This case study explores role of mortgage liquidity facilities (MLFs) in housing finance in Africa using the Malaysian experience (Cagamas Berhad) and comparing it to that of Egypt, Tanzania and Nigeria. MLFs have traditionally provided funding and capital market access to primary mortgage lenders. Seen as less complex than securitisation, MLFs can play a critical role in establishing a more developed secondary mortgage market, including the development of securitisation. Thus, MLFs are more appropriate for emerging markets involving lower levels of transfer risk, and not linking bond issues directly to the underlying mortgages.
The Centre for Affordable Housing Finance in Africa commissioned this case study, which shows how MLFs help housing markets increase in sophistication, to contribute to the growing track record of novel solutions and initiatives, pioneered by policy makers, financiers, developers and households themselves that suggest that there are new opportunities for making the housing finance sector work for the poor in Africa. MLFs play a vital role as a centralised issuer of corporate bonds to mobilise long-term funding from domestic capital markets, but can also catalyse the development of the primary mortgage market.
Before the establishment of a MLF, consideration needs to be given to the nature of the domestic institutional investor base, the development of the private bond market and its ability to support cost-effective credit rating, bond underwriting, and servicing infrastructures. Also, there needs to be a sufficiently homogenous pool of mortgages to be underwritten under sound origination standards.
It’s important not to see liquidity facilities as a stepping stone for securitisation, as the case of Egypt clearly shows. Liquidity facilities are different from securitisation platforms or conduits in terms of risks and requirements. Usually a government sponsored conduit is not necessary to initiate securitisation as market entities can do this efficiently if there is sufficient demand and the right tax and regulatory environment. MLFs can have a big impact in developing the primary mortgage market, as shown in Egypt and Tanzania. Sometimes there is a need for refinancing to kick start the generation of mortgage assets onto banks’ balance sheets which can be used for refinancing. We hope that this case study, and the other case studies in the series, contribute to the development of imaginative solutions by housing finance practitioners across the continent, assisting them in adapting initiatives to manage the vast array of challenges they face daily.
This case study was prepared with the support of FSD Africa