Housing Finance in Madagascar

Introduction

Madagascar is an island country off the coast of Mozambique.  The economy is driven by its extractive industries, banking, transport and agricultural sectors. In 2008 the country experienced a negative growth rate (-3.7 percent) as a result of the global financial crisis and local political instability, and in 2009 the government was overthrown.  The economy has since been recovering slowly. In 2014 GDP growth was three percent, but is estimated to have plateaued at 3.2 percent in 2015. It is projected to accelerate to 4.0 percent in 2016 and 4.5 percent in 2017 as governance and business climate reforms take effect, alongside buoyant extractive industries, agriculture and tourism. Living conditions have worsened further with increasing inflation rates.  Although the country has significant national resources, it is estimated that more than 70 percent of its inhabitants live below the poverty line.

Presidential and parliamentary elections were held in the last quarter of 2013, a major step in ending the five year political crisis which should bring about renewed economic and social development.

Madagascar is one of nine countries which has been selected to pilot the Climate Investment Fund’s (CIF) Scaling Up Renewable Energy in Low Income Countries Programme (SREP). It will receive new funding and operational support to do this, with the African Development Bank (AFDB), serving as implementing agency as Madagascar develops its new CIF investment plans. Criteria used to select countries include low energy access rates, existence of an enabling policy and regulatory environment, renewable-friendly energy development strategies, strong governance capacity, and capacity for implementation. Each country will be provided with up to US$300 000 to develop an SREP investment plan.

In June 2014, the government, under the newly elected president Hery Rajaonarimampianina, launched a dialogue on green growth to assess the challenges and opportunities presented by green growth in the country, developing ways of moving to sustainable development for all while preserving the country’s natural capital.

Currently, environmental degradation costs the country nine percent of GDP annually. Ecological deterioration is aggravated by the populations’ poor resilience to natural disasters, while most of the productive sectors of the economy are very vulnerable to climatic incidents. In 2013, Madagascar faced a major cyclone and its worst locust plague since the 1950s, and by June a quarter of Madagascar’s food production had been destroyed.

The World Bank reports that the fiscal revenue to GDP ratio remains low (10.1 percent), well below the target in the revised state budget. Current expenditures continue to consume a large share (75 percent) of total public expenditures. The country continues to rank poorly on the ease of doing business index: 164^th out of 189 countries in World Bank Doing Business 2016 report, a slight decrease compared to the previous year’s ranking of 166^th.

As a whole, the primary sector recorded poor growth in 2015 (0.7%, down from 3.3% in 2014) due to floods in the north and drought in the South. Agriculture is the dominant sector in the economy, contributing 24.8 percent of GDP in 2008 and 26.4 percent in 2013.   Over the same period, construction’s contribution to GDP dropped from 4.9 percent to 3.5 percent, and finance, real estate and business services dropped from 15.5 percent to 11.3 percent by 2013.  The secondary sector as a whole contributes about 15 percent to GDP, and was the leading sector in terms of growth in 2013, up 7.9 percent mainly due to extractive industries. The tertiary sector contributed 56 percent of GDP and grew by 1.2 percent in 2014, compared to 2.4 percent in 2013.

Madagascar’s participation in Global Value Chains is limited to exporting unprocessed goods and selling imported goods.  According to the Central Bank, creation of local enterprises has been reduced from -16.7 percent in 2103 to -25.5 percent in 2014.

Access to Finance

Madagascar’s financial sector is managed tightly by the Central Bank, and the country has a comprehensive national finance strategy for 2013-2017.  The Central Bank lending rate has been held at a steady 9.5 percent since August 2009, allowing a sense of stability in an otherwise uncertain economy. The rate was reduced to 8.3 percent in May 2015. It is expected that the easing of monetary policy measures will result in an easing of credit conditions for the private sector. According to the Central Bank of Madagascar, there are 11 banks, seven non-bank financial institutions (pension funds and insurance companies) and 30 microfinance institutions (MFIs).  The financial sector is dominated by commercial banks, which hold about 84 percent of the total system’s assets, while non-bank financial institutions and microlenders account for the remaining 16 percent of assets.   Only five percent of the population use banks.

Increase in household expenditure has been financed by borrowings. As a result, private borrowing increased from 10.1 percent of GDP in 2013, to 17.1 percent in 2014, showing an increase of seven percent.

The increase in short term credit (from 11.4 percent in 2013 to 23.7 percent in 2014) is meaningful, as compared to medium term credit (from 8.6 percent in 2013 to 9.2 percent in 2014).

As regards public sector credit it has been minimal and it has decreased both for the short term (72.9 percent in 2013 to 20.0% in 2014) and the long term (from 73 percent in 2013 to 49 percent in 2014) credit. Most credit given has a short to medium term maturity, with a maximum maturity of seven years.  The average lending interest rate by banks was 13.5 percent in 2014, while the deposit interest rate was 10.75 percent in the same year.  As a result of the high interest rates, only a select clientele can afford to obtain credit from the banks.

The microfinance sector is small at five percent of bank transactions, but has been growing rapidly.  From a value of about AR22.7 billion (US$7.398 million) in 2002, it had grown to about AR244.4 billion (US$79.64 million) in 2011.  The sector has approximately 31 players, including state, foreign investor and donor-supported initiatives.  The Central Bank regulates the sector.  Some 16 MFIs reported to the Mix Market (an online source of microfinance performance data and analysis), and in 2014 had a gross loan portfolio of US$148.9 million, disbursed to 192 191 active borrowers.  Almost 800 000 depositors saved US$114.3 million in deposits.  The largest of these is CECAM, with 54 602 active borrowers in 2014 and a gross loan book of almost US$35 million.  In 2012, Orange Madagascar collaborated with MFS Africa to launch an online money transfer service so that its customers could receive international remittances directly to their Orange Money accounts.  The intention was to lower the costs of sending money, both for the receivers and the senders.

Overall, access to financial services is extremely low.  According to the International Monetary Fund’s Financial Access Survey, only 15.1 in every 1 000 households had a loan with a commercial bank in 2013, and 67.2 in every 1 000 households had a savings account with a commercial bank.  Outstanding loans from commercial banks in 2013 amounted to 10.72 percent of GDP, and deposits amounted to 18.47 percent of GDP.  In 2013, Madagascar had only 1.86 ATMs per 100 000 adults, and 1.74 bank branches per 100 000 adults.  There were only 0.38 commercial bank branches per 1 000 km² in 2013.

Between 2010 and 2012, the International Fund for Agricultural Development (IFAD) implemented a project to improve access to professional domestic and international remittance services mainly for the rural population in the Malagasy highlands who have limited or no access to the formal banking sector. The African Development Bank provided a Credit line and Technical Assistance grant for the development of a credit product for rural micro, small and medium enterprises within Première Agence de MicroFinance in Madagascar (PAMF-Madagascar) between 2011 and 2014. The United Nations Capital Development Fund implemented a programme to strengthen coordination and supervision of the inclusive finance sector, develop financial infrastructure at the meso level, and improve the provision of financial services to the rural poor between 2010 and 2014. A project by IFAD is underway (from 2007 until 2015) to increase the incomes of poor rural people in five of the country’s poorest and most densely populated regions. It aims to create efficient business development services that respond to the needs of small and micro rural enterprises. It should also assist in structuring traditional clusters into modern value chains by line of business, to enable long-term sustainability and market expansion with linkages to regional growth poles. IFAD also initiated a programme in 2009 which runs until 2018 to support farmers and their organisations to better integrate them into the economy, facilitating farmers’ access to services by matching demand and supply, and increase production levels by establishing financial mechanisms responding to demand for services, through the Agricultural Development Fund and the Regional Agricultural Development Fund.

In 2012, the World Bank launched the Global Financial Inclusion Database (Global Findex) to explore levels of financial inclusion around the world.  According to Global Findex, 4.3 percent of rural and 9.7 percent of urban Madagascans over 15 years of age have an account with a formal financial institution.  Very few Madagascans have an outstanding loan to purchase a home: 1.2 percent of the top 60 percent of income earners and 0.4 percent of the bottom 40 percent of income earners.  Loans for home construction are slightly more common but still scarce: three percent of the top 60 percent of income earners had one, and 1.4 percent of the bottom 40 percent of income earners.  Poverty is widespread in Madagascar.  About 49.1 percent of the population earns less than US$1 a day, thus basic needs such as food, education and housing for this group of people is largely unsatisfied.

Enforcement of prudential standards is weak, as insufficient funds have been available for supervision since the Central Bank ran into financial difficulties in 2004.  Overall, there is a poor business climate. It has, moreover, regressed in many other fields. Major obstacles to attracting investment are political instability, difficult access to credit, corruption, lawlessness, lack of infrastructure, costly and unreliable energy supply and the absence of an independent legal system.

Housing Affordability

GDP per capita in Madagascar decreased in 2012 by 0.9 percent, in 2013 by 0.2 percent, but is estimated at having increased in 2014 by 0.9 percent. In 2012 it was estimated at US$33 241 (AR102 million), down 4.2 percent from 2011.  In 2010, the average annual wage was estimated at US$518 (AR1.59 million), but much lower in the agricultural sector, at about US$251.52 (AR771 800).

Household affordability is further affected by droughts, flooding and cyclones, the three most common disasters that affect more than half of all households.  It is not unusual for a household to suffer a loss equivalent to a full month’s income.  72 percent of households say that recovering from such a shock can take over a year.

Housing Supply

According to the Periodic Household Survey of 2010, about 86.5 percent of the country’s households live in self-built, traditional housing.  These houses are usually temporary structures made with compacted mud and poorly attached thatched roofs which provide very little protection from diseases and the environment, and little security from crime.  Access to basic services is very low. Only 27.7 percent of the population has access to water, and only 7.1 percent to improved sanitation. Approximately 88.2 percent of the urban population lives in slums, and over 57 percent of urban residents have no refuse removal services at all.  The rate of urbanisation is high, estimated to be 29 percent.

Habitat for Humanity indicates that 75 percent of the country’s population live in rural areas. The average size house in rural areas is about 26m².  The current housing backlog in Madagascar is estimated at about two million units.  Annual population growth creates a demand for an additional 100 000 units; this demand is expected to grow by three percent.

Madagascar’s property development sector, to the extent that one exists, is geared towards very high income earners, expatriates and tourists.  No formal housing is developed for lower or even middle income earners.

Habitat for Humanity Madagascar has been working in the country since the year 2000, and has serviced about 4 460 families.  The organisation builds new houses, develops water and sanitation services, and promotes urban renewal.  Habitat Madagascar has been active in building houses in the east, central highland, west, south highland and northwest regions of Madagascar.  Houses range between 15m² and 40m² for one bedroom, a living room, a kitchen and a bathroom.  House foundations are made of stone or fired clay bricks and then covered with concrete floors, while the walls are made of clay brick and mortar.  Clay tiles or thatch are used for the roofs, and windows and doors are made of eucalyptus wood.  These materials are locally produced and come from renewable sources.

A joint government, UNDP and UN-Habitat initiative took place in March 2013, the country’s first National Urban Forum.  Under the theme ‘building together the future of our cities’, the Forum adopted a declaration that made the urban sector a national priority.  A key aspect of the commitments involved strengthening the private sector in the development and management of urban infrastructure.

While the overall business climate has deteriorated in Madagascar in the past four years, the most significant decline has been in terms of obtaining construction permits.  The 15 procedures involved in acquiring a construction permit takes 185 days and cost 30.8 percent of income per capita.  For this reason, Madagascar ranked 164^thfor this indicator out of 189 countries in the World Bank’s 2016 Doing Business Report, up from 166^th in 2015.

Property Markets

Originally Madagascar prohibited foreign land ownership, offering rather long-term leases of about 99 years.  Under customary law, land in Madagascar is perceived as the land of the ancestors (tanindrazana). Although land may become individualised, many believe that land must be titled or recorded in some fashion before an individual can claim perpetual ownership rights to the plot.  In 2004, legislation that allowed foreigners to own land was passed.  In order to acquire land, however, foreigners must invest up to US$500 000 in the real estate, banking or tourism sectors.

Most urban land is held under customary tenure, and residents do not have title recognised under formal law.  In 2006, the Madagascar Action Plan was drafted, setting out development goals within the time frame of 2007 to 2012.  One of these goals was to increase the number of households with land title from 10 percent to 75 percent.  Progress on these goals is yet to be reported.

Madagascar ranked low on the World Bank’s ‘registering property’ index, at 161^st globally in 2016 (up from 162^nd the previous year), and behind the Sub-Saharan Africa average.  In 2016, it took six procedures and over 100 days to register property.  The process cost was 9.2 percent of the total property value.

Housing Policy and Regulations

Madagascar’s most immediate challenge is to create a stable governance environment in which the society and economy can again begin to flourish.  As a result of the successful political elections held in 2013, growth in 2014 was expected to be three percent, mainly related to agriculture and related industries, extractive industries, tourism and construction.

Many international partners, who did not recognize the transitional government that came to power in 2009 through unconstitutional means, have normalized their relations with Madagascar in light of the last elections. The Government of Madagascar identifies “fight against poverty through inclusive growth” as its main objective and possesses a strategy centered on three pillars: improving governance, promoting economic recovery, and expanding access to basic social services. This strategy has been outlined in the Programme Général de l’Etat (PGE) and translated into a 2015-2019 National strategy.

With the growing presence of microfinance in the country, there are opportunities for MFIs to diversify their product range to cater for the housing needs of low income earners.  Energy efficient products should also be in high demand.  There is a need for stakeholders in the housing sector to participate in the affordable housing process – from the supply of affordable and innovative building materials to the delivery of formal housing that is affordable to lower income earners.

Housing Sector Opportunities

Madagascar’s most immediate challenge is to create a stable governance environment in which the society and economy can again begin to flourish.  As a result of the successful political elections held in 2013, growth in 2014 was expected to be three percent, mainly related to agriculture and related industries, extractive industries, tourism and construction.

Many international partners, who did not recognize the transitional government that came to power in 2009 through unconstitutional means, have normalized their relations with Madagascar in light of the last elections. The Government of Madagascar identifies “fight against poverty through inclusive growth” as its main objective and possesses a strategy centered on three pillars: improving governance, promoting economic recovery, and expanding access to basic social services. This strategy has been outlined in the Programme Général de l’Etat (PGE) and translated into a 2015-2019 National strategy.

With the growing presence of microfinance in the country, there are opportunities for MFIs to diversify their product range to cater for the housing needs of low income earners.  Energy efficient products should also be in high demand.  There is a need for stakeholders in the housing sector to participate in the affordable housing process – from the supply of affordable and innovative building materials to the delivery of formal housing that is affordable to lower income earners.