Housing Finance in Ethiopia

Introduction

Ethiopia is the second most populous country in Africa with an estimated population of more than 100 million people. Although classified as a low income country, Ethiopia emerged as one of Africa’s fastest growing economies, averaging 10.5 percent a year from 2004 to 2018.[1] The country’s real gross domestic product (GDP) growth is expected to drop from 9 percent in 2019 to 3.2 percent in 2020, due to the combined impact of COVID-19 and continued political unrest[2] The government has a strong development orientation, and ambitious projects coupled with elevated public investment and credit. However, in the 2020 fiscal year, the country’s public debt and fiscal deficit are forecasted to increase to 56.9 percent and -3 percent, respectively.[3] At a national level, effort is being made to broaden private sector participation and increase competitiveness.

Ethiopia was considered one of the least urbanised countries on the continent, but this has been rapidly changing. The country’s urban population was 21.2 percent in 2019, with an urbanisation rate of 4.9 percent. Rapid urbanisation has outpaced urban investment needs and development of infrastructure and service delivery.[4]  An estimated 1.2 million housing backlog[5] exists in the country with a projected demand of 655 800 housing units during 2015-2025.[6] As such, Ethiopia’s cities are characterised by little formal planning, an organic road network and widespread informal housing.

The largest industrial sub-sector, construction, which accounted for 12.5 percent of GDP in 2018 and is currently the largest employer, has underpinned Ethiopia’s high growth.[7] The government has invested significantly in social housing projects attracting foreign and local building contractors, and stimulating the expansion of integrated industries.

Ethiopia entered the COVID-19 pandemic with a strong growth rate, but real GDP growth is expected to decline from pre-pandemic estimates of 7.2 percent to 3.2 percent.[8] In the first quarter of 2020, inflation increased by more than five percent mainly due to a weakening currency and disruptions in imported food supplies and energy.[9] The African Development Bank estimates that reduced economic activity could result in up to 2.5 million job losses, putting Ethiopian livelihoods at risk. The economic contraction will likely have a negative impact on housing investment and delivery. The Government’s policy response to COVID-19 includes large fiscal stimulus packages, supported by international financial institutions, liquidity and macro-prudential measures to contain the effects on the banking system and employment relief measures to protect the private sector and vulnerable groups.  Overall, non-resource intensive countries, such as Ethiopia, are expected to be more resilient to the effects of COVID-19.

 

[1] World Economic Forum (2020). Ethiopia’s unconventional COVID-19 response. https://www.weforum.org/agenda/2020/06/ethiopia-covid19-response/ (Accessed 11 September 2020).

[2] International Monetary Fund (2020). Sub-Saharan Africa: COVID-19 An Unprecedented Threat to Development. IMF Regional Economic Outlook, April 2020. https://www.imf.org/~/media/Files/Publications/REO/AFR/2020/April/English/ch1.ashx?la=en Pg. 18.

[3] International Monetary Fund (2020). Sub-Saharan Africa: COVID-19 An Unprecedented Threat to Development. IMF Regional Economic Outlook, April 2020. https://www.imf.org/~/media/Files/Publications/REO/AFR/2020/April/English/ch1.ashx?la=en  Pg. 19.

[4] Terfa, B.K., Chen, N., Liu, D., Zhang, X., and Niyogi, D. (2019). Urban Expansion in Ethiopia from 1987 to 2017: Characteristics, Spatial Patterns, and Driving Forces. Sustainability, 11(10), 2973. Pg. 2.

[5] World Bank (2019). Ethiopia Urban Land Supply and Affordable Housing: Housing Deep Dive Report.

[6] Korea Development Institute (2018). Enhancing National Housing Development and Administration http://www.ksp.go.kr/english/pageView/publication-eng/620 (Accessed 27 August 2019). Pg. 30.

[7] Ethiopia Semonegma (2019). Challenges facing Ethiopia’s construction industry sector. 29 August 2019.  https://semonegna.com/challenges-facing-ethiopia-construction-industry-sector/ (Accessed 11 September 2020).

[8] African Development Bank (2020). African Economic Outlook 2020: Supplement Amid COVID-19. https://www.afdb.org/en/documents/african-economic-outlook-2020-supplement (Accessed 11 September 2020). Pg. 73.

[9] African Development Bank (2020). African Economic Outlook 2020: Supplement Amid COVID-19. https://www.afdb.org/en/documents/african-economic-outlook-2020-supplement (Accessed 11 September 2020). Pg. 15.

Access to Finance

The National Bank of Ethiopia (NBE) oversees banking regulation. Several financial inclusion indicators are improving. The percentage of adults with an account has risen to 35%, up from 22% in 2014. Account use has improved, with 26% of adults saving at financial institutions. Eleven percent of the population was borrowing from financial institutions in 2018, up from 7% in 2014. This means that most credit is sourced through informal channels. Only a few households have mortgage finance and the World Bank estimated in 2014 that mortgages represented only 1.87 % of the GDP of the country. Ethiopia also still lags on many indicators compared to its southern neighbor, Kenya, for example, which has two times more adults with an account.

There are 20 banks in Ethiopia. The state-owned Commercial Bank of Ethiopia (CBE) is the sole source of mortgage origination for the government-backed housing scheme, the Integrated Housing Development Program (IHDP). In 2017, the CBE held 69 % of the total mortgage market share by value, approximately 247 000 current mortgages, compared to the six largest commercial mortgage lenders and microfinance institutions (MFIs

As part of its efforts to deliver affordable housing, the state has made a significant investment in housing through the IHDP, estimated at Br 243.8 billion (US$5.6billion) over 15 years. Through the IHDP, and its linked mortgage facility, Ethiopians who qualify can access a more affordable mortgage facility. The lending rate is currently 8.3%for mortgage financing available to beneficiaries of the program. Commercial bank rates can be as high as 17%.

State-originated mortgages are based on four standard housing products: a studio apartment (32m2), and a one, two, or three-bedroom apartment (51, 75, or 100m2, respectively). Deposit requirements are between 10%and 40 % upfront, and loan terms are between 10 and 20 years, with larger units requiring higher deposits. Some commercial banks provide housing loans. Zemen Bank, for example, requires 20% of the price of the house as an up-front deposit, with another 20% saved over a six to 12 month period. The loan term is seven years. Dashen Bank allows for greater loan coverage, up to 90% of the house value, for salaried persons, with a much longer-term of 20 years. In both these cases, however, the ability to access these loans on these terms is a challenge for the majority. Only 16% of the population receives a formal salary, and households saving ability is limited. As a result, only a small number of mortgages, not more than 6000, are held by commercial banks.

There are 41 MFIs with nearly 1800 branches, 4.7 million borrowers, and 16 million accounts as of June 2021. MFIs hold more than 10 times the value of housing and construction project loans than banks. Loans offered by MFIs are cheaper with an interest rate of 14.3 % a year. Despite this, most households still depend on loans from friends and family.

The Ethiopian government has developed regulations to assist the financial sector to cope with the challenges of COVID-19. One set of these for the microfinance sector aims to allow them to manage customer debt. This includes restructuring and rescheduling loans for borrowers (applying to performing loans); suspending several directives that classify certain loans as sub-standard; regulating borrowing limits for borrowers, and even suspending the requirement for updating creditor information through the Credit Reference Bureau for borrowers

[1] Capital Ethiopia (2019). NBE repeals controversial bond bill. 25 November 2019. https://www.capitalethiopia.com/capital/nbe-repeals-controversial-bond-bill/ (Accessed 11 September 2020).

[2]Lakew, T.B and Azadi, H. (2020). Financial inclusion in Ethiopia: is it on the right track? International Journal of Financial Studies, 8(28). Pg. 2.

[3] Cepheus (2019). Ethiopia’s Banking Sector. https://cepheuscapital.com/wp-content/uploads/2019/01/Banking-Sector-Paper.pdf Pgs. 3 and 27.

[4] Gebremichael, T. (2020). Ethiopia: Foreign currency intermediation for domestic banks – a doubtful empowerment. 6 September 2020. All Africa. https://allafrica.com/stories/202009070784.html (Accessed 11 September 2020).

[5] Cepheus (2019). Ethiopia’s Banking Sector. https://cepheuscapital.com/wp-content/uploads/2019/01/Banking-Sector-Paper.pdf (Accessed 21 August 2019). Pg. 3.

[6] Reuters (2019). Ethiopia opens up banking sector to its diaspora. https://www.reuters.com/article/us-ethiopia-banks/ethiopia-opens-up-banking-sector-to-its-diaspora-idUSKCN1UQ1OG (Accessed 30 August 2019).

[7] International Monetary Fund (2020). IMF Country Report No. 20/29: The Federal Democratic of Ethiopia. Pg. 58.

[8] Kahsay, D. (2020). Ethiopia: Can mortgage banking help address Ethiopia’s rapidly growing demand for housing. All Africa. 25 July 2020. https://allafrica.com/stories/202007250109.html (Accessed 10 September 2020).

[9] Zamaro, Z. (2019). Financial Sector Liberalisation Curtails Industralisation. https://addisfortune.news/financial-sector-liberalisation-curtails-industralisation/ (Accessed 23 August 2019).

[10] World Bank (2019). Ethiopia Urban Land Supply and Affordable Housing: Housing Deep Dive Report. Pg. 43.

[11] Demirguc-Kunt, A., Klapper, L., Singer, D., Ansar, S., and Hess, J. (2018). The Global Findex Database 2017: Measuring financial inclusion and the fintech revolution. The World Bank.

[12] Wassie, S. B., Kusakari, H., and Sumimoto, M. (2019). Performance of Microfinance Institutions in Ethiopia: Integrating Financial and Social Metrics. Social Sciences, 8(4), 117.

[13]Ethiopia Semonegna (2020). New bank aimed at providing loan for housing construction set to enter market. 8 June 2020. https://semonegna.com/goh-betoch-bank-aimed-at-mortgage-banking-set-to-enter-market/ (Accessed 10 September 2020).

[14] World Bank (2019). Ethiopia Urban Land Supply and Affordable Housing: Housing Deep Dive Report. Pg. 43.

[15] Kahsay, D. (2020). Ethiopia: Can mortgage banking help address Ethiopia’s rapidly growing demand for housing. All Africa. 25 July 2020. https://allafrica.com/stories/202007250109.html (Accessed 10 September 2020).

[16] World Bank (2019). Ethiopia Urban Land Supply and Affordable Housing: Housing Deep Dive Report. Pg. 40.

[17] African Development Bank (2020). African Economic Outlook 2020: Supplement Amid COVID-19. https://www.afdb.org/en/documents/african-economic-outlook-2020-supplement (Accessed 11 September 2020). Pg. 73.

Affordability

 

Ethiopia is a low-income country with 13 % of the urban population living below the international poverty line, which makes it difficult for people access to housing. The state, through the IHDP-financed mortgage, is the main formal housing supplier in urban areas –provided through a lottery. This loan requires an initial down payment and monthly installments. An applicant (or their spouse) needs to have not owned a home, must be at least 18 years old, and lived for at least six months in the city.

A one-bedroomed apartment, with a 20% deposit for 15 years would require around Br1250 (US29) a month in installments. This is not affordable for households in the first five consumption quintiles. Such a unit may be more affordable if a large deposit, say 40%, is paid upfront. However, this would exceed the ability of most households, due to low savings. While IHDP houses have real affordability challenges and are unlikely to be serving lower-income households, they are in fact heavily subsidised. While the average cost of unit delivery is Br1 065 445 (US24382) 30 beneficiaries obtain mortgage loans for between 10% and 50 % of this.

Most urban households in Ethiopia rent (as high as 60% in Addis Ababa). Private rental often has multiple households and extended families and friends sharing single houses or urban house extensions. Rental costs range up to Br1 100 (US$25.2) a month. Kebele rental, a form of government-held housing unit that is low cost but also low quality, is a cheaper alternative, used by about one-third of urban renters. Kebele costs below Br 100 (US$2) a month. Competition for access to these units is stiff given their high affordability. Many IHDP beneficiaries also rent out their houses to generate revenue to pay the mortgage, and only 46 % of lottery winners move into their apartments.

The picture of the rental market is thus one of most households being unable to afford the private rental, limited access to kebele rental units, and most households opting for informal settlements.

[1] World Bank (2019). Ethiopia Urban Land Supply and Affordable Housing: Housing Deep Dive Report. Pgs. 12-13.

[2] Alemayehu, A. (2019). Why should Ethiopians care about urbanisation, jobs, infrastructure and formal land and housing. 27 March 2019. World Bank Blogs. https://blogs.worldbank.org/africacan/why-should-ethiopians-care-about-urbanization-jobs-infrastructure-and-formal-land-and-housing#:~:text=According%20to%20the%202015%20Ethiopia,in%20urban%20areas%20by%202028 (Accessed 11 September 2020).

[3] Lakew, T.B and Azadi, H. (2020). Financial inclusion in Ethiopia: is it on the right track? International Journal of Financial Studies, 8(28). Pg. 6.

[4] Franklin, S. (2019). The Demand for Government Housing: Evidence from Lotteries for 200 000 homes in Ethiopia. https://urbanisation.econ.ox.ac.uk/materials/papers/160/franklinjmp.pdf  (Accessed 11 September 2020). Pg. 8.

[5] Abiye, Y. (2019). Government Revises Selling price of Condominium Houses. 9 February 2019. The Reporter. https://www.thereporterethiopia.com/article/govt-revises-selling-price-condominium-houses (Accessed 10 September 2020).

[6] Franklin, S. (2019). The Demand for Government Housing: Evidence from Lotteries for 200,000 homes in Ethiopia. https://urbanisation.econ.ox.ac.uk/materials/papers/160/franklinjmp.pdf (Accessed 10 September 2020). Pg. 10.

[7] Franklin, S. (2019). The Demand for Government Housing: Evidence from Lotteries for 200,000 homes in Ethiopia. https://urbanisation.econ.ox.ac.uk/materials/papers/160/franklinjmp.pdf (Accessed 10 September 2020). Pg. 2.

[8] Amnesty International (2020). Ethiopia: Forced eviction in Addis Ababa render jobless workers homeless amid COVID-19. 29 April 2020. https://www.amnesty.org/en/latest/news/2020/04/ethiopia-forced-evictions-in-addis-ababa-render-jobless-workers-homeless-amid-covid19/ (Accessed 11 September 2020).

Housing Supply

Unmet housing demand is estimated at approximately 1.2 million, with 381 000 new housing units needed annually, and the stock combined to meet new housing demand and current stock upgrades rising to 486 000 annually to 2035. Only 165 000 units are produced nationwide annually.

The state-led IHDP has delivered over the years(between 25000 and 35000 housing units annually). However, it is not fiscally sustainable given the levels of subsidies. It also does not reach the required beneficiaries. Because the IHDP dominates access to land in urban areas, it has also contributed to the restricted supply of land for the private sector and household-led housing, as most of this is reserved for state-led developments. Only 7% of land in Addis Ababa was auctioned to the private sector between 2012 and 2017.

Up to 75% of rented units are provided by the private sector, with the state providing the remaining stock through kebeles. While rental is an important aspect of housing supply, the availability of rental units is constrained. There are more 360 000 kebele units, and most (95%) are in urban areas.40However, kebele housing stock is reducing, because some of its lands are prioritised for redevelopment due to its prime urban location. Such redevelopment disadvantages its occupiers because although they are allowed access to IHDP housing as an alternative, they often cannot afford it. A small amount of housing stock (24587 units countrywide) is rented out to civil servants through the state Federal Housing Corporation. This has a negligible impact on the market as a whole.

Finally, cooperative housing is another channel for housing supply and finance. It is not clear how much housing stock falls in this category: UN-Habitat states 28.2% of Addis Ababa’s total housing stock is made up of cooperatives, while the World Bank puts this higher at 50%. The state allocates land to housing cooperatives and, to qualify, a small number of individuals, commonly 10 to 20, none of whom already owns a home, must register as a group. The cooperative must have 50% capital upfront for construction before land registration, with the remaining 50% set aside prior to construction. The main challenge with cooperative housing has been its discontinuation and the perception that it is only feasible for wealthier households given the high savings requirements.

Land is a key constraint to housing supply and the state is the main producer of land for development, although this process is slow. Informal land development has been an inevitable consequence of restricted supply. Mushrooming peri-urban informal settlements and the increasing encroachment of settlements into farmland through informal conversions are common. The high demand means the cost of land in the informal market is up to four times that of the formal state scheme. Regulations around land development are also a constraint. There are minimum sizes for plot development and land use and building regulations permission processes are slow.

Coverage of the land registration system is poor and not always accurate inland rights in urban areas. This hampers the security of land rights and the ability to trade. Ongoing projects in urban areas to remedy this, through adjudication and registration, to create greater title certainly has, however, not performed well.

Foreclosures are allowed; however, concerns have been raised by banks that the leasehold system is not clear on the ability to repossess when the leaseholder has not met conditions tied to the lease.

[1] Kahsay, D. (2020). Ethiopia: Can mortgage banking help address Ethiopia’s rapidly growing demand for housing. 25 July 2020. All Africa. https://allafrica.com/stories/202007250109.html (Accessed 10 September 2020).

[2] Kahsay, D. (2020). Ethiopia: Can mortgage banking help address Ethiopia’s rapidly growing demand for housing. All Africa. 25 July 2020. https://allafrica.com/stories/202007250109.html (Accessed 10 September 2020).

[3]Mulugeta, T. (2019). Ethiopia: Housing corporation set to build apartments for Br2 billion. 14 September 2019. All Africa. https://allafrica.com/stories/201909180471.html (Accessed 10 September 2020).

Property Markets

Urban Ethiopians mainly live in rental units. As many as 54% of urban formal units across the country are rented, with Addis Ababa registering a higher number of more than 60%. Given the dominance of the IHDP in housing supply, the secondary property market is hugely influenced by units developed through this program. However, their restricted supply means that these units can fetch as much as five times the original purchase cost. Similar restrictions on land supply mean the ability of households to build.

heir own formal housing or contract small-scale developers to build housing is limited. This points to a property market that, while highly constrained at present, can be opened through correct policy interventions. This restricted supply and growing demand have played a major part in house inflation in the country.

[1]Seyoum, A. (2020). Ethiopia: Regulating housing sector. 1 February 2020. All Africa. https://allafrica.com/stories/202002010038.html (Accessed 11 September 2020).

[2] Capital Ethiopia (2020). New bill in process for real estate developers. 27 January 2020. https://www.capitalethiopia.com/featured/new-bill-in-process-for-real-estate-developers/#:~:text=A%20draft%20real%20estate%20development,assurances%20developers%20give%20for%20buyers. (Accessed 11 September 2020).

[3] Mwangi, N. (2020). Ethiopia announces 50% cut in rent due to COVID-19 pandemic. 10 April 2020. CGTN Africa, https://africa.cgtn.com/2020/04/10/ethiopia-housing-corp-announces-50-cut-in-rent-due-to-covid-19-pandemic/ (Accessed 10 September 2020).

Policy and Regulations

The Ethiopian housing market has had several comprehensive and recent reviews. The environment is mainly dominated by the state-driven IHDP. Closely linked to this are limited land sales to the private sector, a program of state-driven rental through kebeles, and civil servant housing that is struggling to meet supply. In urban areas, standards for the building sector are high for plot layout and sizes, and the system also labors under slow regulatory permission processes.

The main outcome of the reviews has been a set of recommended changes, which the state is still considering. Two main areas of change under consideration are the land supply system and, second, changes to the state-driven housing program.

As the sole supplier of land in urban areas, the state has struggled to meet the diverse and growing demand. To remedy this, significant policy and regulatory changes are necessary including facilitating greater access to land and housing for the private sector; encouraging private sector investment by improving lease conditions (terms, pricing, payment schedules, and tax structures); and expediting the implementation of a legal cadaster.

The state also needs to introduce measures that help the market accurately price land, help financial institutions assess the value of the proposed collateral, and help borrowers make educated decisions. Capturing greater value, for example through a transparent auctioning system, will allow the state to obtain resources to fund more infrastructure and subsidise the poor.

There is scope for the state to provide guarantee funds to support potential defaults for loans for lower-income earners. A mortgage refinance facility should also be considered. Easing regulatory mechanisms to allow pension funds to invest in capital market instruments have also been suggested.

 

[1] Ejigu, A.G. and Haas, T. (2011). Contextual Modernism and Sustainable Urbanism as New Housing Strategies. In 23rd Conference of the European Network for Housing Research, Toulouse, France 5-8 July 2011. ENHR.

[2] Tigabu, L. (2014). The Ethiopian Urban Land Lease Holding Law: Tenure Security and Property Rights. Jimma University Journal of Law, Vol. 6. Pg. 116.

Opportunities

Ethiopia’s housing demand is mainly met. Both ownership and rental housing have untapped potential for large-scale housing developers, as well as individual households looking to develop their own housing. The small number of mortgages, and low level of microfinance lending for housing, point to great potential for financing. However, these opportunities are dependent on progress by the state in implementing structural reform to improve the land and housing markets. Over the past five years, and in partnership with donors and multilateral agencies, a considerable amount of technical work laying out what needs to be done, including actionable road maps, has been completed. There is some progress in reforms including the liberalisation of the financial sector, and the IHDP is under review.

 

^[1] Beaugé, F. (2013). Addis Ababa is the showcase for Ethiopia’s economic great leap forward. 18 June 2013. https://www.theguardian.com/world/2013/jun/18/ethiopia-addis-ababa-middle-class (Accessed 5 October 2019).

Availability of data on housing finance

Like many countries on the continent, there is a noticeable lack of reliable data on demographics, land, and housing markets. The central Statistics Agency’slast comprehensive census was in 2007, which means any market analysis in urban areas is based on projections and does not reflect 13 years of shifting demographics in the country.

Land and housing markets require evidence-based policy and feedback mechanisms, especially if large-scale reform to programs such as the IHDP is needed. Mechanisms for this do not exist and should be developed within the lands, housing, and municipal agencies.

Market information is also necessary for developers and households to enable them to investigate and evaluate market trends. With more reliable data, the private sector will be more likely to introduce new products, develop greater efficiencies, and lower costs for housing. One more important data gap is related to regulatory financial data, held by the NBE. Currently, obtaining accurate disaggregated information on the housing finance market is difficult. Most of the data obtained in this work were from secondary sources, including work done by donors and multilateral agencies. This should be provided as public information by the regulatory bank, to improve the operations of the market.

^[1] World Bank Statistical Capacity Country Profile: Ethiopia. http://datatopics.worldbank.org/statisticalcapacity/CountryProfile.aspx (Accessed 5 October 2019).

Urban Informality

Approximately 65%-75% of the urban population in Ethiopia live in slums, with most households having poor access to basic services –95.9% have no access to standard sanitation, 64.1% do not have access to electricity, and more than 40%have no access to clean drinking water. Many of these slums develop as people in need of housing develop settlements in areas not demarcated and allocated for this by municipal authorities. Households, for a fee, will purchase land in peri-urban and former farming areas and build rudimentary housing.

Websites

National Bank of Ethiopia https://nbebank.com/

Commercial Bank of Ethiopiahttps://www.combanketh.et/

Central Statistics Agency of Ethiopia https://www.statsethiopia.gov.et/

Ministry of Urban Development and Construction http://www.mudc.gov.et/