KEYNOTE ADDRESS DELIVERED BY ALH. UMARU IBRAHIM, mni, FCIB, THE MANAGING DIRECTOR/CHIEF EXECUTIVE OF NDIC AT THE NDIC’s YEAR-2014 SENSITISATION WORKSHOP FOR OPERATORS OF PRIMARY MORTGAGE BANKS (PMBs) HELD ON 22ND AND 23RD SEPTEMBER, 2014 AT FOUR POINTS HOTEL, LEKKI, LAGOS STATE.
1.0 It is my great pleasure to deliver the keynote address at this maiden workshop organized by the Nigeria Deposit Insurance Corporation (NDIC) with the theme: “Developing and Implementing Sustainable Effective Risk Management in Primary Mortgage Banks (PMBs) In Nigeria”. It is pertinent to state at this point 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 sound practice of banking in Nigeria. This workshop presents such an opportunity, and this year, the Corporation is beaming its searchlight on risk management in the operations of PMBs.
2.0 A Primary Mortgage Bank (PMB) is a company licensed to carry out mortgage financing, real estate construction financing, acceptance of savings and time\term deposits and acceptance of mortgage-focused demand deposits in Nigeria. Other functions carried out by a PMB are drawing from mortgage funds (e.g. National Housing Fund Facility) for on-lending and provision of financial advisory services for mortgage customers. A PMB is therefore expected to source for savings from individuals, organisations, companies and investment outfits and utilise such deposits by providing construction finance for developing houses and mortgages to people who want to buy such or any houses. In addition to that, all PMBs also have a responsibility of accessing the National Housing Fund (NHF) managed by the Federal Mortgage Bank of Nigeria (FMBN) on behalf of contributors who wish to apply for such mortgages from the FMBN.
Why do we require PMBs?
3.0 Distinguished participants, Nigeria is faced with a myriad of challenges and foremost of them is inadequate habitable houses for Nigerians especially, of middle and lower incomes. Estimates from the Federal Ministry of Housing puts the housing deficit at 17 million units with additional 2 million units added each year. The World Bank on the other hand, predicts that N59.5 trillion would be required to bridge/close this deficit put at more than 16 million houses. Currently, the Nigerian mortgage contribution to the GDP is estimated at a paltry figure of 1% compared to 29% and 25% recorded in South Africa and Malaysia respectively. The paucity of adequate housing has been linked to inadequate funding of infrastructure necessary for housing like motorable roads, water supply and power as well as inconsistency in land policies. The infrastructural deficit raises the question of how speedily we can accommodate Nigeria’s growing population.
4.0 Addressing the identified deficit requires a multifaceted approach especially in the area of funding. In Nigeria, efforts made in this direction include the creation of FMBN, National Housing Fund Scheme (NHF), and the licensing of PMBs. Another step taken by the government is the recent creation of the Mortgage Refinance Company of Nigeria (NMRC) in 2013 as an institution designed to bridge the funding gap of residential mortgages by promoting the availability and affordability of good housing through increased access to liquidity and longer-terms funds in the mortgage market. The PMBs are uniquely licensed to access funds from FMBN, NHF, NMRC and customers’ deposits to finance housing construction and development.
What are the recent regulatory & policy efforts to bridge the housing gap?
5.0 Ladies and gentlemen, before the recent recapitalisation requirement by the CBN, the PMBs were poorly capitalised and therefore weak with some having a capital base of N100 million or even less, which accounts for their inability to impact positively on the developmental efforts going on in the country. The Central Bank of Nigeria’s approach towards addressing this issue by sanitizing and strengthening the subsector resulted in the introduction a tiered capital bases for PMBs operating at different levels. These were N5 billion for mortgage institutions which wish to operate nationwide and N2.5 billion for those which wish to operate in a state. Under the new guidelines, PMBs would only be allowed to perform duties such as mortgage finance, real estate construction finance, acceptance of savings and time/term deposits, and acceptance of mortgage-focused demand deposits. The 2013 guidelines clearly streamlines the activities of a PMB to the provision of mortgage finance and exclude other related activities such as the provision of estate management duties.
6.0 The NDIC is the sole agency empowered to guarantee depositors’ funds in deposit-taking financial institutions in Nigeria, including PMBs. 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 PMB. The new coverage level represents an increase of 100% over the earlier coverage level of N100,000. The NDIC has developed and deployed a framework for Financial Assistance for PMBs so as to promptly intervene and assist the PMBs to overcome temporary liquidity problems. Supervision of PMBs is jointly carried out by both CBN and NDIC. 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.
7.0 Distinguished participants, the Nigeria Mortgage Refinance Company (NMRC) was established with $300 million initial capital to: (i) refinance mortgages created by eligible mortgage lenders; (ii) develop the market by standardizing mortgage practices; (iii) develop the secondary mortgage market; and (iv) deepening the capital markets by raising funds through the issuance of high quality long term securities. NMRC is a private sector-driven company with the public purpose of bridging the funding gap of residential mortgages and promoting the availability and affordability of good housing to working Nigerians by providing mortgage lending banks with increased access to liquidity and longer terms funds in the mortgage market.
8.0 The NMRC is being implemented as a component of the Nigeria Housing Finance Programme initiated by the Federal Ministry of Finance, the Central Bank of Nigeria (CBN), Federal Ministry of Lands, Housing & Urban Development (FMLHUD) and the World Bank/IFC. It is important to add that Mortgage Refinancing has proved a successful process in many countries such as Jordan, Brazil, Colombia, Tanzania, Malaysia, Egypt, Argentina, etc. albeit with differing refinancing terms and conditions from country to country based on their inherent economic factors. The main objective of the recent initiatives on mortgage and housing policies is to rejuvenate the housing finance market, where the ratio of mortgage finance as a percentage of GDP currently stands at 0. 5% and lags behind emerging markets like South Africa at 29%, Mexico at 10% and Malaysia 29%.
9.0 Ladies and gentlemen, as you can recall earlier in the year, the Federal Government launched the first 10,000 mortgages for affordable homes scheme under the Nigerian Housing Finance Programme. Applicants who meet the eligibility requirements will be handed over to the PMBs for final processing. The PMBs will originate the mortgages to be backed or refinanced by the NMRC. So far, more than 60,000 applications for funding under this scheme are being considered. However, for the PMBs to access the refinancing platform, the institutions are expected to demonstrate strong Credit Underwriting Standards underlying a robust Enterprise Risk Management practices that are capable of enhancing the eligibility criteria, structure of mortgage and terms of payment for the NMRC-assisted funding.
Why should PMBs develop and implement effective risk management systems?
10.0 Ladies and gentlemen, the recapitalisation of PMBs has resulted in some having national licences and mobilizing considerable deposits and creation of significant risk assets. The institutionalisation of NMRC as a wholesale financial institution which refinances portfolios of PMBs & DMBs, implies a shift of required core competencies of PMBs to areas like deposit mobilization, creation of risk assets, assets and liabilities management, risk management and financial regulatory compliance, as it is in the DMBs. The creation of the NMRC, a market of more than N59.5 trillion, as predicted by the World Bank and an ever growing population implies that PMBs are set to experience phenomenal growth.
11.0 Distinguished participants, you may recall that the global financial crisis of 2007-2009 was mainly due to the problems in the US mortgage sector. As we are well-aware, the mortgage markets are inextricably linked to the functioning of the economy, both in the US and worldwide. The US subprime mortgage crash, exacerbated by the interconnectedness between real estate and financial institutions, as well as poor corporate governance practices and weak risk management at many systemically important financial institutions, led to one of the biggest crisis the world has ever witnessed.
12.0 It is important to stress at this juncture 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. Given the recent regulatory efforts and the associated high cost of cleansing the system of toxic assets of DMBs through the Asset Management Corporation of Nigeria (AMCON), the supervisory authorities are deeply concerned about the build-up of toxic assets of the microfinance banks (MFBs) which stood at about 45.70% as at December 2013 as against the prescribed maximum of 5%. Our attention is now being focused on both the MFB and PMB sub-sectors so as to address the emerging challenges. Our efforts can only be successful if the operators can embrace good corporate governance and sound risk management practices. We cannot afford the repeat of 2008/2009 crisis.
13.0 PMBs in Nigeria can create significant impact if and if only they adhere to recommended corporate governance practices based on effective and sustainable risk management practices as instituted by regulatory authorities. In particular, PMBs should be interested in enhanced risk management standards because some mortgage portfolios are on a predominantly variable rate and therefore it is highly sensitive to interest rate fluctuations. For instance, an increase in interest rate could make mortgage repayment difficult and result in default which may give rise to toxic assets. Furthermore, new mortgages could become less attractive for consumers due affordability pressures. Therefore, PMBs should be able to assess a consumer’s ability to continue with mortgage repayments in the case of an interest rate rise. A lack of thorough and effective assessments could pose a major risk for many PMBs.
Complementary Regulatory Efforts..
14.0 While I urge the PMBs to look deeper into emerging risk management issues at their various institutions, I want to assure you that both the CBN and our self, are making concerted efforts to ensure that risk management issues in the financial system are continuously addressed. To this end, we are rapidly developing capacity in the implementation of Basel II and III.
15.0 Indeed, the NDIC has always placed a great importance on the design, development and implementation of sound risk management practices. The NDIC, through the risk-based supervision of PMBs and off-site surveillance, assist to ensure that PMBs are conducting their businesses in safe and sound manners.
16.0 At this juncture, I wish to reiterate the fact 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 the premium contribution by all the insured institutions. We have on our record that some PMBs are yet to meet their premium payment obligation as at when due. I therefore wish to appeal to you all to pay your annual premium promptly.
17.0 Ladies and Gentlemen, the Workshop for PMB Operators is organized to address some of issues highlighted. Experienced subject matter Experts and Discussants have been selected to add value to the presentations. I urge you to take this opportunity and appreciate that the success of the workshop revolves around your constructive contributions during the sessions. It is my sincere hope that you will find this workshop worthwhile and enriching.
Thank you for your attention.