Housing Finance in Sierra Leone

Introduction

Sierra Leone, in West Africa, reported a population of about 7. 1 million, a 43 percent increase and an average annual growth rate of 3.2 percent from the 2004 Census. The urban population is estimated at 40 percent. GDP growth was measured at 5.9 percent.  In 2015, the country was hard hit by the Ebola epidemic and the suspension of operations by major iron ore mining companies due to drops in global iron ore prices.  Mining companies are governed by the Local Content Policy which gives preference to local hiring, local products and services, which left many unemployed.  GDP growth in 2016 was at 6.1 and is projected at 5.4 percent in 2017.  Agriculture still stands as the biggest contributor to GDP as it makes up 71 percent, while industry (inclusive of mining) 7.9 percent and services 21 percent in 2016. The construction sector has been slowing down since 2015 to 2016, as it stood at 1.2 and 1.0 percent of GDP respectively.

The 2016 UNDP Human Development Index report has pointed out that despite recent economic growth, multidimensional poverty and inequality remains very high. The income poverty is 52.3 percent (those earning less than US$2/day), 77.5 percent of Sierra Leoneans are multi-dimensionally poor which is 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.[1]

 Sierra Leone’s fiscal deficit, as a share of GDP increased to 4.8 percent in 2015, owing mainly to three developments within this period: high expenditure on tackling Ebola, a remarkable slowdown of economic activities due to Ebola, and a significant lowering of mining revenue due to suspension of iron ore mining. The deficit reduced to 4.2 percent as a share of GDP in 2016 as the country struggled to revive from the economic crisis in 2015.

The inflation rate was estimated at 8.09 percent in 2015 and is rising quickly, standing at 17.41 percent at the end of 2016; and is currently at 19.14 percent in 2017.  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 remain key issues that the Sierra Leonean government must face if it is to maintain its growth levels. Unemployment which has remained unchanged from 2014 to 2015 at 3.4 percent, has however reduced to 2.99 percent in 2016. The Sierra Leone government has developed the Agenda for Prosperity Strategy to drive economic growth and employment in the country from 2013 to 2017.

An estimated 40 percent of Sierra Leone’s population live in urban areas with an urban growth rate of 3.04 percent estimated for years 2010-15. With the rapid spate of urbanization, the country has witnessed a significant explosion of urban centres especially Freetown, the nation’s capital which has led to the development of many informal settlements and slums in Freetown, with now over 30 informal settlements. This overcrowding has posed significant challenges to both local and national government authorities, and put enormous pressure on social service delivery. The Ebola outbreak brought slum conditions to the forefront as it made contact tracing of suspected Ebola patients insurmountable. 

Access to Finance

Sierra Leone is home to 12 commercial banks (eight Nigerian, one British 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).  With support from development partners, 59 Financial Services Associations and 17 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.  Out of all these financial institutions only few offer housing related loans, such as Ecobank and the housing finance companies.

At the end of the 2016 financial year, non-performing loans as a percentage of total gross loans increased to 30.67 percent from 18.15 percent in 2015, and the capital-asset ratio of the banks was 12.65 percent in 2016. Interest rate for loans in some commercial banks from 2000 to 2017 varies from 13 to 27 percent with an average of 19.75 percent, whilst commercial bank prime lending rates stood at 18.9 percent in 2016. The mortgage interest rate as of September 2016 was six percent at a 20 percent down payment.

The Sierra Leone Stock Exchange was established in 2001 as a private company.  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) were established in 2004 with a mandate to administer Sierra Leone’s National Pension Scheme. Under this programme NASSIT invests in housing finance and has been the key financier of Home Finance Company (HFC) Mortgage.  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 varying repayment periods, and lower deposit requirements for residents (for example, terms of 10 years are offered to non-residents whilst 15 years to residents).  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) at six percent.  The average 15-year fixed rate mortgage dropped from 4.10 percent in 2014 to four 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 for a period of 15 years. The ‘Buy Land and Build Own Home Mortgage’ product allows applicants to buy land for a maximum amount of US$10 000 and then provides a further US$30 000 to build. The minimum down payment for this programme is 20 percent of the cost of the land with a maximum term of 10 years each for a total of 20 years.  The builder and building plans must be approved by the bank; the land purchase requires the applicant to have secured title.

The Construction Finance Mortgage is targeted at estate developers for the construction of residential properties.  Maximum loan terms are 36 months and the developer must produce land title.  The Construction Stage Payment Mortgage provides construction finance for developers to complete homes for HFC customers, with maximum loan terms of 12 months. HFC Mortgage and Savings Company have as at 2015 financial year about US$20 million to operate its various mortgage and loan schemes and over 1 000 customers who have used or are using one of its eight mortgage products.  Other commercial banks too are also offering a variety of mortgage products to their customers.

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. Brac- SLE is reported to have the largest operational area, working in 11 out of 14 districts with 29 branches all over the country. With 35 173 borrowers, they have the most borrowers in the country. However, Ecobank and BRAC – SLE had the largest share of outstanding loans portfolio throughout 2016. The Sierra Leone Association of Microfinance Institutions (SLAMFI) was formed to promote the development of professionally sound and financially sustainable microfinance institutions (MFIs) through coordinated capacity building, dissemination of best practices, advocacy for a conducive microfinance environment, promotion of strong partnerships with donors, investors and other stakeholders, and the provision of the appropriate quality and variety of products and services that meet the financial needs of the economically active low-income people of Sierra Leone. The SLAMFI report for 2016 stated that the outstanding loan portfolio for all MFIs was almost US$64 million, with the highest amount been given out by Ecobank and BRAC – SLE of approximately US$19 million and US$11 million respectively.  Portfolio-at-risk over thirty days (PAR>30) stood at 11.144 percent in 2016. The Operational Self-Sustainability (OSS) for all MFIs in 2016, reported an average of 94 percent, however some institutions like ARD are way below the average while others like ACTB are above as their OSS stands zero percent and 14.8 percent respectively.

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 informal settlements in Freetown. The federation has been increasing its members from 1 500 to about 7 000 in just four years and more than 35 savings groups have been mobilised and federated into FEDURPSL[1]. These groups’ daily savings are contributing to the nascent trust fund known as Fordibambia Trust Fund (FTF).  FEDURP manages and resolves their self-initiated and self-supported micro-credit scheme. 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 settlements following the flooding disaster in September 2015[2].

Two development banks in the country, the National Development Bank and the National Cooperative Development Bank, 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 2017 Doing Business Report, Sierra Leone ranked 148^th, compared to the previous rating in 2016 of 145 in terms of ‘Ease of getting credit’ indicator. In terms of starting a business, Sierra Leone ranked 87^th in 2017 compared to 99^th in 2016.  The Credit Reference Bureau Act of 2010 has been adopted, which requires all commercial banks to reference it before approving loans to customers.  Borrowers can inspect their data in the public registry, and data on both firms and individuals are distributed.  Sierra Leone scores five out of 12 points on the ‘strength of legal rights’ index as it has been scoring since 2014. There is no collateral registry in operation in the country.

Housing Affordability

Housing affordability is a serious challenge in Sierra Leone.  The 2015 census reported that 8.6 percent of the labour force is unemployed; with an additional 31.4 percent of the working age population (15-64 years) non-economically active.  The smallest single bedroom housing unit includes a living room (parlour) with an estimated area of 20 m². The prevalent rental units are mostly two- and three-bedroom apartments with estimated area of 200 and 250 m² respectively.  Rents depend on the location, the exchange rate and price of land.  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 units range between US$3 000-5 000. The average rental prices for one- and two-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, and lack of adequate supply.  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 charged by banks in Sierra Leone on loans to prime customers was 22 percent (measured in 2015), making borrowing very expensive.  The average rate of savings remained at 6.4 percent since 2014. In the 2015 SALHOC survey, 70.5 percent of survey respondents stated that they find it very difficult to afford rental housing.  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 due to importation of most of the building materials. The average costs to build two- and three-bedroom flats are US$15 000 and US$25 000 respectively.

Housing Supply

Creating access to affordable housing remains a challenge for government, which is why housing is noted as a critical area with regards poverty alleviation. The 2015 census reported that the total stock of houses in the country is 801 417, with 61 percent in rural areas, and 39 percent in urban areas. The population per house is reported to be 8.8 persons, with an average 1.6 households per house.

A national survey conducted in 2015 found that 54.2 percent of households lived in separate houses, 20.6 live in flats or apartments.  Nationally, 71.1 percent of households were recorded as owner occupiers and 23.8 percent as renters. The quality of houses that most households live in is inadequate: 7.2 percent live in a house constructed with clay bricks, 14.9 percent in houses made with mud walls and 24.8 percent in cement constructed houses.  Those living in mud walled houses are vulnerable, as the country is prone to seasonal rains.  Many of these poor-quality houses are also built in environmentally challenged areas which have led to several landslides, mudslides and flooding over the years.  Housing supply has not kept up with demand, causing rentals to increase yearly and placing tremendous economic hardships on both middle and low-income earners who according to a 2015 SALHOC survey are spending over 40 percent of their earnings on housing.

NASSIT intends to support private developers to construct large scale housing delivery schemes for all income groups. The housing supply deficit has increased to about 500 000 houses. NASSIT has acquired land in all the four provincial urban towns and intends to roll out a significant number of housing units. The Sierra Leone Housing Corporation (SALHOC), the statutory body charged with the delivery of low cost housing, has developed strategic partnerships with private sector developers and international NGOs between 2014 and 2015. The Trillium project began in 2014 as a real estate and property investment business geared towards creating not only an attractive and conducive living environment for the people of Sierra Leone, but also aimed at creating jobs for the youth and skilled people, fostering wealth creation for cottage industries and the construction sector. HFC Mortgage has started funding a real estate developer known as Sparklight which is currently building about 50 low-cost housing units at Gloucester.

Property Markets

The World Bank’s 2017 Doing Business Report ranks Sierra Leone 163^rd out of 189 countries in terms of ease of registering a property, the same as 2016.  It takes 56 days to complete the seven procedures involved in registering a property, and costs 10. percent of the property value.

All land is registered with the Ministry of Land, Environment and Country Planning. Paramount chiefs and other community authorities are the predominant land owners. There are a few state lands which are under the custodian of the Ministry of Land. These traditional authorities allocate land-use-rights to extended families for further division among family members or lineages attached to a particular chiefdom. No significant land-related decision is final until the paramount chief approves.  This complex land tenure system has make acquiring land very challenging and rift with court cases.  However, a draft national land policy formulated in 2014, which is geared towards revolutionizing land ownership, use and management has received Cabinet approval and is now at the implementation stage. With no effective industry regulator, Sierra Leone experiences indiscriminate rental prices and the absence of a code of practice to guide proceedings. As a result, many urban dwellers have been priced out of the formal property market and as such resorted to building makeshift houses in slum areas. Mortgages exist but there are only a small stock of modern housing and other buildings, the real estate market is gradually becoming active as mortgages are becoming more popular with the public.

Housing Policy and Regulations

The 2004 Local Council Act gives local councils the right to acquire and hold land. Local councils have the responsibility for the creation and improvement of human settlements. It is on this basis that SALHOC has established working contacts with all the district councils to facilitate the process of acquiring land for its future low-cost housing projects.  Land titles in cities such as Freetown are delivered through a grant from the state or possessory title to state land based on adverse possession.

UN-Habitat together with the National Commission for Social Action, the Ministry for Lands, Housing, Town and Country Planning and Environment, and the UNDP, worked on a Framework for human settlement development to deal with the growing urban population in 2006.  The programme resulted to the following, a revised and updated national housing policy, an outline of a National Housing Programme and a Report on “Slums and Informal Settlements in Freetown” and a Concept Paper on “The Improvement of Slum and Informal Settlements in Freetown.

The World Bank also provided support for Sierra Leone through revisions and updates to the national housing policy, preparing the outline of a five to 10-year national housing programme and preparing a report on the slum and informal settlements in Freetown. The government however, through the Agenda for Prosperity is in the process of developing the requisite legal framework to get the public sector in the real estate and property business to work with private developers to harmonize and produce affordable housing schemes for all income earners. It should be pointed out all these plans are still in their embryonic stage as low-cost housing units from private developers will mostly be mortgaged whilst those that will be supplied by the government through SALHOC are highly subsidized by the government since they will be geared towards low and middle-income earners.

Housing Sector Opportunities

The business environment in Sierra Leone has been improving.  The ranking of Sierra Leone in 2016 was 145 and it currently stands at 148 in 2017.  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 most of the population. There has been significant movement and collaboration between SALHOC and other private sector developers to increase the supply of housing units, developed effective policies to regulate the real estate market. The country can now boast of about four private sector developers currently working in the real estate business with some having already constructed some housing units and others have already secured land and are on the verge of commencing construction work. The mining sector has resumed full scale operation and expansion, which is expected to increase urban incomes. thereby improving opportunities to access mortgage facilities to buy homes. Based on a SALHOC survey conducted in 2015, about 80 percent of the respondents stated their willingness to use the available mortgage to buy land and build houses. SALHOC is presently engaged in the selling of low cost housing building materials such as roofing sheets, brick and tile blocks at a very reasonable price. This development will assist people in building their houses at a more reasonable price than their competitors.