On February 20, 2014, Sanusi Lamido Sanusi was suspended as governor of the Central Bank of Nigeria (CBN) in what is being seen as a political move. The naira dropped, stocks dropped, the bond market was closed, and interbank rates rose. Luckily, Nigeria’s S&P sovereign debt risk rating of BB- isn’t under review, but because the full impact on Nigeria’s debt rating and cost of capital is not yet known, financial markets in Nigeria are bracing themselves for an interesting 2014. We will return to this later.
The Nigerian Mortgage Refinance Company (NMRC) was launched by the Federal Government in January 2014. This is a very important move considering Nigeria’s huge population. With 170 million people, more than half of whom are below 25 years old, Nigeria’s housing market is exploding.
Better still for everyone, there is very little debt in the system because in the past, most Nigerians built houses the old fashion way – with savings. You buy the land in year one, having saved up for years to pay for it. Then you pay the surveyor, architect and town planners in year two, mostly out of your salary. By year five you pay for the foundation of your property. Slowly over the next two to 10 years, the building is completed with savings, salary and sometimes family donations.
Because of this model, most Nigerian households do not borrow to build. Only a very small proportion of Nigerian homes hold mortgages on their houses. As such, there is no debt to chain people with.
For this reason, the NMRC as a mass mortgage is a welcome development. However, this seeming monopoly will be privately owned and controlled. Effectively, the Nigerian government would be giving a private company an unspecified amount of government funds so that they can profit from lending the same money back to Nigerian citizens on the ground.
If a typical international bank is one of the shareholders of the key NMRC, it would make large profits as dividend. For example, putting in $100 million capital into the corporation and getting a 2-percent origination fee from raising a further $1 billion debt or equity and 5 percent dividend, it would gain approximately $20 million + $5 million. So, before we trade the debt, it makes $25 million on a $100 million very low risk equity capital, low risk because the Nigerian government is guaranteeing the company. It can potentially make over 25 percent return on its money in year one.
But there is much more. Banks are trading houses as well as investment advisors. Assuming that the average Nigerian mortgage is for $40,000 (N6.8 million), high-end Lagos homes regularly go for 10 times as much. If we build 1 million homes a year, it’s a $40 billion market. By lending and trading in US dollars for their convenience, profits of 1 percent on this new debt market will be $400 million. If a bank has 25 percent of this, it’s a $100 million profit, potentially making $125 million profit on a $100 million investment in a short space of time – supernormal profits.
There are also other potential income streams. For example, the NMRC may try to sell derivatives. This option is dangerous. A few decades ago an American investment bank destroyed the Ashanti gold-mining company under the supposedly watchful eyes of the Ghanaian regulators. So the new wholesale finance of Nigerian mortgages must be well managed and its risks assessed or it might not even benefit Nigerian banks or people enough in the long run.
For example, if international banks choose to trade this new mortgage debt only in dollars, they will slow local currency debt markets development in Nigeria.
Perhaps one or two regulators in Nigeria should speak up now while they can.
Surprisingly, the launch of the NMRC has not been passed as an Act or debated by the Senate. Seeing this, Sanusi pulled a brilliant move at the CBN. In 2012, there was a CBN draft (approved by Sanusi in March 2013) regulatory guidance paper called the ‘Regulatory and supervisory framework for the establishment of mortgage refinancing companies in Nigeria’. With this, Sanusi effectively removed the supposed monopoly of the NMRC.
An excellent first step allowing others to start competing mortgage refinance corporations. Even better, the framework restricted the sale of derivatives, saying under section 7.5: “At no time shall the MRC incur any foreign exchange, commodity, or equity risks, or use financial derivatives except as hedging instruments.” This was Sanusi standing up to powerful international bankers and consultants.
We need a wider look at savings-driven models of housing finance, because any majority privately-owned government-guaranteed model which maximises short-term profit as its core goal has risks.
Crucial questions exist. For example, if an international bank is about to make over 100 percent profit, why doesn’t it take risks in an NMRC without a government debt guarantee? Other models with locally-based banks or mutual/building societies have much better long-term risk management credentials and would help local banks and markets more. Why are they not being looked at? Surely, domestic banks or at least locally-based ones should have some competitive advantages so we develop our own markets.
Also can this Fannie Mae-style model (with unlimited government debt guarantees) be launched without an Act debated by senators?
The former head of the World Bank once said that African regulators were frequently unable to fully comprehend the complexity of institutional models suggested to them. Without safeguards, the NMRC may rob millions of Nigerians of billions of dollars for many years, and potentially hinder housing development, not help it. The Chinese rejected it in favour of a model with local authority debt guarantees.
I do not know if the alleged crimes Sanusi committed while governor of the CBN are true. However, in my opinion, he was a good regulator. If others do not speak up now on issues like the NMRC as he did, we will miss Sanusi and regulators like him much more than we can imagine.
Chidi Oti-Obihara
