopiahope.com
http://www.nbe.gov.et
http://www.mwud.gov.et/