How can we extend mortgage lending to the low income segment in Mozambique? Demystifying this issue is the first step.
Understanding to what extent one can extend mortgage lending to the low income segment in Mozambique, requires an understanding of how households finance their housing. This poses challenges for policy makers and other key stakeholders throughout the housing value chain. Recent results from the work on the Access Frontier can help demystify the challenges and opportunities in serving this market.
According to FinScope 2014, there are 14.43 million adults aged 16 or more in Mozambique; 54 percent are under the age of 35, typically regarded as the youth segment, the majority of them requiring an adequate shelter to live in. Two thirds of adults earn less than 5 000MT a month (roughly US$100). 17 percent of respondents could not or would not provide income data, perhaps meaning that they have irregular sources of income. FinScope 2014 also showed that adults in rural areas have, on average, lower incomes than those living in urban areas.
Mortgage finance, we are told, is the solution to housing finance, due to its suitable terms and conditions. This suggests that the question is: how developed is the mortgage market in Mozambique? It is worth mentioning that, based on the information available in the Access Frontier report, no adults claim to currently have a mortgage, but around 69 000 (0.5 percent) said that they have previously taken out a mortgage.
The Access Frontier Methodology developed by David Porteous enables an identification and quantification of access barriers. It segments those who do not yet use a product into three market zones, namely the market enablement zone (has access to the product but does not use it), the market development zone (does not have access to the product, that can be excluded by design and/or by default), and the market redistribution zone (does not have access to the product because they are too poor). Illana Melzer then extended this methodology to the housing finance sector.
Using FinScope 2014, FSDMoz commissioned the development of the Access Frontier specifically for housing lending. An example of a mortgage loan from a large commercial bank was used to establish levels of access. A basic product of a minimum loan amount of US$10 000 (estimated in 2014); with instalments made on a monthly basis via a direct debit from a bank account, with a loan term of 25 years, and a loan to value ratio set at 70 percent. The loan considered was for housing only, not land. The fees and pricing were also collected, as well as the requirements to get a mortgage loan product. As noted, less than one percent of Mozambican adults have access to this loan (and estimated households).
Based on the above explanation, it become clear that mortgage loans can have a limited contribution in solving the housing finance issue in Mozambique.
By defining the current housing loan market as composed of those who currently have a housing loan banking product or those that are currently borrowing money for the purposes of housing (build/rehabilitate a house, buy a house to live in, buy a house to rent out), the research, conducted by FinScope Mozambique 2014, has shown that in the current market, no one currently holds a mortgage credit product. Additionally, a small proportion of the market currently has a non-mortgage housing loan from the bank, i.e. 0.2 percent only in urban areas and no one in the rural areas. However, those in the market who claim to be currently borrowing money for housing reach 3.4 percent in urban areas and 1.7 percent in rural areas. These figures represent a very small market.
The market redistribution zone was not possible to be estimated due to the lack of indicators in the survey data relating to poverty and deprivation. However, the research explored what a household would need to access a mortgage loan, including requirements related to the borrower and to the property to be mortgaged.
In relation to the potential market, based on the typical mortgage loan product illustrated above, those individuals in the potential market must earn a personal income of at least 25,000 MT per month. Therefore, based on the results of the research, 92 percent of households cannot afford the minimum loan of 300 000 MT($6 000). This leads to the conclusion that the potential market is also very limited.
This is clear evidence that mortgage loans in Mozambique do not seem to be the solution for housing finance. The need to find innovative housing finance solutions is unquestionable, however. So, what would be the alternative solutions for housing finance? The answer to this question will require a collective effort for key players throughout the housing finance value chain.
The first step in that direction was a research conducted on the Housing Investment Chronicles in Mozambique, with the aim to provide an understanding of how, why, when and by what means low income households in Mozambique invest in housing; and to identify particular areas for intervention and research, to promote access to housing finance that is appropriate to low income households.
The Access Frontier study clearly demonstrates that for the majority of the population, alternative finance mechanisms should be designed. The extensive data available has also demonstrated that affordability, high levels of financial illiteracy, low levels of income and savings, and issues related to Know Your Customer, prevent the majority of population from accessing a mortgage loan.
Finally, it would be relevant to emphasize the importance of understanding how, why, when and by what means low income households in Mozambique invest in housing, in order to identify particular areas for intervention and to promote access to housing finance that is appropriate for low income households. This would help to demystify the notion that mortgage lending could be expanded to a relevant scale in Mozambique. One thing is crystal clear, however, and that is that finding alternative solutions for the housing finance challenges won’t be easy.