Housing Finance in Somalia

Introduction

Somalia is located in the horn of Africa and is divided into three regions namely Puntland, Somaliland and South-Central Somalia. While all three regions belong to the country of Somalia, they are autonomously governed with each having their own governance structure. The country is slowly emerging from decades of violence and civil war. The formation of the Federal Government of Somalia in 2012 established the country’s first permanent government since 1991. In December 2016 and February 2017 parliamentary and presidential elections were held, however the political situation remains challenging.[1]

According to the World Bank, Somalia’s per capita income is only US$ 435, making it the fifth poorest country in the world. Approximately 51.6 percent of the population live below the poverty line and poverty is aggravated by the lack of a cohesive government, insecurity, and natural disasters such as floods and droughts.  Currently only 41.8 percent of school aged children are enrolled in primary schools and less than eight percent of secondary age children attend secondary schools. Almost 70 percent of the population are under the age of thirty, and the youth unemployment rates are estimated to be 67 percent. These compounding factors increase the youth’s vulnerability to militant groups and criminal activities.[2] According to UN Habitat, in   2015, Somalia was 39.6 percent urbanised but this is expected to increase to 44.6 percent by 2025.

Somalia does have substantial unexplored mineral deposits however agriculture and fishing are the main sources of employment. The Somali diaspora is the major investor in the country and is estimated to provide 80 percent of the start-up capital for small and medium sized enterprises.[3]  However, livestock remains the backbone of the economy and accounts for 80 percent of foreign exchange receipts and 60 percent of the population derives a livelihood from livestock production. Given the ongoing drought in Somalia, and the death of a large percentage of livestock, it is expected that in 2017 almost six million people (half of the country’s population) will require assistance, resulting in the need for a large humanitarian response.[4]

The Ministry of Planning and International Cooperation has almost finished developing the National Development Plan (NDP) 2017-2019, which defines Somalia’s short to medium term strategic direction, development priorities and proposed implementation mechanisms. The NDP is focused on improving basic health and education services, establishing sound and accountable institutions and rehabilitating productive infrastructure.[5] This plan provides a mechanism through which the local authorities and foreign donors can coordinate their projects. The IMF recently committed to a new 12-month Staff Monitored program from May 2017 to April 2018. This commitment will likely boost confidence and continue to catalyse donor support.

Access to Finance

For two decades since 1991, Somalia had been functioning without banks; all institutions that regulated the economy collapsed and the country was suspended from accessing global financial markets. In recent years, the banking system is starting to re-emerge. The formal financial sector is small and concentrated in Mogadishu with each institution having only a few branches in other parts of the country. It comprises of the Central Bank of Somalia (CBS), six banks with provisional licenses, and 12 licensed Money Transfer Operators (MTOs). An additional 13 applications for commercial bank licenses are pending.[1] Somalia’s six commercial banks include the International Bank of Somalia, First Somali Bank, Salaam Somali Bank, Somalia’s Premier Bank and Tawakal Money Express are all new players. The four Islamic financial institutions offering mortgage/home loans are Salaam Somali Bank, Dahabshiil Bank International, Premier Bank and International Bank of Somalia (IBS).

CBS’ balance sheet remains broadly stable with assets between US$71 million to US$73 million.[2] The CBS controls neither the exchange rate nor the supply of the Somali shilling (SOS). It has not issued any bank notes since 1991 and the bulk of payments are settled in US dollars, mobile phone platforms, and counterfeit SOS notes. Moreover, official international reserves are relatively low. [3] That being said, the CBS has been building its capacity and putting systems in place, so that it can, increasingly, play its conventional role in the economy. Commercial banking activities are being strengthened through the development of various frameworks, analyses and systems. The capitalisation of banks remains strong and their assets increased by 20.5 percent in 2016.[4] Industry capitalisation is about 40 percent, which meets the requirement that 40 percent of the weighted average assets owned by Somalia banks is financed by equity. All but one bank meets the minimum capital requirement of US$5 million.[5]

MTOs continue to dominate the formal and informal financial sector, and facilitate the transfer of remittances from the Somali diaspora, donor resources and foreign investments. It is estimated that these MTOs handle almost US$ 1.5 billion in annual remittances to Somalia.  To put this in perspective, according to the World Bank, Somalia’s GDP in 2016 was US$6.2 billion.

As stated by Premier Bank only three percent of Somalis are banked and a large informal financial sector exists.  There are no fixed income markets in Somalia and no formal credit facilities. Interestingly 70 percent of Somali people have access to mobile services and access to financial services in Somalia is largely based on innovative mobile telephony schemes.[6] Thus, the mobile telephone acts as a means to make financial transactions for many Somalis. Due to a lack of data, it is impossible to measure the percentage of Somalis that have access to these services. However, given the size of the remittance market, it is easy to infer that a large share of Somalis must have access to these basic services.

The informal Hawala system is used in Somalia, which comprises approximately 17 organisations, that operate based on trust. Some of which are: Dababshill, Amal Express, Kaah Express and North American Money Transfers. Mobile Money transfers are offered by Hormuud in Southern Somalia, Somtel in Somaliland and Golis in Puntland.

Access to finance by households is also enabled by a growing microfinance sector. Key players include Silatech, Kaah Express, Barwaquo Microfinance Bank, Kaaba Microfinance Institution (has 5 000 clients and is a field partner of Kiva) etc. Loans are offered for a period of up to six months. Microfinance facilities and informal facilitators charge between five percent – 10 percent commission.[7]  Alternatively, loans are also secured through family members.AFFORDABILITY

The effects of years of conflict and instability, are reflected as multidimensional poverty affects 61 percent of the population in urban households, and 95 percent of the population in rural households.  As mentioned previously, Somalia’s per capita income is only US$ 435.

In 2015, the average house price per square meter was US$ 250 and the average plot size is 400m^².[8] According to a recent news article, the price of the cheapest newly built house built by a developer in Somalia is US$ 70 000 with double storey houses costing approximately US$130,000.[9]  Assuming a mean housing price of US$ 100 000, this would be affordable to almost zero percent of the Somali population.  This house would cost, US$ 769 per month, and US$ 276 809 over the term, at an interest rate of 8.5 percent, zero percent deposit and repaid over a 30 year period.[10] Given that the average monthly salary after tax is US$ 225 illustrates how unaffordable formal home ownership is for the average Somali.

According to Numbeo, apartment rentals inside the city centre vary from US$50 to US$350 per month and between US$50 to US$150 per month outside the city centre.  While the current rental market is booming according to an article by The Somali Investor, rent has increased in some places from US$ 300 five years ago to between US$ 2 000 and US$ 3 000 in 2016. However, these figures are biased toward city and urban areas such as Mogadishu and Hargeisa.

Cement is expensive in Somalia, still costing about US$ 14 per 50kg bag. Using the GNI per capita of US$ 122.90, ± 8.8 bags of cement can be bought – far below the estimated 35-40 bags of cement that would be required to build a basic 40m² house. With 73 percent of the population earning less than US$ 60 a month, the affordability for formal housing is extremely limited.  And, for example, an income of US$ 60, one could afford a house priced at US$ 1 951, assuming an interest rate of 8.5 percent and a 30 year repayment period; this would be affordable to 69.2 percent of the Somali population.[11]

Housing Affordability

The effects of years of conflict and instability, are reflected as multidimensional poverty affects 61 percent of the population in urban households, and 95 percent of the population in rural households.  As mentioned previously, Somalia’s per capita income is only US$ 435.

In 2015, the average house price per square meter was US$ 250 and the average plot size is 400m^².[1] According to a recent news article, the price of the cheapest newly built house built by a developer in Somalia is US$ 70 000 with double storey houses costing approximately US$130,000.[2]  Assuming a mean housing price of US$ 100 000, this would be affordable to almost zero percent of the Somali population.  This house would cost, US$ 769 per month, and US$ 276 809 over the term, at an interest rate of 8.5 percent, zero percent deposit and repaid over a 30 year period.[3] Given that the average monthly salary after tax is US$ 225 illustrates how unaffordable formal home ownership is for the average Somali.

According to Numbeo, apartment rentals inside the city centre vary from US$50 to US$350 per month and between US$50 to US$150 per month outside the city centre.  While the current rental market is booming according to an article by The Somali Investor, rent has increased in some places from US$ 300 five years ago to between US$ 2 000 and US$ 3 000 in 2016. However, these figures are biased toward city and urban areas such as Mogadishu and Hargeisa.

Cement is expensive in Somalia, still costing about US$ 14 per 50kg bag. Using the GNI per capita of US$ 122.90, ± 8.8 bags of cement can be bought – far below the estimated 35-40 bags of cement that would be required to build a basic 40m² house. With 73 percent of the population earning less than US$ 60 a month, the affordability for formal housing is extremely limited.  And, for example, an income of US$ 60, one could afford a house priced at US$ 1 951, assuming an interest rate of 8.5 percent and a 30 year repayment period; this would be affordable to 69.2 percent of the Somali population.

Housing Supply

In 2014, the Federal Government of Somalia in collaboration with the United Nations Population Fund, reported that there were approximately 2 076 677 households in Somalia with an average household size of 5.9 people.[1]   Just under a quarter (24 percent) of the population has access to formal housing (60 percent in urban areas and six percent in rural areas)[2]. About 24 percent of houses in Somalia are constructed with durable materials and can be classified as permanent structures. Approximately 56 percent have walls or roofs constructed utilising semi-durable materials, the remaining 20 percent are categorised as temporary. In rural areas, 90 percent of households are owner occupied as opposed to 60 percent in urban areas. One in every four houses is rented in urban areas as opposed to one in every 25 in rural areas.  Additionally, one third of those households in urban areas had two or more families living in the same house, with more than half of them sharing a single roomed house.[3] Less than 60 percent of those residing in urban areas own the houses in which they live, versus 90 percent in rural and nomadic areas.

The UN Habitat has been active in Somalia for more than 30 years, their project activities range from targeting immediate local needs, to more strategic attempts to address sustainable urban development through integrated human settlement programmes. To date, UN Habitat has invested in 19 projects totalling US$ 49 million.[4] Some of their housing projects include, Shelter Provision, Reintegration, and Improved Livelihoods for Returnees and Internally Displaced Persons in three towns, this project is valued at US$ 3.2 million, and includes the construction of 475 houses.  Another project is Integration of Long-term IDPs into the Host Community in Bossaso, its project value is US$ 2 million, and 524 houses are planned.  And, lastly the Shelter Provision, Reintegration, and Improved Livelihoods for Returnees and IDPs project which is valued at US$ 2.3 million and 335 houses are planned.  These three projects are funded by the Government of Japan, and are intended to provide security of land tenure and permanent housing, social infrastructure, and skills training for 1 334 vulnerable IDP families in Bossaso and Berbera towns[5]

Salaam Properties, a development company, was established in 2014 with the objective of developing well designed, competitively priced houses in Mogadishu.  It is currently developing Darul Salaam City, the first large scale housing project in Somalia which will ultimately comprise 6 000 housing units, which will be constructed over a three year period, with a total project cost of US$ 20 million. The latest news reports mentioned that 500 units will be developed in the first phase of this project.[6]

Jazeera Estate which is being constructed in Mogadishu, 3 km from the airport. This gated development is proposed to have over 1 200 apartments, villas and townhouses as well as commercial and public facilities.  And, according to the Somalia Real Estate Association, the Jazeera and Darul-Salaam developments will add 10 200 housing units to Somalia’s housing stock.[7]  In 2015 South African based NGO, Gift of the Givers, renovated 47 rooms (three permanent residents per room) in a facility for disabled people in the Hamarweyn district in Banadir region.[8]

As the country stabilises, there appears to be increased construction activity and higher demand for construction materials.  Somalia’s construction sector is one of the three main drivers to its economic growth.  There are approximately 14 companies across Somalia which supply roofing and construction materials.  And, in 2015 a quarry that had been shut down for more than 30 years, due to security concerns, had  reopened.  The quarry, in Wadajiir district, provides jobs to truck drivers, manual labourers and machine operators.[9]

A key component of formal housing is cement and in 2012, it was estimated that Somaliland and Somalia imported 100 000 tons of cement. In June 2017, the government of Somaliland gave ownership of the Berbera Cement Plant to Red Sea Cement. This company is expected to renovate the abandoned 200 0000 ton integrated cement plant that will ultimately support the country’s economic ambitions.[10] While the Global Cement Report for Somalia suggests that the short term future seems bleak, various articles indicate that the construction market is booming due to the strengthening political situation.

Property Markets

Housing, land and property issues were central during both the pre-1991 conflict in Somaliland and the post 1991 conflict in South-Central and continue to be an obstacle for peace within the region. Prior to the conflict, Somalia had a mixed land tenure system in which some land was owned communally and administered through clan structures, and in urban areas some was owned privately and administered through the formal legal system. Land was nationalised in the 1970s and was considered a public asset held by the Government in trust for the Somali people. The uncertainty and insecurity created by this system meant that land was already poorly managed and the subject of frequent disputes. The period from 1991 to 2012 was marked with widespread conflict over land, land-grabbing by warlords and huge displacement of local populations, especially in South-Central Somalia. While there is more security in Somaliland, the movement of Internally Displaced Persons (IDPs) within the region and the return of refugees from outside the country has also contributed to significant land disputes. [1]

In many cases land is unregistered and ownership is difficult to prove without clan support. Protection of individual and collective ownership of land and other property depends entirely on clan support and/or the military might of related factions. For the first time in Somalia, title deeds have been handed over to 500 displaced households in Baidoa. This pilot project identified secure land tenure to protect people from evictions from IDP camps.  Still, there are cases of fraud and land being sold to multiple people.

In urban areas, the municipality also has the mandate to consider applications for land legalisation by individuals. While there is no functioning land registry in existence, people may legalise their interests in land through applying for a building permit. The building permit may be given for temporary or permanent purposes. A building permit issued for permanent purposes will be given only to those building a structure out of bricks, stones or concrete. These building and building material requirements have detrimental effects on security of land for poor and displaced people.[2]  It is only the mayor’s office which registers property and the procedure is cumbersome, given the lack of an electronic system and the loss of land document archives. Because the process of legalising interests in land is complicated, bureaucratic and expensive, most Somalis buy and sell land without going through a formal system.[3]According to the World Bank, registering a property entails fives procedures, takes 188 days and cost 1.5 percent of the property value. Officially, land registration in Somaliland takes approximately 30 days and costs about US$ 30, half the average monthly income.[4]

It should be noted that land grabbing is common in both rural and urban areas. Conflicts within rural areas occur due to Deegaan (refers to traditional ownership over land) and the guri/ galti dynamic (the relationship between the settled residents (guri) and the ‘outsiders’ (galti)).[5]

Housing Policy and Regulations

The overall Somali legal framework relating to housing and land is exceptionally patchy.[1]  In 1973, the Barre government apparently passed a Land Law relating to urban areas regulating the registration of urban land, although very little information about this exists. Then again in 1975, the Siad Barre government introduced the Land Law, which attempted to abolish customary ownership in rural areas and transfer ownership of all land to the state. Under the law, the only way to claim rights to land was through registration of leasehold titles, granted for 50 years. Most title documents held within the registry, over both rural and urban land, were destroyed in the post 1991 conflict. It is unclear whether the Land Law 1975 is in force today. It is probable that the 1973 law is not in force, given the limited information regarding its contents. During the stateless period, land management decisions were made at the local level by the controlling group of governor, or between competing informal authorities, as the need arose. The Transitional Federal Government stated that it would engage directly in land reform when it became stable. However, the new Federal Government currently lacks the capacity to draft and pass effective legislation in this area.[2]

Each autonomous region in Somalia have their own set of laws. Land administration in Somalia suffers from both a lack of proper policy framework and a multiplicity of overlapping laws and regulations. Responsibility for urban, agricultural and grazing land is divided between different Ministries which often do not have streamlined procedures and have low levels of cooperation and communication. These systemic weaknesses have added to and exacerbated a large number of land disputes in the country.[3]

In Somaliland the following laws deal with the allocation and registration of land: Agricultural Land Ownership Law (1999); Somaliland Constitution (2001); Urban Land Management Law (2001) and the Land Tenure Act (2009). The legal framework in place in South Central Somalia is similar to Somaliland, though it has not passed any laws relating to land since 1991. It is also less enforced due to the low capacity of the courts and the absence of Land Dispute Tribunals.[4]

Customary land ownership laws are still in use, and there is an urgent need to develop tenure security to attract further investment.  The legal framework for Somalia’s land tenure system is a mix of secular, sharia, and customary xeer law. In some parts of Somalia, the registration office has the authority to register ownership of land, land taxation, rehabilitating authorisation documents, building permits and inheritance certificates.  However these registrations are not widely practiced, as they are not compulsory.[5]

The Somalia Real Estate Association (SREA) was established in 2014, and its objectives are to provide professional assistance to the Somali real estate sector and to assist the government in establishing a proper regulatory framework.  The organisation aims to streamline the real estate sector, and draw together all those involved in the Somali real estate business, from land owners to developers.

Housing Sector Opportunities

In order to support Somalia’s flourishing entrepreneurs, a number of enabling reforms have already been developed and supported by the AfDB, IMF, World Bank, UN and bilateral partners.[1] These reforms include access to finance, sector regulation and better financial intermediation. The commitment to establish formal finance institutions and to operationalize the Central Bank will assist in creating a favourable investment environment. And, will further assist with the lack of formal credit facilities, and perhaps even the provision of mortgage loans and allow the private sector to add to the housing stock in Somalia. The thriving informal financial sector, as well as the strong presence of microfinance institutions, also creates a unique opportunity to support housing development.