- It is my great pleasure to deliver the keynote address at the 2015 Credit Underwriting Standards Workshop organized by the Nigeria Deposit Insurance Corporation (NDIC). It is pertinent to state that in the NDIC’s continued quest to effectively promote safe & sound banking practice as well as contributing to financial system stability, the Corporation provides avenues for capacity building and knowledge sharing on evolving global best practices on Mortgage Lending. This workshop presents such an opportunity as the Corporation is exploring avenues of instilling and deepening Credit Underwriting Standards in Nigeria.
- A Primary Mortgage Bank (PMB) is a company licensed to carry out the business of savings, mobilisation and granting mortgage loans for constructing of real estate for Individuals, Organizations and Government. A PMB is expected to source for savings from individuals, Cooperative societies, Organisations, etc. and utilise such deposits by providing mortgage loans.
Why do we require PMBs?
- Distinguished participants, Nigeria is faced with a myriad of challenges and foremost of them is inadequate credit facilities for Nigerians especially, of middle and lower incomes to fund their mortgage needs. According to the Federal Ministry of Housing estimate, Nigeria has about 20 million housing deficits requiring a funding of N59.5 trillion. Currently, the Nigerian mortgage contribution to GDP is a paltry figure of 1% compared to 29% and 25% recorded in South Africa and Malaysia. The yawning funding gap has been linked to inadequate funding window targeted at the “Bottom of Pyramid” component of the population such as women, rural dwellers, artisans etc. The deficit raises the question of how speedily we can bridge the funding gap?
Addressing the identified funding requires a multi-dimensional approach. In Nigeria, efforts made in this direction include the creation of Primary Mortgage Banks, National Housing Fund & Federal Mortgage Banks. Another step taken by the Government is the recent creation of the Nigerian Mortgage Refinancing Company with the initial equity of $300 million.
What are the recent regulatory & policy efforts to bridge the Mortgage Funding Gap?
- Under the 2013 CBN’s Revised Guidelines for Primary Mortgage in Nigeria, PMBs are allowed to perform duties such as acceptance of savings and granting of mortgage loans.
5.0 The NDIC is the Sole Agency empowered to Guarantee Depositors’ Funds in deposit-taking financial institutions in Nigeria, including MFBs. The NDIC, as an insurer, reimburses depositors of all PMBs up to a maximum limit of N200,000 per depositor per PMB in the event of failure of such. The new coverage level represents an increase of 100% over the earlier coverage level of N100,000. As a bank Supervisor, the Corporation protects Depositors by ensuring that banks’ affairs are conducted in a safe and sound manner. In addition to having the powers to prosecute erring Directors and Management of banks, the Corporation has also put in place a robust Customer Complaint Resolution Mechanism. Therefore, Depositors and stakeholders of PMBs have the confidence that their deposits and interests in the banks are protected at all times.
- Distinguish participants, the Nigerian Mortgage Refinance Company (NMRC) was established with $300 million initial equity to:
- Refinance Mortgages created by eligible mortgage lenders
- Develop the market by Standardizing mortgage practices
- Develop the secondary mortgage market
- Deepening capital markets by raising fund through issuance of high quality
The NMRC is a private sector driven company with the public purpose of bridging the funding gap for mortgages and providing access to liquidity and longer-term funds in mortgage market. The NMRC is being implemented as a component of Nigeria Housing Finance programme initiated by Federal Ministry of Finance, CBN, Federal Ministry of Lands, Housing and Urban Development and World Bank/Ifc. The Mortgage Refinance has proved a successful process in Jordan, Brazil, Colombia, Tanzania, Malaysia & Egypt.
- The Federal Government launched the first 10,000 mortgage, so far more than 66,402 applicants have applied. However, for PMBs to access the Refinancing Platform of NMRC, such institutions should demonstrate strong Credit Underwriting Standards.
Why should PMBs implement Credit Underwriting Standards?
- Credit Underwriting Standards are Guidelines established to ensure that safe and secure loans are issued and maintained. Such guidelines set benchmarks for how much debt to obligors, at what rate and tenor. It is important to stress that weak Corporate Governance and poor Risk Management frameworks can result in risky behaviours by the PMBs and this can result in the creation of huge toxic assets and ultimately put insured deposits at risk. Available records showed that PMBs Portfolio At Risk averaged 45.70% which was more than the prescribed 5% threshold. In its bid to clean the system, on 5th January, 2015, the CBN revoked the License of 21 PMBs and handed same to NDIC for Liquidation. Our attention is now being focused on the PMB sub-sector so as to address the emerging challenges, especially in Credit Underwriting Standards.
- PMBs in Nigeria can create significant impact if only they adhere to recommended corporate governance practices based on effective and sustainable risk management practices as instituted by the Regulatory Authorities. In particular, PMBs should be interested in enhanced Credit Underwriting Standards because their loan portfolios are on a variable rate and therefore sensitive to Monetary Policy Rate (MPR) fluctuations. For instance, an increase in the interest rate could make mortgage-loan repayment difficult and result in default which may give rise to toxic assets. Furthermore, new loans could become less attractive for small borrowers due to affordability pressures. Therefore, PMBs should be able to assess borrowers’ capacity and willingness to continue with loan repayments in the case of an interest rate rise. A lack of thorough and effective assessments could pose a major risk for the PMBs.
Ladies and Gentlemen, in Credit-Underwriting Standards, Macro-prudential issue is now a necessary issue for PMBs. The recent Austerity measure announced by the Federal Government is sequel to: (a) Drop in Crude oil price by 50% since June 2014 (b) Stagnant global economy growth in USA, China, European Union and Brazil, (c) Increasing US supplies of Shale oil, (d) Increasing oil supplies in Russian/NATO embargo on Russia, (e) Foreign Portfolio Investors reducing their exposure in the Nigerian market by 14% with the end of USA Quantitative Easing. The impact of the items highlighted on the PMBs operations must regularly be reviewed is setting up the desired Credit Underwriting Standards.
Complementary Regulatory Efforts.
- While I urge the NDIC Examiners to peer deeper into emerging risks at their various institutions, I want to assure you that both the CBN and NDIC are making concerted efforts to ensure that Credit Risk Underwriting Standards’ issues are continuously addressed. To this end, we are rapidly developing capacity in the implementation of Basel II and III, Enterprise Risk Management and Internal Capital Assessment Adequacy Planning (ICAAP) measures.
- At this juncture, I wish to reiterate the fact that the ability of the NDIC to sustain its efforts in ensuring that all insured institutions are put on the path of sustainable growth and development depends largely on strong ethical standards, verifiable skills and professionalism of the Examiners.
- Ladies and Gentlemen, the 2015 Workshop on Credit Underwriting Standard is organized by Rock Global. Experienced subject matter Experts on Mortgage Banking, Credit Underwriting Standards and Macro Prudential Supervision have been selected to add value to the presentation.
I urge you to take this opportunity and appreciate that the success of the training revolves around your constructive participation during the sessions. It is my sincere hope that you will find this workshop worthwhile and enriching.
Thank you for your attention.