Housing Finance in Sierra Leone

Introduction

Sierra Leone, one of the poorest countries in the World is situated in the West Coast of Africa, sharing boundaries with both Guinea and Liberia. It is ranked 181 in the 2015 UNDP’s Human Development Index[1], which represent a rise from by two places from the 2014 ranking of 183. Provisional result of the 2015 National Population and Housing Census put the population at 7.075 million, which is 29.6% increment from the last Census conducted in 2004. The spatial nexus in Sierra Leone is essentially rural-urban. The urban population has the lion’s share of services, assets and earned income and is likely to bequeath more to successor generations compared to the rural population. In 2010 the rural population was estimated to account for 62% of the overall population while urban was 38%. Freetown accounts for roughly 40% of the urban dwellers. There is no dedicated strategy for spatial inclusion in Sierra Leone but the essential elements of it are subsumed in the country’s medium-term plan, the Agenda for Prosperity (A4P 2013-2018)[2].  In 2014 the economic growth rate was slowing down to 6% compared to the original projection of 13.8%.  GDP growth rate was as low as -20.6% in 2015[3] and the economy is projected to recover slightly reaching two point eight% in 2016. In recent years economic growth has been driven by mining especially iron ore. Principal exports are iron ore, diamond and rutile and the economy are vulnerable to fluctuations in international prices. In 2014 rapid spread of Ebola virus caused a contraction of economic activities to several areas including transportation, health and industrial production. The real gross domestic product (GDP) was seven point one percent and one percent excluding iron ore production. This went way below the pre-Ebola forecast of 11.3% and 6% respectively. The deterioration in the mineral export and higher import in 2015 impacted adversely on the trade balance for 2015.

A 2015 UNDP Human Development Index report has pointed out that despite recent economic growth, multidimensional poverty and inequality remains very high. In a country of an estimated population of 6.453 million, the report noted that income poverty is 52.9% (those earning less than US$2/day) and that 72.7% of Sierra Leoneans are multi-dimensionally poor, among the highest in the world. This means that almost three quarters of Sierra Leone’s population live below the poverty line and faced deprivations such as poor health facilities, lack of educational opportunities, inadequate living standard, lack of income, disempowerment, poor quality of work and threat from violence.[4]

The inflation rate was estimated at 10.41% in 2013; 7.19% in 2014 and 8.09% in 2015 down by almost two percent from the 10.41% inflation rate in 2014².  The tight monetary policy that is being implemented currently is helping to keep food prices low while also keeping inflation in the country to a minimum.  The lack of infrastructure, a poorly trained labour force and an unattractive environment for the private sector are key issues that the Sierra Leonean government must face if it is to maintain its growth levels. Unemployment has remained unchanged in 2015 from 2014 at 3.4%. The Sierra Leone government has developed the Agenda for Prosperity Strategy to drive economic growth and employment in the country from 2013 to 2017.

Access to Finance

Poverty in Sierra Leone is predominantly rural. Rural poverty has its roots in the colonial system and the policy and institutional restraints that it imposed on poor people. In recent decades, economic policies and institutional structures have been modified to close the income gap. Structural adjustments have dismantled existing rural systems, but have not always built new ones.   Sierra Leone has 13 commercial banks (eight Nigerian, one British, and  one from Togo, along with two state-owned banks and one domestic private bank), nine insurance companies and three housing finance companies (Sierra Leone Housing Corporation, Alliance Housing Finance Company Limited and Home Finance Company Limited)⁵.  With support from development partners, around 60 Financial Services Associations and 20 community banks have been established throughout the country to help with financial intermediation.  Commercial banks are well capitalised and looking for innovative ways to serve the market with new products and services.

At the end of the 2015 financial year, credit to the private sector given by commercial banks expanded by zero point four-three percent, from Le5.85 billion (US$928 571) from Le1.35 trillion (US$214 million). The domestic credit of private sector in 2015 accounted for four point eight percent of GDP. Commercial banks’ resource base increased by nine point seven-five percent during 2015 as deposits had increased by 62.83 percent, from Le3.94 trillion (US$900 million) to Le4.29 trillion (US$980 million).  Savings increased by Le145.75 billion (US$330 000), bringing the total to Le1154.31 trillion (US$261 million).  Non-performing loans as a percentage of total gross loans decreased from 18.15 percent in 2015 from 33.44 percent in 2014, and the capital-asset ratio of the banks was at 15 percent.  Estimated non-performing loans in commercial banks across the country were estimated at 31.73 percent in 2015. Interest rates for loans in some commercial banks in 2015 vary from 13 to 27 percent, whilst prime lending rates are at 26 percent⁴.

According to Forbes business ranking 2015, Sierra Leone was ranked 113^th for trade freedom, 125^th for monetary freedom and 100^th for tax burden[5]. Corruption has also decreased these last decay as it was ranked 119^th having a corruption index of 29.o points.

In 2008, Sierra Leone adopted a strategy for reform of the financial sector to strengthen banking supervision, enhance competition, increase access to commercial bank finance and improve the payment system.  The financial sector still faces a number of challenges such as the high costs of financing, operating costs and limited bank branch infrastructure.  The high concentration of the banking sector also limits competition.  These factors contribute to the low share of credit to the private sector.

In an economy marked by the high incidence of the informal sector, the Government of Sierra Leone has identified the provision of micro-finance services to the poor, especially women, as a key mechanism to help reduce poverty. The provision of financial services (savings, insurance, loans) to low-income households is aimed at enabling them to acquire capital, improve their livelihoods and generate informal sector employment. Micro-financing is also regarded as a way of promoting employment generation, import substitution and private sector development, thus having an important impact on the local and national economy.

There are two licensed, deposit taking microfinance Institutions in the country: Ecobank Micro Finance Institution (EMSL Ltd) and Bank for Innovation and Partnership (BIP), and eight credit-only MFIs. Finance Salone and Hope Micro have the largest number of borrowers; however, Finance Salone and BRAC – SLE have the largest share of loans. The most recent data from MFI sector for 2015 put total loans given out by the various microfinance institutions at US$17.3 million to 106 938 borrowers. They have also received deposits amounting to US$5 million from 51 428 depositors. In June 2015, BRAC-SLE reported total loans of about US$3 million issued to 21 040 borrowers and zero deposit. There are no updated figures from the other MFIs. In a June 2015 report, the Sierra Leone Association of Microfinance firms detailed the impact of the Ebola epidemic on its especially with majority of their customers who are traders and farmers been severely affected due to the economic slowdown. The report stated that the Ebola outbreak has affected microfinance funders as loan disbursement reduced by 36 percent during the Ebola period and outstanding loan portfolio fell from US$18 million to US$14.9 million. The number of active clients dropped from 78 000 to 73 000 during the crisis while portfolio-at-risk doubled from 11 percent to 22 percent. During this period, the eight registered MFIs reported decrease in revenue and operational self-sufficiency dropped from 105 percent in June 2014 to 78 percent in December 2014.

The association of Slum Dwellers commonly referred to as Federation of Urban and Rural Poor in Sierra Leone (FEDURPSL) has encouraged groups saving from several communities in several informal settlements in Freetown. The federation has been increasing its members from 1500 to about 7000 in just four years and more than 35 savings group has been mobilised and federated into FEDURPSL[6]. These groups are saving on a daily basis and are contributing to the nascent trust fund known as Fordibambia Trust Fund (FTF). FEDURP continues to manage and resolve their self-initiated and self-supported micro-credit scheme in which more members are being supported. In addition to this FEDURP continues to engage with authorities on the allocation of land for the housing demonstration project. Centre Of Dialogue On Human Settlement And Poverty Alleviation (CODOSAPA) is set to build 360 housing units at Newton in Sierra Leone with ultra-modern facilities for human settlement following the flooding disaster in September 2015[7].

The Sierra Leone Stock Exchange started operating in 2001 as a private company.   The three housing finance companies – Sierra Leone Housing Corporation, Alliance Housing Finance Company Limited and Home Finance Company Limited – are listed on the Bank of Sierra Leone website.  The National Social Security and Insurance Trust (NASSIT) was established in 2004 with a mandate to administer Sierra Leone’s National Pension Scheme. Under this programme NASSIT decided to invest in housing finance and has been the key financier of Home Finance Company (HFC) Mortgage. NASSIT have also helped fund Regimanuel Grey Estates, which is one of the leading Real Estate Developers in the country to construct 10 high income housing units that were going for a purchase price of about US$100 000.  HFC Mortgage and Savings Bank offers eight different mortgage products – Home Purchase Mortgage, Group Scheme Construction Stage Payment, Home Completion Mortgage, Home Improvement Mortgage, Home Equity Mortgage, Buy Land and Build Own Home Mortgage, Construction Finance Mortgage and Construction Stage Payment Mortgage.

All mortgage products are offered to residents and non-resident Sierra Leoneans, although with longer and vary repayment periods, and lower deposits required, for residents and non-resident. A maximum of 10 years is given to non-resident whilst 15 years is given to resident.  The Home Purchase Mortgage and Group Scheme Construction Stage Payment products offer a maximum loan amount of US$100 000 for a 15-year term, with a 20 percent deposit (for residents). The average 15-year fixed rate mortgage dipped from 4.10 percent in 2014 to 4 percent in 2015. The Home Completion Mortgage requires a 30 percent deposit over 15 years at an interest rate of six percent, whereas the Home Improvement Mortgage requires a 50 percent deposit at an interest rate of six percent also. The ‘Buy Land and Build Own Home Mortgage’ product allows the applicant to buy land for a maximum amount of US$10 000 and then provides a further US$30 000 to build[8].  To apply for this product, the applicant must be an existing customer of HFC.  In addition, the builder must be approved by the bank, the building plans must have been approved and the purchase of land requires the applicant to have secured title.  Once approved, the loan can be disbursed directly to the customer.  The minimum down payment for this product is 20 percent of the cost of the land.

In 2012, the World Bank launched the Global Financial Inclusion (Global Findex) Database to explore levels of financial inclusion around the world.  According to 2014 Global Findex database, 16 percent of adults (15years+) and 12 percent of adult women have accounts with a financial institution. The percentage of young adults (15-24) is about five percent. According to the report, about 11.7 percent of adults living in rural areas and 20.2 percent of adults living in urban areas having account with a financial institution. The majority of those with accounts use them to receive wages.  Use of credit is fairly common; four percent of adults over 15 years of age report that they had a loan with a financial institution and 9.3 percent adults stated they have outstanding mortgage with a financial institution. However, the vast majority of these loans were from family or friends is reported at 43 percent and seven percent of adults have borrowed from a private informal lender. The percentage of adults with mortgage loans has substantially increased from 0.4 percent in the 2011 Findex database to 9.3 percent.  In 2014, 11 percent of adults have saved at a financial institution with a large percentage of adults saving mostly for education or school fees and to start a business or farm[9].

There are two development banks in the country: The National Development Bank and the National Cooperative Development Bank.  These banks work in conjunction with the MFIs, mainly in urban centres.  Rotating savings and credit associations are informal savings and credit institutions used commonly throughout the country.

According to the World Bank 2015 Doing Business Report, Sierra Leone rank 140, this is unchanged from the 2014 ranking. Sierra Leone ranking in terms of the ‘ease of getting credit’ indicator in the World Bank’s 2015 is 147[10]. In terms of starting a business, Sierra Leone is rank 91 in 2015 compared to 87 in 2014.  The Credit Reference Bureau Act of 2010 has been adopted, which requires all commercial banks to refer to it before making out loans to customers.  In 2014, the public credit registry had information on 23 725 individuals and 11508 firms, comprising one percent of the population, which is 0.1 percent increase from the 2013 figure.  Borrowers can inspect their data in the public registry, and data on both firms and individuals are distributed.  In 2014, Sierra Leone scores five out of a possible 12 points on the ‘strength of legal rights’ index. The strength of legal rights index is one of the indicators used in the World Bank Doing Business Report. There is no collateral registry in operation in the country.

Housing Affordability

Housing affordability is a serious challenge in Sierra Leone, where more than 60% of the population live on less than US$1.25 a day and 60 percent of the youth are unemployed which is a pertinent social issue. Youth unemployment is projected to grow even further in the next five years. The lowest housing unit is a single bedroom and a living room (parlour) with an estimated area of 20 m². The prevalent housing units that are available for rent are mostly two and three bedroom apartments with estimated area of 200 and 250 m² respectively.  The prices to rent these aforementioned housing units per year depend on the location. In the east end of Freetown, average rental process for a three-bedroom apartment ranges between US$1 000-1 500, whilst in the central and west end of Freetown, rental prices for three bedroom ranges between US$3 000-5 000. Average rental prices for two and one bedroom apartments ranges between US$500-1 000 and US$100-250.  The widespread proliferation of slums in most urban centres is a direct consequence of the extreme difficulties encountered by the urban poor to afford decent housing. With poverty so prevalent, most urban poor do not have the income required to open a bank account, thus making it almost impossible to access mortgage facilities offered such as HFC Mortgage.  As a result, the HFC Mortgage and Savings Bank products are affordable to only a fraction of the population.

The lending rate by banks in Sierra Leone which is the rate charged by banks on loans to prime customers was 22 percent (measured in 2015) percent (end 2014), making borrowing very expensive.  The average rate of savings remained at 6.4 percent since 2014. In a recent SALHOC survey, 70.5 percent of survey respondents stated that they find it very difficult to rent a house due to very high rental prices.  However, the Sierra Leone Housing Corporation (SALHOC) and the Sierra Leone Investment and Export Promotion Agency (SLIEPA) have been able to attract some private sector developers and international NGOs to revive the provision of affordable low-cost housing units to all income groups. The major hindrance to the provision of affordable low-cost housing units is the huge construction cost considering the fact that most of the building materials have to be imported into the country. The average costs to build a two bedroom and three bedroom flats are US$15 000 and US$25 000 respectively.

Housing Supply

In Sierra Leone, the urban population is growing at a faster rate than the rural population. The legislative framework for housing and regional/urban planning is weak and there are no standardized building regulations thus, like many African countries, Sierra Leone struggles to house the majority of its poor population. This legislative framework is outdated, considering the socio-economic changes that have occurred since the enactment of these acts. The Town and Country Planning Act is now obsolete since its provisions cannot be used to prepare the regional/urban development plans that are required to address the impact of the civil conflict on shelter and human settlements

Property Markets

According to a 2013 Knight Frank report, rental for the industrial sector dominates the property market, with prime rental rates of US$3 per m² per month in Freetown[11].  The office and retail market have prime rates of US$17 per m² per month. Specifically, with regard to residential property, a four-bedroom executive house in a prime location is rented for US$4 000-5 000 a month.

The World Bank’s 2015 Doing Business Report ranks Sierra Leone 99 out of 189 countries in terms of ease of registering a property[12].  This is an improvement from a rank of 161 in 2014.  It takes 10 days to complete the seven procedures involved in registering a property, and costs 11 percent of the property value. In 2013, Sierra Leone made registering property easier by computerising the Ministry of Lands, Country Planning and the Environment, reducing the time needed for property registration by 20 days.

Housing Policy and Regulations

Land tenure system in urban areas follows the English land law. Land in Sierra Leone is classified as state land, private land and communal land. In Freetown and the Western Area, statutory laws recognize private freehold land, while under the Province Land Act of 1960 in the three provinces is governed by customary law with chiefs serving as custodians. Customary law is unwritten, varies across the 149 chiefdoms, and evolves over time. It is enforceable in both formal and non-formal courts. The 2004 Local Council Act gives local councils the right to acquire and hold land

Housing Sector Opportunities

The business environment in Sierra Leone has been improving.  In 2013, Sierra Leone’s ranking improved by eight places in the World Bank’s Doing Business Report, although it dropped by two places in 2014, placing 147^th out of 189 countries.  It remains unchanged at 140^th in 2014 and 2015.  As the macroeconomic environment improves, an important area of opportunity is the housing sector.  There is certainly considerable scope for growth in the housing financing markets and housing suppliers should consider how to package their offerings to suit the affordability criteria of the majority of the population. Despite the Ebola epidemic slowing down the country, there has been significant movement and collaboration between SALHOC and other private sector developers like Sierra Leone Investment and Export Agency (SLIEPA) to increase the supply of housing units, developed effective policies to regulate the real estate market. It is expected that income levels of urban dwellers would be on the increase thereby putting them in a position to be able to access mortgage facilities to buy these homes. Also, SALHOC is presently engaged in producing  low cost  building materials such as roofing sheets, stabilised soil  blocks and floor tiles.This new development will assist people in building afforadable  houses.