Housing Finance in Madagascar

Introduction

Madagascar is the world’s fourth largest island[1], located off the coast of Mozambique. The total population is roughly 25 million inhabitants (July2017) with a population growth rate of 2.5%[2].

The economy is driven by its extractive industries, banking, transport and agricultural sectors. In 2008 the country experienced a negative growth rate (-3.7%) as a result of the global financial crisis and local political instability, and in 2009 the government was overthrown.  Living conditions have worsened as a result of increasing inflation rates.  Although the country has significant national resources, it is estimated that more than 70% (2012) of its inhabitants live below the poverty line[3]. A calmer political environment with better governance and the recovery of public and private investment should allow for further economic growth, driven by agriculture, production in export processing zones, new information and communications technology, transport, tourism and construction[4]. Which should alleviate poverty and unemployment.

For the most part the country has been stable following the presidential election of 2013, at which point “a new economic and social development strategy based on inclusive growth and sustainable development” was adopted[5]. Expressed further through the implementation of the 2015-2019 National Development Plan (PND), however poor social conditions remain including poverty, malnutrition and growing inequality[6].

Madagascar is one of nine countries which have 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 an implementing agency as Madagascar develops its new CIF investment plans. Criteria used to select countries included 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 launched a dialogue on green growth to assess the challenges and opportunities in the country, developing ways of moving toward 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 poor resilience to natural disasters, most of the productive economic sectors are very vulnerable to climatic incidents. For instance, 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 country is defined as low income, with an estimated GDP growth rate of 4.4% for 2016 and a projected growth rate of 3.5% for 2017[7]. The country continues to rank poorly on the ease of doing business index with an overall ranking of 167^th of 190 in 2017. An improvement over its 2016 rank of 169^th, following a simplification of procedures to establish businesses, transparency in issuing construction permits (availability of construction rules online), and improved cross-border trade (simplified customs procedures, institution of data sharing system).

As of 2016 the GDP was composed of three key sectors 58.9% services, 24.8% agriculture and 16.3% industry[8]. The labour market is defined by under-employment or low-paid jobs, and with 76.2% of the population being under 35 the labour force is supplemented by 400 000 youths annually[9]. However unemployment is only at 3.6% (2014) which is relatively impressive for the region, considering its closest neighbour Mozambique lies at 22.4%[10]. The informal sector is thereby growing, marked by an expansion of micro and small enterprises, as a result there is an increasing demand for reflective government policy which provides opportunities for entrepreneurs[11]. Potentially involving institutional and regulatory frameworks with provision for incentives, appropriate and accessible financial services and innovative practices to strengthen multi-sectoral partnerships[12].

Access to Finance

Madagascar’s financial sector is managed tightly by the Banque Centrale de Madagascar (BFM), and the country has a comprehensive national finance strategy for 2013-2017.  The BFM lending rate has been held at a steady 9.5% since August 2009, allowing a sense of stability in an otherwise uncertain economy. The rate was reduced to 8.3% 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 BFM, 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% of the total system’s assets, while non-bank financial institutions and micro-lenders account for the remaining 16% of assets.

Only five percent of the population use banks[1]. The BFM is pursuing a prudent monetary policy by adjusting currency in circulation to the real needs of the economy in order to maintain inflation below 10%. Emphasis will be placed on monetary targeting through the use of indirect monetary policy instruments such as liquidity injection and absorption auctions to manage liquidity as conditions warrant. The BFM aims to strengthen the analytical framework for the monetary policy, in particular by improving the forecasting model and enhancing communications to better inform the market on the effects and impacts of monetary policy.

Interest rates are high, averaging 14.9% for a three-year loan, reflecting a lack of competition between banks and the likely incorporation of a risk premium in the rates charged. The banks’ funding structure is generally short term, with short-term credits representing an average of 55% of the total stock of credits, compared to 45% for medium-term and long-term credits. The banking sector’s performance reflects its aversion to risk. However, it must face the challenges inherent to development imperatives: competition within the sector; diversification of financial products and expanded access to bank financing for economic agents, particularly SMEs; customer protection and sector resilience. As a result of the high interest rates, only a select clientele can afford to obtain credit from the banks. According to the World Bank Madagascar has one of the highest interest rates at 48.76%.

The microfinance sector is small at five percent of bank transactions, but has been growing rapidly.  From a value of about MGA22.7 billion (US$7.471 million) in 2002, it had grown to about MGA244.4 billion (US$80.4 million) in 2011. The sector has approximately 31 players, including state, foreign investors and donor-supported initiatives, regulated by the BFM.  There are 12 MFIs registered with MixMarket (an online source of microfinance performance data and analysis) composed of 760 thousand borrowers and a gross loan portfolio (GLP) of US$137 million[2].  Of these CECAM has the most active borrowers with 66 870 in 2015 and a GLP of US$18.9 million, conversely MicroCred Madagascar (MCM) has only 31 790 thousand active borrowers and a GLP of US$47.68 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 in addition to the supply of financial products. As of 2015 only 31.2 per thousand people borrowed from commercial banks and although this number has grown steadily since 2006 at which point it was 13.3 per thousand, the proportion is still marginal[3]. The number of depositors with commercial banks is somewhat higher at 73.5 per thousand (2015) which is a steady increase following the drop between 2010 and 2011 from 106.5 to 52.3[4]. Outstanding loans from commercial banks in 2013 amounted to 10.72 percent of GDP, and deposits amounted to 18.47 percent of GDP.  In 2015, Madagascar had only 2.3 ATMs per 100 000 adults, and 2.1 bank branches per 100 000 adults[5].

MCM was the first MFI to launch an agent network in Madagascar in the first quarter of 2015. As of January 2016, they had 392 agents, seen as sufficient for supporting its client base for the next year. Customers are not charged for cash in but do pay fees for cash out. Agents may collect know your customer (KYC) data, but cannot open accounts. As of December 2015, 40% of MCM’s transactions are through the agent channel, which is seen as a success from the perspective of customers, although it is increases costs for the bank through increased commission fees.

According to the Global Findex report, 4.3 % of rural and 9.7 %of urban Madagascans over 15 years of age have an account with a formal financial institution. Access to financial services continues to be limited as a percentage of GDP, the total outstanding loans average 8% and only 7.8% of the population hold bank loans.  Very few Madagascans have an outstanding loan to purchase a home: 1.2% of the top 60% of income earners and 0.4% of the bottom 40% of income earners.  Loans for home construction are slightly more common but still scarce: 3% of the top 60% of income earners had one, and 1.4% of the bottom 40 % of income earners. Poverty is widespread in Madagascar.  About 49.1 % 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 BFM 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, and lack of infrastructure, costly and unreliable energy supply and the absence of an independent legal system.

 

Housing Affordability

Housing is unsurprisingly largely unaffordable to the majority of the population in Madagascar given the high rate of poverty, the average monthly net salary is US$ 131[1]. Rental of a one bedroom apartment in the city centre costs US$ 215 and outside the city US$99, a three bedroom is US 1 976 and US$ 2 233 respectively[2]. The price to purchase an apartment in the city centre is US$ 2 142 per m² and outside the city is US$2 474 per m²[3]. Furthermore the average mortgage interest rate is 20%[4].

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% 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% 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% of the population have access to water, and only 7.1% to improved sanitation. Approximately 88.2% of the urban population live in slums, and over 57% of urban residents have no refuse removal services at all.  The urban population is rather low at 36.4% however demand for housing is on the rise with a high rate of urbanisation of 4.47%[1].

Habitat for Humanity confirms that the majority 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 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 brick 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 under 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.

There has been improvement within the construction industry following two reforms, namely increasing transparency of dealing with construction permits through the free online publication of construction-related regulations, and reducing the time needed to acquire a permit, despite these measures Madagascar’s ranking in dealing with construction permits has dropped to 184^th from 182^nd in the doing business index. The current process involves 15 procedures to obtain a construction permit, it takes 185 days and costs 28.2% of the property value.  Overall improvements have however been made to facilitating business within the country reflected in the overall increase in ranking from 169^th in 2016 to 167^th in 2017, doing business index.

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% to 75%. Progress on these goals is yet to be reported.

Madagascar ranked low on the doing business index for registering property, at 159^th out of 190 in 2017 (down from 157^th in 2016). As of 2017 it takes six procedures, 100 days and 9.2% of the property value to register property. The inefficiency of the process is further exacerbated by the number of departments and agencies that are involved in the process including the Property Registry, Topographical service, Regional Planning Service and the Tax authority additionally it is legally required to use a notary, increasing the potential expense.

In order to evolve Madagascar’s housing market and align it with economic and social development the government needs to create policies to facilitate the acquisition of land and houses for low to mid income housing as the rich have no difficulty acquiring a house or land and their purchasing power fuels the high end real estate market increasing prices and alienating the majority of the population.

Housing Policy and Regulations

The policy and regulations in Madagascar related to housing are outdated, as some of them were introduced in the nineties. Recent data is thereby not readily accessible. However as of 2005, in recognition of the inadequacies of land tenure and administration the government embarked on implementing an ambitious national land tenure reform program aimed at delivering a transparent, inclusive, equitable, and efficient administrative and management system expressed through the ratification and adoption of two laws, the 2005 Framework Law  and 2006 Law on Untitled Private Property[1]. The objectives of which were to provide a legal and regulatory reform; to modernise land registries and survey/mapping offices; to decentralise land management to commune level (establishing permanent land office, guichet foncier, at the commune level to deliver land certificates); and to ensure training and capacity building[2]. The status and delivery of these objectives is however not available[3].

More recently and relation to the broader economic development agenda, the 2017 Economic Development Document was produced by the Ministry for Economy and Planning, (in compliance with IMF membership) to support and facilitate the consolidation and implementation strategy for the PND.  The central objective of the aforementioned polices is social inclusion, to alleviate poverty and promote economic growth and stability. As such the document catalogues the underlying concerns which include; “modest economic performance, inadequately inclusive economic growth, predominant subsistence economy, land tenure problems; economic dualism; persistent inflation and the erosion of purchasing power; limited coverage of the social protection system; inefficient financial system limiting access to financing; persistent governance problems; underdeveloped sanitation infrastructure; the adverse impacts of climate change”[4].

The PND is highly reliant on cooperation and investment from international agencies such as the IMF (providing financial and technical support) and the private sector. Based on the available information housing is not identified directly as a mechanism for social development or as an objective of the policy.

Housing Sector Opportunities

The potential for growth and development in Madagascar is pegged to its ability to stabilise the macroeconomic environment through strengthened governance and increased private investment so that society and the economy can again begin to flourish.

The Government of Madagascar identifies “fight against poverty through inclusive growth” as its main objective and possesses a strategy centred 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 (that take into consideration the environmental vulnerabilities of the country) to the delivery of formal housing that is affordable to lower income earners.

Investment in the housing sector potentially is very profitable in Madagascar, house prices are very heterogeneous and change from one place to another and from one region to the capital. However rental markets are on the rise, which serves as a motivation for housing investors and developers to work on their development strategy and assess potentially alternatives housing purchase models such as rent to buy. Nonetheless the population needs to have more opportunity and needs support in order to have the means to acquire land and houses adapted to their purchasing power which is very low as compared to other countries.