Expanding Housing Finance in Uganda

Task 2: Study to examine the use of retail funds for mortgage lending

Final Report

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June 2009: VERSION 3.0

Authors: Michel Hanouch

Richard Ketley

Jessica Kramer

Christo Wiese

Genesis Analytics (Pty) Ltd Office 03, 50 Sixth Road, Hyde Park, 2196, Johannesburg, South Africa 2196 Post to: PO Box 413431, Craighall, 2024, Johannesburg South Africa. Tel: +27 11 994 7000, Fax: +27 11 994 7099, www.genesis-analytics.com

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PREFACE

This report forms part of a FIRST Initiative-funded study aimed at expanding access to housing finance in Uganda. The study comprises of 2 tasks. This report, addressing Task 2 of the study, specifically examined the potential use of retail funds for mortgage lending and put recommendations forward on options for extending the role of deposits as a funding source. Ideally, this report should be read in conjunction with the Task 1 report which endeavoured to design a Housing Finance Pilot scheme targeting low-income households.

Genesis Analytics was commissioned by the Urban Institute to undertake this Task 2 report. A Johannesburg-based economics consulting firm, Genesis provides diagnostics, policy advice, strategic direction, institutional design and implementation support in Africa and other developing countries.

Other parties involved in the study included UMACIS, UN-Habitat and the World Bank.

Special mention must be made to the Bank of Uganda, whose assistance and cooperation contributed to the successful delivery of this report. In addition, the IFC’s Uganda Primary Mortgage Market Initiative is acknowledged for their support throughout the study. Finally, we are grateful to Christo Wiese who provided invaluable input on bank regulation, and Sally Merrill (Urban Institute), Simon Walley (World Bank), Dr. William Kalema (UMACIS), and Douglas Diamond for their detailed comments on earlier versions of this report.

Richard Ketley

Director

Genesis Analytics

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TABLE OF CONTENTS

Preface i

TABLE OF CONTENTS ii

List of Boxes v

List of Figures v

List of Tables v

List of Acronyms v

EXECUTIVE SUMMARY VII

Overview of the FIRST Project in Uganda vii

Developing the Task 2 paper vii

Key Findings ix

Summary of Recommendations xi

Recommendations for external funding structure xi

Recommendations for regulatory modifications xi

1 INTRODUCTION 1

1.1 Background 1

1.2 Objectives 3

1.3 Scope and Approach 3

2 OVERVIEW OF UGANDA’S MACROECONOMY 4

2.1 Key Macroeconomic indicators 4

2.2 Population and employment 6

2.3 Macroeconomic Variables affecting affordability of Housing Finance Products 7

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3 DEMAND FOR HOUSING FINANCE 10

3.1 Income and Affordability 10

3.2 Availability of housing units 11

3.3 Alternative products to mortgage finance 12

4 SUPPLY OF HOUSING FINANCE 12

4.1 Brief overview and Key performance indicators of the banking sector 13

4.2 Players in the Market 14

4.3 Risk Management 18

4.4 Availability of long term funds within the banking sector 19

4.4.1 Core deposits at industry level 20

4.4.2 Core deposits at bank level 23

5 ALTERNATIVE SOURCES OF TERM FUNDING FOR HOUSING FINANCE26

5.1 Institutional investors 27

5.1.1 NSSF 28

5.2 Pension reform 30

6 OTHER FUNDING STRATEGIES 30

6.1 Retail sector 31

6.1.1 Savings linked to housing finance 31

6.1.2 Deposit insurance 32

6.2 Wholesale sector 32

6.2.1 Term funding 33

6.2.2 Securitisation 33

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6.2.3 Liquidity Backstop/Facility 35

6.3 Concluding remarks on Funding Structures 40

7 POLICY AND REGULATORY ISSUES 41

7.1 Liquidity 42

7.2 Reporting 43

7.3 Mortgage Legislation 43

7.4 Risk Weights 44

7.5 Micro Deposit-Taking Institutions 44

8 RECOMMENDATIONS 45

8.1 Recommendations for funding structures 45

8.2 Policy and Regulatory recommendations 46

8.2.1 Liquidity management 46

8.2.2 Reporting 47

8.2.3 Risk Weight 47

8.2.4 MDIs 48

8.3 Going forward 48

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LIST OF BOXES

Box 1: Housing Finance Bank 26 Box 2: Credit guarantees in Uganda 33 Box 3: Estimated rates of liquidity facility 38

LIST OF FIGURES

Figure 1: Key macroeconomic indicators 4 Figure 2: Key population indicators (left), age distribution (right) 6 Figure 3: Sources of income (left) and monthly income distribution (right) 7 Figure 4: The impact of interest rate and term length adjustments on affordability 8 Figure 5: Illustrating the impact of reference lending rates in South Africa 9 Figure 6: Identifying target markets for housing finance products 12 Figure 7: Sector growth versus nominal GDP growth (UGX bn) 13 Figure 8: Total assets versus total lending and housing finance book (for selected banks and MDIs) 16 Figure 9: Positions of players in the market 18 Figure 10: Key performance indicators of lending activities 19 Figure 11: Assets and Liabilities held by commercial banks (UGX bn) 20 Figure 12: Sources and Uses of LT funds generated from banks’* balance sheet (UGX bn) 21 Figure 13: The Ugandan yield curve (February 2009) and stock of Treasury Bills and Bonds 22 Figure 14: Yield to Maturity for a two, three and five year Treasury Bond (Primary market) 23 Figure 15: Core deposits: best practice versus current practice 24 Figure 16: Core deposits (best practice) versus mortgage/housing finance book (UGX bn) 25 Figure 17: Total assets of banking sector versus potential institutional lenders 27 Figure 18: Sources of fixed income and the impact of NSSF’s new mandate (UGX bn) 29 Figure 19: Loan to Deposit ratio 31 Figure 20: Mechanics of securitisation 34 Figure 21: Mechanics of a liquidity facility 35 Figure 22: Estimating the market demand for funds 38

LIST OF TABLES

Table 1: Characteristics of players in the market 17 Table 2: Core deposit base and method per bank 24 Table 3: Country examples of successful liquidity facilities 37 Table 4: Summary of potential funding structures 41

LIST OF ACRONYMS

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ALCO – Asset-Liability Committee BOU – Bank of Uganda DFCU – Development Finance Company of Uganda GDP – Gross Domestic Product FSA – Financial Services Authority HFB – Housing Finance Bank HFCU – Housing Finance Company of Uganda IMF – International Monetary Fund LT – long term MDI – Microfinance Deposit-taking Institutions MFI – Microfinance Institution NPL – non-performing loan NSSF – National Social Security Fund T-Bill – Treasury Bill T-Bond – Treasury Bond UBA – United Bank of Africa UGX – Ugandan Shilling UML – Uganda Microfinance Limited USA – Unites States of America USD – United States Dollar

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EXECUTIVE SUMMARY OVERVIEW OF THE FIRST PROJECT IN UGANDA

1. 1.1 Overview of the FIRST Project in Uganda

The objective of the FIRST Initiative project in Uganda is to expand the access of households to housing finance, especially modest and lower income households, via the introduction of innovative new housing loan products combined with affordable housing design. The project will deliver two studies to the Bank of Uganda:

i) This paper - a study addressing the financial and banking sector context for housing finance, liquidity and liquidity management, and the resultant potential for use of retail funds for mortgage lending; and

ii) A feasibility study for housing finance pilots targeted at modest and lower income households, seeking to introduce innovative loan products combined with lower cost house design in a planned urban setting.

These companion studies, designed to be read together, provide policy advice regarding liquidity, the regulatory framework for mortgage banking, and preliminary recommendations for pilot housing finance projects.

(i) Examining the Use of Retail Funds in Mortgage Lending. This paper assesses the ability of the banking sector to enable more long and medium term funds to be devoted to housing finance. In addition it provides an overview of the conditions facing mortgage lending, including macroeconomic constraints and the liquidity profile of mortgage lenders. A series of recommendations on regulatory structure for bank and MDI have been provided for BOU. The banks, MDIs, and MFIs most likely to lend to the modest and lower income groups are currently those with least liquidity. Thus, among other findings, the results support the need to provide enhanced liquidity for low and modest income housing, and a housing finance liquidity facility is recommended as a long-term goal. In the short-term, relaxation of the two-year lending cap imposed on MDIs will be necessary for the pilots.

(ii) Feasibility Study for Low Income Housing Finance Pilot Schemes. Expanding housing and housing finance in Uganda faces numerous barriers from both the demand and supply sides. The design of pilot projects to provide housing finance and low cost housing to modest and lower income groups is addressed in “Design of Pilot Projects for Low and Modest Income Households”1 and draws on findings from the above paper. It provides an overview of

1 See Sally Merrill, William Kalema, and Duncan Kayiira, “Expanding Housing Finance in Uganda: Task 1, Design of Pilot Projects for Low and Modest Income Households”, FIRST Initiative, June 2009.

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constraints to low income housing development and housing finance, and suggests pilot projects for assisting two groups that lack access to housing finance in Uganda: (1) the modest income group, or the “missing middle”, which is under the radar screen of banks providing mortgage loans, and (2) low-modest income households who do not have access to either mortgage loans or microfinance for housing.

The key focus of the pilots is development of affordable housing loan products for these groups, such as microfinance for housing and mini-mortgage. The pilots also focus on the supply side, with the goal of joining new loan products with lower cost housing so that the overall “package” is more affordable. The target household groups have not had access to affordable starter homes or incrementally built structures, as Uganda’s few developers tend to focus only on the high income market. A number of lenders have expressed interest in offering new loan products and participating in the pilots, and are joined by developers willing to provide designs for affordable housing. A second paper – the Business and Sustainability Plan - provides more detail for the pilot projects.2 A wide range of options for house size, infrastructure, and finishes are explored, thereby providing a good range of affordability options. Importantly, the recommended pilots are entirely market-based: they do not depend on finance subsidies, nor on funds for land or infrastructure. This ensures the sustainability of the model and enables it to be replicated and scaled up without the need for large budget allocations or donor funds.

Donor Coordination for Housing Development in Uganda. The FIRST project is part of a broader program of reforms to the financial sector being supported by the World Bank, the IFC, UN-HABITAT, and the Stromme Foundation. Most importantly, UN-HABITAT has been involved with the design of this FIRST study from its beginning and is continuing to provide assistance. UN-HABITAT is currently developing its own low income housing project in Uganda. In addition, at the request of our team, UN-HABITAT has conducted a study of savings plans to increase retail funds available for housing and provided many helpful comments on drafts of the Feasibility Report.3

IFC’s ongoing Uganda Primary Mortgage Market Initiaitve (UPMMI) project to assist the Ugandan mortgage market has provided assistance in understanding the mortgage sector, its challenges, recent reforms, and its players. The technical assistance to lenders and various mortgage support functions now being provided by IFC will remain an important aspect of improving the banking environment.

Other donors and NGOs are also seeking to improve the affordability of housing loan products and low cost housing. Introducing microfinance for housing into Uganda, one of the key goals

2 See Duncan Kayiira, William Kalema, and Sally Merrill, “Business and Sustainability Plan for Affordable Housing Finance Pilot Projects”

3 See UN-HABITAT “Savings Products for Low Income Groups”, and the ERSO Loan Agreement

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of this project, is also being supported by the Stromme Foundation, and it will be beneficial to coordinate these efforts.

DEVELOPING THE TASK 2 PAPER

This section of the project involved a study of the role of retail deposits in mortgage lending and how this role could possibly be extended to provide a larger source of term funding for banks. The key objectives of this report are as follows: i) to investigate the various options that could best extend the role of deposits for mortgage lending and ii) to review the liquidity management of both central and commercial bank(s).

In achieving our objectives, a review of the state of the “building blocks” needed to establish a healthy housing finance industry in Uganda, was undertaken. This included an in-depth analysis of the supply of, and demand for, mortgage finance in Uganda, as well as an assessment of the regulatory and macro-economic environment. It should be noted, however, that while a full understanding of the Ugandan housing finance market relies on thorough examinations of both the housing and financial markets, the analysis of the housing market fell out of the scope of this report, forming part of the Task 1 Draft report instead. The content of this report is based on data collected from numerous in-country interviews conducted with the central bank as well as the major players in the housing finance market. Data collected was further supported by a comprehensive desktop study.

Although this report was required to look specifically at the mortgage finance industry, subsequent research showed that it was appropriate to include other housing finance products into the analysis. It became apparent that mortgages are generally confined to an exclusive market, having little reach to the average Ugandan. Alternative, and sometimes less formal housing finance products such as home improvement loans, are better suited to the task of expanding access to housing finance in Uganda. Thus, when this report refers to the housing finance industry, it includes both mortgages and other types of housing finance products in the definition.

KEY FINDINGS

For every section there were a number of key findings, which are briefly summarised below.

Macroeconomic conditions

• Lending rates for mortgages are above 15 percent which has depressed demand for this type of product and made renting a more attractive option

• The large gap between the interest rate on financial savings and inflation strongly discourages savings in the formal financial system (and supports savings in the form of incremental construction instead)

Demand for housing finance

• Due to stringent loan criteria, only one percent of Ugandan households are currently able to afford formal mortgage products

x

• The large gap between the interest rate on financial savings and inflation strongly encourages savings in the form of incremental construction

• The large gap between inflation and the lending rate strongly discourages borrowing to speed up construction

• Demand for mortgages is further constrained by a lack of supply of good quality housing units at reasonable prices

• Given the low levels of income in Uganda, alternative products such as home improvement loans would complement the formal mortgage market well, specifically addressing the needs of the low income segment until some of the constraints to the formal mortgage market are addressed

Supply of housing finance

• The housing finance market is confined to a small number of players, which limits the benefits of competition in the sector

• More than half of the current supply of mortgage finance is through the HFB, which is funded exogenously to market conditions

• The loan to deposit ratio is growing, indicating a potential future shortage of deposits in the formal financial system which could force banks to increase the interest rates paid on deposits (which in turn could potentially positively impact the level of savings in financial institutions)

• With the mortgage market only offering a small margin above shorter term zero risk rated government securities, the latter is crowding out investment in the former

• The level of core deposits per bank, and the respective methods in which they are calculated, have little consistency

• Smaller banks suffer from liquidity constraints Alternative sources of term funding

• Insurance companies are a very small part of the financial sector • Traditional non-bank financial institutions in Uganda (such as NSSF and life insurance

companies) are limited by balance sheet constraints (and in the case of NSSF, investment mandates) and cannot currently be relied upon as a major provider of long term funding

Regulation

• BOU provides insufficient guidelines for how banks should calculate core deposits, nor does it make stress testing or contingency planning mandatory

• Statutory returns do not require for banks to report mortgage loans separately from the rest of the loan book

• Mortgages are 100 percent risk weighted, despite Basel 1 requirements of only 50 percent

• MDIs are restricted from providing loans with a term length of beyond two years

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SUMMARY OF RECOMMENDATIONS

RECOMMENDATIONS FOR EXTERNAL FUNDING STRUCTURE

Given the current market conditions the Bank of Uganda should give further thought to the introduction of an external funding structure in the medium term.

At present the key argument for an external funding structure revolves around the liquidity constraints that the smaller banks and MDIs are currently facing, coupled with their seeming inability to access the capital markets on viable terms on an institution by institution basis. This is in contrast to the bigger banks who i) are not currently liquidity constrained, and ii) are probably strong enough to issue unsecured medium-term bonds themselves.

Of the options commonly in use elsewhere, a liquidity facility is probably the most appropriate format. There are a number of reasons for this judgment:

• It has been successful in other emerging markets such as Malaysia and Jordan, and is currently on-trial in Tanzania

• It is a good vehicle for introducing a state guarantee on mortgage funding without exposing the state to moral hazard in mortgage lending (unfortunately, it can be turned to riskier purposes if not constrained sufficiently)

• It can significantly expand the mortgage lending of smaller banks and thus the degree of competition in the sector

• The alternative of a fully developed securitisation market is not viable in the foreseeable future

It should however be noted that given the expected demand for the facility (noting that only the smaller players are likely to make use of the facility in the short to medium term), the scale of the fund is insufficient to cover the overheads (at least for the first few years of operation). As such the Government of Uganda would most likely need to subsidise such a facility (at least for the short to medium term). It is therefore recommended that a thorough business case and financial model be undertaken to further gauge the viability of such a facility in the Ugandan context, prior to any decisions being taken.

There are also some other constraints to a liquidity facility which need to be taken into consideration. Perhaps the mostly pressing issue is the high returns currently available on Government Securities. Other constraints include the lack of an appropriate legal framework, the need for better liquidity management and finally, the underdeveloped capital market. RECOMMENDATIONS FOR REGULATORY MODIFICATIONS

xii

• To create consistency and reduce uncertainty around the ability of the banks’ balance sheets to provide long term funding, BOU could provide more detailed guidelines to the banking sector on how to reclassify demand deposits to core deposits in the maturity ladder

• The BOU should consider reducing the risk weight for private dwelling mortgage loans to 50 percent in line with Basel 1 requirements. This would allow for mortgages to consumer less bank capital for the same level of margin pickup and subsequently encourage banks to lend to the market

• To have better understanding (and control) of the market, BOU should require banks to report mortgage loans separately and in addition, distinguish between local and foreign currency loans

• The BOU should support the micro finance industry by relaxing term length restrictions of MDI loans, on the condition that the MDI can demonstrate that it has sufficient term funds and adequate ALCO processes in place

1

1 INTRODUCTION 1.1 BACKGROUND

This Task 2 report forms part of a broader FIRST Initiative project which aims to expand low income households’ access to housing finance in Uganda. The focus of this report is to examine potential avenues of expanding the use of retail funds for mortgage lending. In order to better gauge this potential, it is necessary to first understand the Ugandan housing and housing finance markets. With this in mind, this report will evaluate the state of the “building blocks” necessary to establish a healthy housing finance industry in Uganda, and in so doing identify the key constraints to the development of a housing finance market. Understanding these factors can assist in determining which of the constraints to the development of the market is the most binding in Uganda, thus requiring urgent intervention.

In particular, the building blocks that will be reviewed relate to:

• Macroeconomic stability:

− Is there sufficient monetary stability for home loans to be affordable at reasonable nominal interest rates?

− Are macro-economic conditions sufficiently stable that interest rates will not spike to the detriment of the bank and the customer?

− Is there limited crowding out of sources of (long-term) funding by the public sector?

• Demand:

− Can potential borrowers meet the minimum affordability requirements, especially given the current terms and interest rates?

− Can potential borrowers verify their income levels to the satisfaction of lenders?

− Is the house of sufficient “quality” to be used as collateral by lending institutions (i.e. typically, for a bank to accept a house as collateral, it has to be constructed on serviced land, be titled such that it can be owned and transferred, and be of sufficient quality such that it will tend to increase in value)?

− Are there sufficient customers with the income to afford the type of house that the banks will accept as collateral?

• Supply:

− Do potential financial sector players have access to long-term funding? − Can short term liabilities (often 90 percent of liabilities in many low income

countries) be converted into 10-20 year assets without contradicting asset and liability policies? (Or are banks confined to very small proportions of their overall balance sheets?)

2

− Can the banks offload their assets so that balance sheet capacity does not overwhelm their desire to participate in the market?

− Is there sufficient competition within the housing finance market to ensure that the benefits of competition are being realised (for instance price competition, competition re the term of the products offered, and competitive forces driving players to focus on lower income segments)?

− Are risk management capabilities at the relevant lending institutions sufficient to oversee mortgage portfolios, and sufficient to prudently manage the use of core or sticky deposits in long term lending?

• Policy and Regulatory issues:

− Is there any specific legislation governing housing finance? − How does the central bank treat housing finance from a regulatory

perspective with respect to reporting and risk weights? − Does the central bank provide guidelines for banks with regard to liquidity

management and the definition of core deposits? If so, are they appropriate?

In order to evaluate these “building blocks” in context it is necessary to understand the current Ugandan situation in terms of income, poverty and housing. At present the limited supply of low cost quality housing together with the low levels of income, exclude the majority of the country’s population from traditional mortgage products. According to a report commissioned by the FinMark Trust4, the majority of Ugandan households (i.e. approximately 60 percent) make a living from the informal sector and receive a monthly income of UGX 100,000 or less. Banks, however, will only supply mortgages to individuals who typically earn UGX 1 million or more. As a result, access to traditional housing finance products such as long term mortgages, are currently limited to the very few that can afford it. As this project is targeting the low income market, our focus will be on the constraints to the development of products that meet the needs of this market (income less than UGX 1m), although a description of the higher income markets and products is also provided.

The gaps in the “building blocks” which are identified in this report are likely to require action from all stakeholders. That is, while it is true that bank specific risks will mostly need to be ameliorated by effective management, policies and procedures within the banks themselves, external risks will require intervention from other role-players, including government and the regulators, employers, affiliated private sector service providers and funders.

4 (Kayiira & Kalema, 2008)

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1.2 OBJECTIVES

The key objectives of this report are as follows: i) to investigate the various options that could best extend the role of deposits for mortgage lending and ii) to review the current levels of liquidity management in the market.

The review of liquidity management will include the commercial banks as well as the policy guidelines from the BOU. With respect to the commercial banks, their current liquidity management policies will be assessed relative to the local market conditions and standard practice in other countries. It is important to understand the modelling that currently takes place with respect to liquidity management, and specifically whether it is based on the behavioural or contractual nature of the underlying accounts. With respect to BOU, the regulatory requirements imposed on the market with respect to liquidity management will be reviewed, again taking the local conditions and standard practice into account.

In terms of exploring options for extending the role of deposits as a funding source, this report will evaluate a number of options including the use of: housing savings products, depositor insurance, a liquidity backstop facility, and an improved liquidity management policy.

1.3 SCOPE AND APPROACH

To a great extent, the success of a mortgage market relies on key institutions in the housing market being in place. These typically include a land registry system that is uncontested, strong legal rights of the lender and an eviction process that is competent in the face of a borrower defaulting. In Uganda the latter two have generally received positive feedback but the land registry system has received some criticism from industry players, most notably for the length of time taken to process a transfer request. While it is acknowledged that a full understanding of the Ugandan housing finance market relies on thorough examinations of both the housing and financial markets, the analysis of the housing market fell out of the scope of this report, and can be found in the Task 1 Report instead5. In addition, although this report was required to look specifically at the mortgage finance industry, subsequent research showed that it was appropriate to include other housing finance products into the analysis. It became apparent that mortgages are generally confined to an exclusive market, having little reach to the average Ugandan. Alternative, and sometimes less formal housing finance products such as home improvement loans, are better suited to the task of expanding access to housing finance in Uganda. Thus, when this report refers to the housing finance industry, it includes both mortgages and other types of housing finance products in the definition.

5 That is, for a more thorough understanding of the Ugandan housing finance market, this report should be read in conjunction with the Task 1 report.

4

The remainder of this report is structured in the following manner: Section 2 will provide a macroeconomic overview so as to create the context from which the rest of the report is to be read, including a review of the macroeconomic conditions which are particularly pertinent to the housing finance market; Sections 3 and 4 will consider the demand and supply for housing finance, respectively; Section 5 will investigate alternative sources of long term funds in Uganda; Section 6 will provide an analysis of various funding strategies in order to establish which is best for the Ugandan market; Section 7 will review the regulatory environment, and where appropriate, making recommendations for improvement; and finally Section 8 will summarise the various recommendations made throughout the report.

The content of this report is based on information collected from numerous in-country interviews conducted with the major players in the housing finance market as well as the central bank. Data collected was further supported by a comprehensive desktop study.

2 OVERVIEW OF UGANDA’S MACROECONOMY

2.1 KEY MACROECONOMIC INDICATORS

Since the year 2000, nominal GDP has more than doubled its value, recorded at UGX 23,009 billion in 2007, with average GDP growth rates of 8 percent. The high levels of growth that Uganda has maintained for over a decade should create conditions in which the property market prospers.

Figure 1: Key macroeconomic indicators

Source: Bank of Uganda (2009), World Economic Outlook, IMF (2008)

2002 2003 2004 2005 2006 2007 20080%

10%

4%

14%

16%18%

2%

20%

12%

22%

6%8%

InflationLending rateDeposit rateT-Bill rate (91 days)

-11%

0%

2%

4%

6%

8%

10%

12%

0

5,000

10,000

15,000

20,000

25,000

30,000 Total GDP Real GDP Growth (%)

UGX bn

5

It should be noted however that while Uganda (and Africa in general) is not expected to be as hard hit by the global financial crises as some other geographies, Uganda’s growth forecasts have declined (along with those of other developing countries)6. The slowdown of growth can generally be attributed to shrinking export demand (especially from developed markets), lack of available cheap capital and falling commodity prices (on which many emerging economies are based)7. According to a recent country report by the IMF, Uganda is experiencing lower export growth despite a depreciation of the shilling – an indication of the impact of the global financial crises on the country. With respect to inflation Uganda has done well to consistently keep it within the single digit bracket since the 1990’s (in line with BOU’s mandate of ensuring price stability in the market). In 2008, however, inflation rose to 12 percent, fuelled by increasing international commodity and domestic food prices (the latter partly due to poor harvests and high demand) 8. The Treasury Bill rate has remained positive and averaged around 10 percent since 2004, although it increased during 2008 in response to rising inflation.

Both lending and deposit rates have remained relatively stable over the past six years resulting in a very substantial notional spread of around 18 percent. The consistently large spread indicates that the banks’ overall perception of the risk associated with their borrowing clients has largely remained the same. High lending rates can also be attributed to a high reference rate set by BOU (rediscount rate is currently 18.42 percent) and limited competition in the market (further discussed in Section 4).

With deposit rates consistently below the inflation rate, most savers in the banking system face negative real interest rates. In 2008, the real interest rate was approximately -11 percent. As long as negative real deposit rates persist, there is little incentive for the average Ugandan to save in the formal financial sector. Currently only 22 percent of the 71 percent of Ugandans that save tend to do so in formal financial institutions9 while the majority (71 percent) prefers to save in a ‘secret hiding place’10. Others prefer to direct their savings into incremental building. General reasons for not saving in the formal sector include, but are not limited to:

• An inability to access formal financial institutions due to geographic location • High costs associated with opening and maintaining a bank account • Perceived riskiness of institutions • Low returns (negative in real terms) • Savings tend to serve daily household requirements and emergency needs

6 According to the IMF, growth forecasts for developing countries have been cut by an average of nearly 3% for 2009.

7 See Stumble or Fall? (2009) Retrieved from The Economist: www.economist.com

8 BOU (2009)

9 Although seemingly a low volume, this does not reflect similarly on value – those who save with formal institutions are also likely to be the highest income earners

10 (The Steadman Group (U) Limited, 2007)

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2.2 POPULATION AND EMPLOYMENT

Figure 2 below describes Uganda’s population, indicating both growth over the past few years and projected age distribution for 2010.

Figure 2: Key population indicators (left), age distribution (right)

Source: UN (2007), IMF (2008)

0%

2%

4%

6%

8%

10%

12%

14%

0

5

10

15

20

25

30

35

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

PopulationPopulation GrowthUrban Population Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010

60.1%

37.6%

2.4%

>64

20-64

0-19

Millions

Years

In 2008, Uganda had a population of approximately 31 million and is expected to grow to 33 million in 2009. Furthermore, the population is becoming increasingly young and urbanised. In 2007 alone, the urban population grew at 13.5 percent, almost quadruple the overall rate of 5 percent. In addition, projections indicate that 60 percent of the population will be below the age of 20 in 201011. This indicates that demand for housing will increase as this section of the population grows, seeks employment and moves to urban areas. However, it is likely that only a few will be able to participate in the formal market given the low levels of income (discussed below).

11 United Nations 2007 percent 2008

7

Figure 3: Sources of income (left) and monthly income distribution (right)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

64%

31%

5% Formal Sector

InformalSector

InformalAgricultureSector

40.8%

21.5%

10.3%

7.2%

19.5%

0.6%

0% 10% 20% 30% 40% 50%

0 - 50,000

50,000 - 100,000

100,000 - 150,000

150,000 - 200,000

200,000 - 1m

> 1m

FinScope (2007), FinMark (2008) Source:

elow the level where they can secure mortgage financing in the formal market (see Section 3).

the interest rate and rm length in both the home improvement and formal mortgage market.

Approximately 64 percent of the population relies on the informal agricultural sector for income and approximately 62 percent earn less than UGX 100,000. As will be discussed later, these figures indicate that the income of the bulk of the population will fall b

2.3 MACROECONOMIC VARIABLES AFFECTING AFFORDABILITY OF HOUSING FINANCE PRODUCTS

Macroeconomic stability is critical for a successful housing finance market. In order to thrive the sector requires modest nominal interest rates which are stable and predictable. Obviously if the macroeconomic conditions are not conducive then other interventions to develop the market will have fewer efficacies. This subsection further examines the detrimental impact of higher interest rates and shorter terms on the affordability of housing finance products with the use of quantitative examples. Figure 5 illustrates the impact of changes inte

8

Figure 4: The impact of interest rate and term length adjustments on affordability Example 1 – Home improvement market: UGX 500k per month

Example 2 - Formal Mortgage Market: UGX 1m per month

2 yr loan @ 28%UGX 3,643,695

5 yr loan @ 24%UGX 6,952,170

10 yr loan @ 19%UGX 21,427,499

20 yr loan @ 15%UGX 30,377,271

Increase in the value of loan that can be afforded = 91% 42%

Increase in the value of loan that can be afforded =

ource: Genesis Analytics S

In example 1, a borrower who earns UGX 500 000 per month can almost double the value of

more reasonable levels.

his/her home improvement loan if the term is increased from two to five years while the interest rate is cut back from 28 percent to 24 percent. This can be similarly applied in the mortgage market where a borrower who earns UGX 1 million per month, can increase the value of his/her loan by approximately 42 percent if the term in increased from 10 to 20 years and the interest rate falls from 19 percent to 15 percent. Until then, however, it will remain substantially more attractive for Ugandans to rent and gradually save for property and materials (to build with) rather than to buy. For instance, if we assume that today’s rental yields are approximately 10 percent, the average Ugandan household12 would be able to a rent a property worth UGX 7 million (35 percent of monthly income13). That same family would need to sacrifice 33.5 percent of the value of house they live in if they opted to take out a mortgage instead14. Thus, the interest rate and lending term that can be supported by the banking sector are critical drivers of overall sector performance. However, it should be noted that while the term of the loan is important, the real benefit of longer terms will only be realised once interest rates fall to

12 Where average monthly income is UGX170,891 (Kalema & Kayiira, 2008)

13 Assumes that those that rent save 10 percent to buy property and materials to build (therefore the difference in the value of rental affordability versus mortgage affordability is conservative)

14 When purchasing a house for UGX4,8 million and assuming 45 percent of income will be spent on mortgage repayments. These calculations have been based on the following assumptions:

I. Average household income of UGX170,891 (Kalema & Kayiira, 2008) II. 35 percent of monthly income spent on rent

III. 10 percent of monthly income invested in property and materials for building purposes (when renting) IV. Therefore between 35 percent and 45 percent of income would be available for bond (35 percent from rent

and 10 percent from building) V. Mortgage term of 15 years

9

With nominal lending rates at their current level, most consumers will probably feel that housing finance is too expensive. Typically, if lending rates are expected to remain above 15

igure 5: Illustrating the impact of reference lending rates in South Africa

percent in the short to medium term, demand for these types of products will remain muted. Figure 5, provides an example from South Africa showing how mortgage lending accelerated very rapidly when nominal lending rates fell below 15 percent.

F

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

ource: South African Reserve Bank (2007) S

hile this is merely one example, experience from other developing countries supports the view that mortgage lending tends to remain stifled until nominal lending rates drop below a

W

critical point, believed to be in the region of 15 percent15. In Uganda, as Banks are currently providing mortgage loans at between 17 and 19 percent, the mortgage market suffers from relatively few people wishing to take on a 20 year obligation at this rate. Banks interviewed in Uganda confirmed that affordability of mortgages was a binding constraint and thus demand at current rates was limited.

15 More research is required to determine the exact interest rate below which mortgage lending tends to take off, however there is sufficient evidence to support the fundamental point, which is that mortgage lending is unlikely to significantly increase while interest rates remain as high as they are in Uganda.

Nov

-00

Apr-

01Se

p-01

Feb-

02Ju

l-02

Dec

-02

May

-03

Oct

-03

Mar

-04

Aug-

04Ja

n-05

Jun-

05N

ov-0

5Ap

r-06

Sep-

06Fe

b-07

Jul-0

7

Real growth in mortgages y/y%

Reference lending rate

Inflation rate

10

3 DEMAND FOR HOUSING FINANCE The demand for mortgages or alternative types of housing finance is determined by several factors. Typically, these factors include income verifiability of the borrower, affordability levels of the borrower (given the term structure of the loan) and finally, the type of property that is available in the market. This section will explore these factors in the context of Uganda.

3.1 INCOME AND AFFORDABILITY

As noted in Section 2, Uganda is characterised by a young and increasingly urban population. Even though this would suggest that demand for housing (and subsequently housing finance) is significant and will continue to grow, banks will only lend to customers who can afford high quality collateral. More specifically, in order for banks to provide mortgage financing they require:

• Collateral that is: − Of sufficiently high quality to last the duration of the loan period (this

ensures that in a default situation, banks can recover their full outstanding debt amount)

− Available for transfer (i.e. land which is titled and buildings that are built with durable certified materials)

• Income that is: − Sufficient to repay monthly instalments (approximately 35 percent of

salary) on the loan Accordingly, demand for formal mortgage finance is severely constrained to individuals with verifiable income at the very top end of the market. According to a report commissioned by FinMark16, individuals would have to earn at least UGX 1 m per month to apply for a mortgage which implies that not even 1 percent of Ugandan households have access to this product. When taking housing finance products of MFIs and MDIs into account (which are much less stringent on loan criteria) the vast majority of Ugandans still go unserved. The home improvement market can potentially reach households which have income of UGX 200,000 or more, 20 percent of total households meet this income requirement17.

16 (Kayiira & Kalema, 2008)

17 It should be noted, however, that income tax evasion (supported by employers) is widespread and promotes income under-reporting, thus undermining the ability of financial institutions to verify accurate income levels. This topic is further explored in the Task 1 report.

11

At this point, it should be noted that Uganda’s mortgage market is not vulnerable to a subprime crisis18 purely because it does not cater for a subprime market. As noted in the previous paragraph, local banks will only lend to households in the very top end of the market which are typically ‘superprime’ candidates.

3.2 AVAILABILITY OF HOUSING UNITS

Figure 6 shows the different housing market segments that exist in Uganda, based on the level of income of an individual and the quality of land and buildings on which a loan will be taken out. Being the most stringent, the mortgage finance market requires for both income and collateral to be attractive. The rest of the market can be defined as a home improvement/completion market (which does not employ as rigorous collateral and income verification requirements), and is occupied by individuals who either earn a sufficient level of income but are unable to verify it or are constrained from entering the mortgage market due low quality collateral. The current mortgage finance target market is perhaps smaller than it should be and could potentially expand into the home completion/improvement target market if more low cost quality housing was available. This would effectively increase the size of the potential market by increasing the stock of quality housing and decreasing the income required to afford such housing. As depicted in the figure, this will only address the constraints to servicing certain segments of the market. More extreme measures would be required to get to a situation where housing finance were available to all. For instance, costly state intervention would be required to include very low income individuals in the housing finance market.

18 The subprime crisis has resulted in numerous borrowers (in mainly developed markets) defaulting on their mortgages. This is primarily a result of financial institutions lending to people that cannot afford the loan in the first place.

12

Figure 6: Identifying target markets for housing finance products

Source: Genesis Analytics

Collateral unattractive

Income & collateral attractive

Income & collateral unattractive Income unattractive

Quality of land & buildings

Inco

me

Current target

market forMortgage finance

Home Completion/ Improvement loan

State interventionRequired (site & servicing)

Market for mortgage finance expansion

High

High

Low Low

3.3 ALTERNATIVE PRODUCTS TO MORTGAGE FINANCE

The home improvement loan market is serviced by smaller banks and Microfinance Deposit taking institutions. Less strict on income certification and more flexible on what constitutes collateral, these products have greater reach. Typical customers would include those Ugandans who, through saving informally, build their homes incrementally with the hope of one day securing a home improvement loan to complete the construction. The customer base for this product comprises of at least 12,000 individuals with active loans, compared to the 4,000 who have managed to acquire mortgage finance19 (see table 1 in Section 4).

4 SUPPLY OF HOUSING FINANCE Like demand, the supply for housing finance products has several determinants. The quantity supplied depends on the depth of the financial sector in general and the stability of funding sources. The rate and other terms of lending depend on the level of competition in the sector,

19 Bank interviews (2008)

13

the current and expected rates on competing investments, and the risk management capabilities of the suppliers. Accordingly, this section will provide an overview of the players in Uganda and how each of the above determinants affects the ability of the players to effectively serve the market.

4.1 BRIEF OVERVIEW AND KEY PERFORMANCE INDICATORS OF THE BANKING SECTOR

Between 1998 and 1999, the Ugandan banking sector underwent significant reform when a number of local banks were declared insolvent and consequently bought, liquidated or placed under management of the Bank of Uganda. The most notable failure was that of Uganda Commercial Bank, which at the time, was both the market leader and the largest local commercial bank. UCB was subsequently acquired by Stanbic, which is now the current market leader. The banking crisis brought on a moratorium on the establishment of new banks in 2004, which was only lifted in December 2007.

Since the lifting of the moratorium, the banking sector has seen notable growth with the entry of several commercial banks including regional players (such as Equity Bank, Fina Bank and Kenya Commercial Bank) which has contributed to the competitiveness and efficacy of the market20. Today the banking sector comprises of 16 banks, four of which are large international banks namely Stanbic, Stanchart, Barclays and Citibank.

As shown below the banking sector (measured by total assets) is growing faster than GDP with loan growth exceeding that of the sector as a whole.

Figure 7: Sector growth versus nominal GDP growth (UGX bn)

Source: BOU (2008), UBOS (2008)

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

500

1,000

1,500

2,000

2,500

2003 2004 2005 2006 2007 2008

Loans Loan growth (%) 91 day T-Bill rate (%)

0%

5%

10%

15%

20%

25%

30%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2003 2004 2005 2006 2007 2008

Total Assets GDP growth (%) Total Asset growth (%)

Loan CAGR = 29.7%

GDP CAGR = 14.6%

Sector CAGR = 18%

20 However there is clearly still much progress to be made (as illustrated by the limited participation in the housing finance market).

14

This has resulted in an increase in the loan to GDP ratio over the last few years, as well as an increase in the loan to deposit ratio21. If the loan to deposit ratio continues to increase in this manner, banks may soon start to pay more competitive rates for deposits, as their demand for liabilities increases.

Figure 7 also illustrates that as the Treasury Bill rate has decreased (thus decreasing the relative attractiveness of Treasury Bills) lending has increased in the banking sector22. In the last year, however, the Treasury bill rate has increased in line with inflation and could possibly continue to rise if inflation is not brought back under control. In the event that Treasury bill rates do continue to rise, banks may reduce lending in favour of risk free government securities, with clearly negative consequences for housing finance.

In the last year, however, the Treasury bill rate has increased in line with inflation and could possibly continue to rise if inflation is not brought back under control. In the event that Treasury bill rates do continue to rise, banks may reduce lending in favour of risk free government securities, with clearly negative consequences for housing finance.

4.2 PLAYERS IN THE MARKET

More than 50 percent of Uganda’s banking sector is dominated by three banks. While total assets of the sector is worth UGX 6,788 billion, Barclays, Standard Chartered and Stanbic account for UGX 3,567 billion. Although all of the big three have notional exposure to the market, Stanbic is the only bank that is significantly committed to providing mortgages. The other major players in the formal market are HFB and Development Finance Company of Uganda Bank (DFCU) which provide mortgages to non-bank employees, while one smaller bank (Centenary) offers home improvement loans. The history of HFB and DFCU is useful to gain a better understanding of the current market dynamics and how these institutions came to participate in the mortgage market23:

• HFB originated in 1967, when the Housing Finance Company of Uganda was formed as a mortgage lending institution with the National Housing and Construction Corporation and Commonwealth Development Corporation as 50:50 shareholders (CDC subsequently sold their share to DFCU Ltd24 in 1984). As traditional lines of credit diminished, there was a need to mobilise retail deposits for on lending. As a

21 According to FinMark (2008), between 2002 to 2007, mortgage finance increased from UGX 32.4 billion to UGX 190 billion respectively. In 2007, total loans were valued at UGX 2,173 billion, with mortgage finance contributing approximately 8 percent to total loans, a fairly small proportion.

22 Increased lending was further supported by the increasing spread between the lending rate and the Treasury Bill rate in recent years (previously illustrated in Figure 1 in section 2.1)

23 This following is based on a discussion with Dr William Kalema, an expert on the Ugandan banking industry.

24 Note that DFCU Ltd is not synonymous with DFCU (the bank)

15

result, HFCU applied for a banking license in 2007 and subsequently changed its name to Housing Finance Bank (HFB). Shareholders of HFB include the National Housing and Construction Corporation (a parastatal involved in real estate business) (5%), NSSF (50%) and the Government of Uganda (45%). Today, HFB is a mortgage finance company in the process of becoming a fully-fledged commercial bank. Because HFCU was the only source of mortgage lending in Uganda for many years, HFB has inherited a large mortgage book and as a result become the largest mortgage finance player25. The bank, however, is still constrained by lack of long term funding and a small capital base.

• DFCU also has its roots in the mortgage finance market. After having shares in HFCU for 20 years, DFCU Ltd sold its stake to NSSF in 2003 with the intention of supporting and growing its own mortgage business. DFCU Ltd entered the mortgage market because, based on its track record as a lender, it could access various lines of credit and could potentially make a good margin on mortgage loans. Thus DFCU Ltd, not being a bank itself but rather a non-bank institution, bought a small bank (formerly Gold Trust Bank) in 2000 and renamed it DFCU Bank Ltd. Between 2007 and 2008, the entire portfolio of DFCU Ltd was transferred into the bank, along with the various credit lines. Currently, DFCU Bank remains committed to perseveres in growing its mortgage book.

With the exception of Stanbic, the large commercial banks have shown little interest in the mortgage finance market. Their participation has been negligible for a number of reasons, the most notable being:

• Attractive returns on risk-free government treasury bills (further discussed in section 4.4.1)

• Shortage of adequate collateral in the market (for example, poor quality housing and untitled land)

• Potential passing of the Mortgage Bill26 (further discussed in section 7.3)

Figure 8 compares total assets to the housing finance book for each bank offering housing finance products.

25 See Box 1 for further information on HFB.

26 It should be noted that the Mortgage Bill was passed subsequent to the primary research for this report being undertaken. See section 7.3 for further details.

16

Figure 8: Total assets versus total lending and housing finance book (for selected banks and MDIs)

*Loans include overdrafts but not discounts **Does not include MDI data

Source: BOU (2008), Bank Interviews (2008)

Major banks & MDIs: assets versus total lendingBOU 2008 (UGX bn)

9% 15%10%

12%4%

55%

32%

14%

23%

5%21.0%

0%

10%20%

30%

40%50%

60%70%

80%

90%100%

Total Assets Housing Finance Book

Barclays

Standard CharteredStanbic

HFB

Dfcu

Centenary

4,659

222

2,122

274

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Total Assets (Banks)

Total Assets (MDIs)

Total Loans* Total Housing Finance Book**

Housing finance only contributes 13% to total loans

4,659 bn 274 bn

Total assets versus housing finance book (per major bank)BOU 2008 (UGX bn)

Bn

The value of the housing finance book for all five banks (UGX 274 billion) is just 5.9 percent of the value of total assets (UGX 4,659 billion) indicating that the housing finance market plays a very small role in the overall banking sector. The market is very much dominated by HFB which accounts for approximately 55 percent27 of the housing finance market. Out of the four mortgage providers, it is likely that only two will remain major market players in the future28, limiting competition even more: Standard Chartered remains in the market on a passive basis only and have indicated little commitment to further expand29, while Barclays is reluctant to commit resources to the market until issues related to the proposed Mortgage Bill have been resolved. HFB’s role in the market is also subject to change (see Box 1). This leaves just Stanbic and DFCU as the major mortgage providers going forward. At the lower end of the market, smaller banks (such as Centenary, DFCU) and MDIs (such as UML)30, offer

27 In terms of the value of banks’ housing finance books.

28 While this was accurate at the time of the bank interviews (November 2008), participation in the mortgage market was reliant on the passing of the Mortgage Bill, which has subsequently been positively amended and passed. Unfortunately implications of, and reactions to, the new Mortgage Bill are not included in this report. See section 7.3 for further discussion on this subject.

29 Interview with Standard Chartered management.

30 Currently UML is the only MDI providing housing finance but it is believed that Pride will soon enter the market.

17

home completion/improvement loans over a shorter period at higher interest rates31. The table below provides detailed information for each bank’s housing finance book.

Table 1: Characteristics of players in the market32

Stanbic Stanchart DFCU HFB Centenary

Housing FinanceProducts

Purchase, Construction & Home Completion

Purchase & Construction

Purchase & Home Completion

Purchase,Construction & Growing House (low income)

Home Completion / Improvement

Housing Finance Book

38bn 13bn 33bn 150bn 40bn

Number ofHousing Finance loans

350* 85* 765** 3,500** 11,900***

Average loan size UGX200m UGX100m UGX60m UGX50m UGX5m

Average term 20 years 20 years 15 years 10 years 3 years

Pricing 17% 17% 17.5% 18.5% 28%

Implied monthlysalary

UGX7.3m UGX3.7m UGX2.4m UGX2.3m UGX0.5m

Average household monthly income

UGX171k

*Include mortgages only, **Include mortgages and other housing finance products, ***Includes home improvement/completion loans only

Source: Bank interviews (2008)

As shown we estimate that there are approximately 16,600 housing finance loans in Uganda, a negligible amount considering Uganda has a total population of 31 million. Average loan size ranges from UGX 5 million to UGX 200 million, depending on the size the of the bank. It is worthwhile noting the correlation between the size of the player’s balance sheet and the interest rate and term of loans marketed (which is illustrated in Figure 9).

31 It should be noted, however, that the banking sector is currently in a state of flux with regional banks buying up local entities (Equity Bank of Kenya recently acquired UML, for example). This makes it difficult to determine major players in the future.

32 Note that average household monthly income was estimated by Genesis Analytics

18

Figure 9: Positions of players in the market

* Often become housing finance product by default

Source: Genesis Analytics

Personal Loans*

Mortgage Finance

Barclays

DFCU

CentenaryUML

HFB

Home Completion /

Improvement Loans

Interest Rate

Pride

UFTL

Stanbic

Finca

StanChart

MDIsCommercial Banks Note: Size of ball indicates size of balance sheet

4.3 RISK MANAGEMENT

One of the questions regulators consider when encouraging banks to lengthen the term of their asset exposures is whether the banks have the capabilities to effectively manage such risks. The evidence in Uganda is mixed. The sector as a whole has bad debts at manageable but not particularly low levels. Within the housing markets the large banks have achieved a negligible level of bad loans. The same cannot be said, however, for HFB, or DFCU with NPLs above 4 percent (see Figure 10).

19

Figure 10: Key performance indicators of lending activities

Gross provisions and non-performing loans NPLs for mortgage / housing finance loan book

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008

Provisions (left axis)

NPLs:Gross Loans

Provisions:Gross Loans

0% 0%

0.75%

1.4%

4%

4.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Stan

bic

Stan

char

t

Barc

lays

Cent

enar

y

DFCU HF

B

NPLs

UGX bn

Source: Bank of Uganda (2008), Bank interviews (2008)

4.4 AVAILABILITY OF LONG TERM FUNDS WITHIN THE BANKING SECTOR

According to the maturity buckets, more than half of the liabilities (68 percent)33 are short term and do not exceed 30 days in maturity (see Figure 11), while liabilities with the longest maturity (i.e. greater than 12 months) only account for 16 percent.

33 Data on maturity structures was only available for 13 of the 17 commercial banks, accounting for approximately 80% of the market (in terms of total assets). Excluded banks include Barclays, Baroda, Kenya Commercial Bank Uganda (KCBU) and National Bank of Commerce (NCB).

20

As would be expected, most banks reported that large term mismatches would be unacceptable to shareholders. However a closer evaluation of existing portfolios indicates that banks have at least:

• UGX522bn of assets (9 percent of total assets) with mismatches of at least six months • UGX706bn of assets (12 percent of total assets) with mismatches in excess of one

year

4.4.1 CORE DEPOSITS AT INDUSTRY LEVEL

Banks always run term mismatches on their balances sheets, the question is how large a mismatch is prudent. Generally banks seek to identify so called “core” deposits which are considered sufficiently stable to enable the bank to intermediate them into very long term and illiquid assets. The identification and subsequent employment of core deposits as long term funds can potentially mitigate the lack of term liabilities in the sector. As will be further described in Section 7 below, BOU does not strictly define how to calculate core deposits resulting in varying treatment and definition of core deposits between banks. According to standard practices elsewhere, however, it is deemed prudent to assume that approximately 15 percent of demand deposits can be reclassified as ‘core’34. When applying this rule to the demand deposits of the housing finance market players, we find that there is potentially a core deposit base of UGX 450 billion (as seen in the first column in the graph below).

AsseFig 11: ts and Liabilities held by commercial banks (UGX bn)

34 However, the exact level of core deposits that is suited for a particular country can only be informed by taking the local context into account.

ure

Source: Bank of Uganda (2008)

21,2

3 ,345

147 320 489 925 542

(3,577)

(108) (86) (220) (402) (836)

(4,000)(3,000)(2,000)(1,000)

-1,000 ,000 ,000

0-30 days

31-60 days

61-90 days

91-180 days

6-12 months

>12 months

Term assets Term liabilties

(1,232)

39 235 268

522 706

(1,500)

(1,000)

(500)

-

500

000

0-30 days

31-60 days

61-90 days

91-180 days

6-12 months

>12 months

1,

Net Position

21

Figure 12: Sources and Uses of LT funds generated from banks’* balance sheet (UGX bn)

467

917

450

Core Deposits Liabilties (>12 months)

Funds available for LT investments

274

Housing Finance loans

481

Government securities

162

Other

15% of liabilities in 0-30 day bucket

Sources of LT funds from balance sheet

Uses of LT funds from balance sheet

*Selected market players Source: Bank of Uganda (2008)

Theoretically this amount plus the value of long term liabilities on the balance sheet (which, in this case, is those with a maturity of greater than 12 months35) generates an amount that is available for long term investments (such as housing finance and mortgage lending). In Uganda, this implies that there is approximately UGX 917 billion available for this purpose. What now becomes pertinent to understand is how these funds are used by the banks. According to Figure 12, banks only invest approximately 30 percent (i.e. UGX 274 billion) of this amount in housing finance products, but just under double (i.e. UGX 481 billion) in government securities, indicating a preference for banks to invest in government paper. Thus even on the strict and very conservative measure of core deposits at UGX 450 billion, banks' home loans account for at most 61 percent of core deposits. This implies the housing finance market is generally not constrained by the banks’ balance sheets.

35 Although it would be ideal to examine liabilities of a greater maturity, a breakdown beyond 12 months is unavailable.

22

Figure 13: The Ugandan yield curve (February 2009) and stock of Treasury Bills and Bonds

Source: Bank of Uganda (2008), Bank of Uganda (2009), Bank interviews (2008)

11.1%

15.1%16.3%

16.2%16.4% 15.5%

14.3%

1,300

1,350

1,400

1,450

1,500

1,550

6%

8%

10%

12%

14%

16%

18%

T/Bills (91 days) T/Bills (182 days) T/Bills (364 days) T/Bonds (2 year) T/Bonds (3 year) T/Bonds (5 year) T/Bonds (10 year)

UGX billionYield

T/Bonds in Issue -UGX1,484bn (right axis)

T/Bills in Issue -UGX1,518bn (right axis)

As of June 2008, outstanding Government treasuries amounted to UGX 3 trillion (USD 1.75 billion). Approximately 80 percent of the treasuries issued were for a term of two years and below, indicating that longer term Government bonds are less popular. At present the yield curve slops downwards after three years, which provides little incentive to investors to invest in longer dated paper, but also may reflect a lack of liquidity and thus “true pricing” in this area of the curve.

23

Figure 14: Yield to Maturity for a two, three and five year Treasury Bond (Primary market)

Source: Bank of Uganda (2009)

Nov ’08

12%

22%

14%

20%

16%

24%

18%

May ’07

Aug ’07

Nov ’07

Mar ’08

Apr ’08

May ’08

Jun ’08

Aug ’08

Sep ’08

Feb ’04

Oct ’04

Apr ’05

July ’05

Sep ’05

Feb ’06

Mar ’06

Jun ’06

Aug ’06

Nov ’06

Jun ’04

Jan ’05

Jun ’05

Jan ’06

Apr ’06

Sep ’06

Oct ’06

Sep ’07

Oct ’07

Dec ’07

Jan ’08

Apr ’08

May ’08

Feb ’09

Lending rate

14%

16%

18%

20%

22%

24 T%

T\Bond

12%

Jan ’04

Dec ’06

Three year Treasury Bond

wo year Treasury Bond

As illustrated in Figure 14, recent yields to maturity for the most popular bonds have significantly increased over the past year. Currently, investors can purchase a two year Treasury Bill at a rate of 18.6 percent in the primary market, almost exactly the same as the average lending rate. With the current mortgage lending rates offering only a slight margin (if at all) over the shorter term zero risk rated government bonds and there being adequate supply of government paper in the system, there is little motive for banks to lend. Supply of mortgage finance is thus likely to remain depressed until the proposition for banks to lend has improved.

4.4.2 CORE DEPOSITS AT BANK LEVEL

Although the overall market is not liquidity constrained, it is worth investigating the level core deposits (and possible liquidity constraints) at the individual bank level. Table 2 below lists the various banks, the level of core deposits for each bank and the respective methods in which core deposits are calculated.

24

Table 2: Core deposit base and method per bank

Bank Core Deposits as percent of Total Demand and Savings Deposits Method

Centenary 87 percent “By inspection”

Barclays 84 percent

“75 percent of non-interest bearing current accounts and 50percent of savings”

DFCU 29 percent

“50 percent of the lowest average current account + 60percent of lowest average savings account”

HFB 30 percent “Employ central bank rule of thumb of 20 percent of deposits”

Stanbic 39 percent “3 year regression analysis of demand deposits”

Standard Chartered 88 percent “Standard deviation on demand deposits method over 2 years””

Source: Bank interviews (2008) These are very high levels and could, if consistently and accurately measured, support a much larger portfolio of longer term assets. A rule of thumb applied by the FSA36, is to assume that sticky or core deposits should make up approximately 15 percent of demand deposits. This is illustrated in Figure 15 below, where core deposits, calculated using this rule of thumb, are compared to the current estimated provided by each bank.

Figure 15: C sits: best practice versus current practice

36 FSA (Financial Services Authority) is the regulator of all providers of financial services in the UK

ore depoCUGX

Source: Bank interviews (2008), Genesis Analytics

400

241

39

13

400

491

57

11

16

0.1

122

75

0 200 400

Barclays

Centenary

Dfcu

HFB

Stanbic

Standard Chartered

Core Deposits (Estimated)

Over-classificationUGX bn

416

278

13

24

229

343

ore deposits: best practice versus estimated bn

Core Deposits (Best Practice)

25

What the “true”, consistent and appropriate estimate of core deposits is in Uganda would require detailed statistical modelling. As expected, the larger banks have much greater core deposit bases in contrast to their smaller counterparts and thus are not constrained by lack of long term funds37. Accordingly, one would suppose that term lending of smaller banks is constrained by the smaller core deposit bases. However, at least for some of the smaller banks (such as DFCU) it has been noted that only a very small percentage of the core deposits are actually used to fund term lending38. Thus, it appears that banks by their own measure are not necessarily ‘constrained’ as they are yet to make full use of their core deposit base. However, it is clear that the smaller banks and MDIs, such as HFB, Centenary, DFCU and UML, are a lot closer to the limit than their larger counterparts, and thus liquidity could emerge as a constraint to the further growth of their home finance portfolios. In fact, if these banks were to calculate core deposits at best practice and make full use of them (illustrated in Figure 16), there is no doubt that they would face balance sheet constraints. This is a concern as it is the smaller players that could potentially contribute to the socially significant low income market. From Figure 16 it is clear that HFB is a special case and this is discussed in more detail in the Box 1.

Figure 16: Core deposits (best practice) versus mortgage/housing finance book (UGX bn)

Source: Bank interviews (2008), Genesis Analytics

4

40

33

150

38

9

1.5

11

16

0.1

122

75

- 100 200

UML

Centenary

Dfcu

HFB

Stanbic

Standard Chartered

Core Deposits (Best Practice) Loan Book

This suggests the need for a liquidity facility which focuses on meeting the needs of the smaller banks and MDIs

37 It should also be noted that at low levels of lending (as is the case in Uganda), the quantity of mortgage finance supplied is rarely dependent on the amount of long term funding available.

38 Bank interviews, (2008)

26

5 LTERNATIVE SOURCES OF TERM

All banks have a structural mismatch between liabilities and assets, and thus the shortage of

Box 1: Housing Finance Bank Dedicated state owned housing banks play an important if controversial role in the development of housing markets inmerging onomies. In arkets which private banks lack the balance sheet to support the market, state owned institutionsan play key r e i d velopin a market. However in many instances this positive role is compromised by weaknesses in

credit risk management, a poor record of collections, a failure to achieve value in contracting relations with developers and anexcessive concentration of risk. The most important public policy question with regards to state owned housing financeinstitutions is whether they actually create assets that reach individuals that cannot be served by the private sector. In a marketwhere the vast majority of the poorest households live in informal housing, almost any provision of formal housing finance willalmost by definition not reach the poorest or most deserving of state support.

The role HFB in the Ugandan market reflects many of these challenges. The bank is by far the largest provider of housingfinance (with between 3000 and 3500 loans on book) and accounts for 55% (in terms of value of its housing finance book) ofthe formal housing finance market, but serves a similar target market to some of the banks – particularly DFCU (see Table 1).HFB has a poorer record on collections with NPL’s at 4.3% compared to the large banks average of less than 2%. Historicallythe bank’s activities have been closely tied to the management and sale of former state owned houses and the activities of theNational Housing Construction Company.

Most recently the bank has been restructured and granted a license to operate as a commercial bank. The most importantelement of this restructuring was the conversion of a Government fixed deposit into equity during 2007, with the result that thebank now has a capital to total asset ratio of 39 percent. Technically the bank is short of core deposits to support the scale ofthe housing exposure (using the 15 percent of demand deposits rule HFB has housing loans of over 1,500 times core deposits)and thus could face significant liquidity management challenges. As a commercial bank HFB will seek to significantly leveragethe capital base with customer deposits. The future role of HFB in the market is difficult to judge and will to a large extentdepend on how stringent the Bank of Uganda is on requiring HFB to normalize its ALCO profile, before it further expands itsterm lending exposure.

e ec m inc a ol n e g

(100)(50)

-50

100 150 200

0-30 days 31-60 days 61-90 days 91-180 days 6-12 months >12 months

Term assets Term liabilties

UGX bn

ource: Bank of Uganda (2008), Bank interviews (2008) S

AFUNDING FOR HOUSING FINANCE

term funds on Ugandan banks’ balance sheets is not unusual or unexpected. Where the Ugandan market is most limited in this regard is in the availability of term funding for mortgages from non-bank financial institutions such as pension savings funds and life insurance companies, which in other markets have provided significant funding to banks in the form of deposits or debt securities (e.g. bonds and collateralised debt obligations). The availability and

27

possibility of non-bank funding for the mortgage market in Uganda is further explored in this section.

5.1 INSTITUTIONAL INVESTORS

In many developed countries liabilities of institutional investors (primarily pension funds and life insurance companies) are typically as large as or larger than that of the banks, with the result that banks can offset a significant proportion of the term mismatch on their balance sheet through structured transactions with these institutional investors.

Banks in Uganda, however, account for approximately 81 percent of total financial services assets (by contrast, in South Africa, banks only account for 38 percent39 of total assets). The potential to raise term funding from other financial sector institutions is thus limited by the smaller size of these institutions balance sheets.

Figure 17: Total assets of banking sector versus potential institutional lenders

6788

1190

1620

1000

2000

3000

4000

5000

6000

7000

8000

Banks NSSF Insurance**

Balance sheet too small to be significant long term funder

UGX bn

*Only include data for banks who participate in the housing finance market, **Data only available for 2006

Source: BOU (2008), NSSF (2008), Insurance Commission (2006)

Furthermore, in order for banks to be able to create attractive assets for pension funds/institutional investors they need to be able to create securities that are priced at a

39 SARB, FSB 2005

28

sufficient premium to the equivalent government securities, and appropriately for the term and risks associated with the underlying assets Nonetheless, two main term savings groups could possibly provide further funding for banks in Uganda:

• National Social Security Fund (NSSF) which invests compulsory contributions from formally employed workers

• Insurance companies (long term)

It is unlikely, however, that the life insurance industry will be prominent providers of long term funding, as the market is extremely underdeveloped and minute compared to the banking sector. This leaves NSSF as the only viable institutional investor.

5.1.1 NSSF

Despite being small relative to the banking sector, the NSSF could potentially play a role in assisting the lenders to better manage their liquidity. NSSF’s direct portfolio exposure to housing finance is approximately UGX12bn40, with the largest assets on NSSF’s balance sheet being short term investments (UGX 539 bn) (consisting mostly of short term deposits at banks) and investment properties (UGX219bn), accounting for 45 percent and 18 percent of total assets, respectively. However, in terms of NSSF’s investment mandate, within the next 5 years the investment mix is likely to change from the current portfolio (Equity: 18 percent, Fixed Income: 61 percent, Real Estate: 21 percent) to the desired portfolio (Equity: 30 percent, Fixed Income: 30 percent, Real Estate: 60 percent). The desire to invest more in real estate is based on the understanding that it would create more employment and also generate attractive returns for shareholders41. The impact of reducing fixed income from 61 percent to 30 percent is illustrated in Figure 18.

40 Calculation based on proportions in 2006 data.

41 For example, NSSF had planned to invest in satellite cities (with shopping malls, medical facilities, banks and schools) which would act as a catalyst in attracting investment in the housing industry. On completion of one or two of these cities, NSSF had intended to completely withdraw from the supply side of housing, and focus its energy on the demand side, with the assumption that a number of other players would be investing in the supply side of housing. However (for various reasons) real estate investment has not yet kicked off leading to the reluctance of NSSF to exit this market.

29

Figure 18: Sources of fixed income and the impact of NSSF’s new mandate42 (UGX bn)

Halving fixed income investments would mean reducing short term investments, with longer term investments remaining relatively constant (for at least the near future). Despite this, ‘Other’43 funds, predominantly designated for short term investments, will still be significant at approximately UGX 180 billion and could potentially be invested in mortgage securities. In other words, even if the desired portfolio is achieved, there is still capacity to increase term funding to banks. What is more, if NSSF had to increase its future investment in Treasury Bonds to previous levels of say UGX 200 billion (possibly in response to more attractive interest rates), there would still be funds available that could be redistributed from short term investments to term lending. It should be noted that as NSSF’s property portfolio gets larger, NSSF is likely to become a major landlord in the Ugandan housing market. As such, NSSF will need to be careful not to rent out its properties at rates lower than the typical lending rate, as this would further diminish the demand for mortgages.

42 Calculations based on 2008 and 2006 balance sheet data, as well as information on current and desired investment portfolios.

43 As labeled in Figure 18.

*Mostly made up of short term investments such as fixed deposits and treasury bills

Source: NSSF (2008, 2006), Genesis estimations

509

126

180

12612

318

12

647

Other* Treasury Bonds Term Lending

-51%

Fixed Income (Current mandate)

Other* Treasury Bonds Term Lending Fixed Income (New mandate)

Potential to distribute some funds to longer term investments such as term lending

Proportions likely to remain the same in the short term as consist of medium and long term investments

30

5.2 PENSION REFORM

Given the very low level of non-bank financial sector assets in Uganda, successful implementation of pension reform would play a critical role in increasing the size of the pension industry in Uganda, which would in turn create a greater source of term funding available to banks. Currently the ratio of pension funds to gross domestic product is only 4.2 percent, with an average of 300,000 contributors. Poor performance of the social security system is attributed to44

• An uncompetitive environment dominated by the state-owned NSSF • Past mismanagement of pension funds by NSSF • Lack of official incentives to save

Once the pension reform has been fully realised increased levels of much needed (and appropriately priced) long term funding will become available which, if invested appropriately, could further lessen balance sheet constraints of banks and other lenders which provide housing finance. Our terms of reference do not include a detailed analysis of the prospects for and fine points of pension fund reform.

6 OTHER FUNDING STRATEGIES As the loan to deposit ratio has been steadily increasing and the supply of institutional funds is limited, it is worth examining alternative ways to increase the availability of long term funds.

44 Bank interviews (2008), (The Competitiveness and Investment Climate Strategy , 2008)

31

Figure 19: Loan to Deposit ratio

This section will examine potential retail and wholesale interventions. Retail solutions include developing mechanisms through which additional deposits are attracted into the banking system, while wholesale solutions consider both on and off balance sheet interventions.

6.1 RETAIL SECTOR

6.1.1 SAVINGS LINKED TO HOUSING FINANCE45

A simple method to enhance the balance sheet of a bank is to introduce term savings product that are linked to housing finance products. This type of product would not only provide valuable behavioural information to the bank (can the customers keep up a contribution schedule) but also act as a form of collateral as savings accumulate. For example, to receive funding from the bank, borrowers would have to save regularly for a designated period (e.g. two years) only after which borrowers can gain access to housing finance products. Ultimately, the savings which the borrower has accumulated can be used as a down payment for the future loan. This type of product is deemed to be beneficial for the housing finance industry as not only does it encourage savings but it also increases the average maturity of deposits, making way for more long term lending. Currently, HFB and DFCU offer products of this nature. HFB’s Shelter account has a minimum maturity of two years and encourages customers to save towards a goal such as a mortgage down payment46. Similarly, DFCU’s

45 Savings products in developing countries were further reviewed in a separate paper by UN-HABITAT: ‘Saving Products for Low-Income Groups with a Special Focus on Developing Countries – An Overview’ (February 2009)

46 The interest rate offered on the two year investment is 8% per annum.

Source: Bank of Uganda (2008)

0.61 0.61

0.41 0.390.34 0.35 0.35 0.37

0.460.55 0.59

0.71

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

80

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 (Sept)

0.

32

Smart Plan47 requires depositors to regularly invest savings with a view of achieving a long term goal48. Products like these, however, have been unable to significantly impact the level of savings in Uganda, probably as a result of the negative real returns available due to the combination of the low interest rates on these savings products (at the most nine percent)and the relatively high inflation rates (currently twelve percent). As a result investment in incremental building is more popular – appreciation of property (and building materials) far outweighs returns from savings.

That being said, it is likely that in the future, as both the loan to deposit ratios and demand for funding grows, banks will naturally adjust savings rates to attract deposits, enabling products such as those mentioned here to play a larger role in enhancing balance sheet capacity. A decrease in inflation would naturally hasten this process.

6.1.2 DEPOSIT INSURANCE

Mobilisation of savings is directly linked to the positive/negative perception of the formal financial system. Deposit insurance can be used to boost savings if there is a lack of confidence in banks in the market. The BOU already offers an explicit deposit insurance scheme outlined in article 108-111 of the Financial Institutions Act of 2004. This article requires for all banks to contribute, on an annual basis, at least 0.2 percent of their average weighted deposit liabilities or face a penalty if they fail to comply. In the event of bank failure, BOU will cover up to UGX 3m per depositor49, an amount deemed sufficient for the average Ugandan and particularly so for low income Ugandans. Given this level of protection and the other obstacles (such as the aforementioned poor real returns and preference to invest incrementally in property in the market) we are not convinced that savings levels are currently compromised by a lack of trust in banks or that a change in the level of depositor protection is required at this stage to trigger a higher level of bank savings.

6.2 WHOLESALE SECTOR

We consider three structures that are used to channel funds from institutional investors into the banking sector:

• Term funding • Securitisation

47 This product is recognised as one of DFCU’s most successful

48 Interest rates vary according to the maturity of the investment. For a 6 month, 12 month and 24 month investment, the interest rates are 4, 6 and 9 percent respectively.

49 Financial Institutions Act of 2004

33

• Liquidity facility

6.2.1 TERM FUNDING

Simple wholesale funding relies on direct institutional financial support. This implies that a bank would fund the mortgage from its balance sheet, supported by long term funds acquired through institutional investors in the form of bonds or term deposits. Funders are exposed to the overall performance of the bank, but are protected from “first loss” by the banks shareholders. Where funders are risk averse, credit enhancement guarantees may be introduced to provide guarantees to funders to cover losses in the event of the borrower defaulting (see example in Box 2).

Box 2: Credit guarantees in Uganda

In Uganda, the IFC launched the Uganda Mortgage Finance Programme in August 2007 whereby the IFC provides partial guarantees (up to US$10m) to lenders providing long term funds (up to US$40m) to 3 designated commercial banks. Banks that receive term funding pay a premium for the facility. This project attempted to boost the provision of long term funding in the mortgage market by mitigating the risk associated with providing term funding but has been largely unsuccessful as market players have viewed the pricing as unattractive (i.e. the premium that banks have to pay for the facility is seen as being too high) and the level of guarantee is seen as inadequate (i.e. the funder only receives 25% of the loan if the borrower defaults).

Source: Bank of Uganda (2008), Bank interviews (2008), (Hassler & Walley)

As mentioned in the previous section, NSSF is the only suitable long term funder in the Ugandan market. However, up until now it has been unwilling to make very long term deposits in the banking system and its new investment mandate seems to evidence a preference to invest directly in property instead of lending long term. This is surprising as with large foreign parents and given the time in which they have operated in the market, large banks in Uganda offer very high quality corporate risk that should be acceptable to the NSSF.

6.2.2 SECURITISATION

Securitisation is an off-balance sheet approach, which is costly to establish and manage, but greatly minimises the exposure of the investing institution to the bank. Figure 20 describes the securitisation process in more detail.

34

Figure 20: Mechanics of securitisation

Source: Genesis Analytics

Bank A

Long-term funding providers

Bank N LT FundingLoan

Loan

Securitisation Entity (SE)

1. Borrowers cede their property as security for a long-term mortgage loan

1. Bank provides loan from its balance sheet

2. Mortgages are “cured” for a minimum period of time

3. Banks then sell the rights to the future flow of interest & principle repayment to a securitisation entity (SE) in return for a lump sum

4. Banks administer the mortgage on behalf of the SE for a fixed fee

1. Enhances the quality of the acquired mortgages by either

2. Combining all loans into a single portfolio, or

3. Segregating loans into a number of different portfolios depending on maturity, originator or type of loans

4. Sells bonds from the portfolio(s) to funders

Bond

1. Funders buy bonds, where possible combining a range of different bonds to generate the risk return profile congruent with their investment objectives

2. Funders use a range of derivatives & hedging products to offset potential default risks, if risks are unacceptably high

The key difference between securitisation and funding from an institutional investor is that banks effectively sell the rights of the mortgage to a securitisation entity who then sells bonds onto investors who are now directly exposed to the risk of default. Securitisation is unlikely to be successful in Uganda in the current environment due to the absence of several key requirements for the development of a sound mortgage security market, however it may become an option as the mortgage market matures. Key obstacles to the successful use of securitisation at present include but are not limited to:

• Uganda’s underdeveloped capital market • Limited spread over government securities • Lack of a track record in the mortgage market • Lack of appropriate legislation • Lack of appropriate intermediaries • The associated costs

It should be noted that although securitisation as a model and a technique is currently under fire given its role in the sub-prime debt crisis in the USA, it is unlikely that it will disappear entirely as a business model. At the same time the criticism that the model suffers from a principle – agent problem in that the originating institution pays less attention to the quality of an asset that it intends to on-sell does have some merit, and will no doubt result in some important modifications to the traditional model. In particular, regulation will need to be enhanced to better account for the risks inherent in this model.

35

6.2.3 LIQUIDITY BACKSTOP/FACILITY

An alternative to the aforementioned funding structures is a mortgage liquidity facility, which is generally more appropriate for emerging markets than securitisation and can play a vital role in the establishment of a more developed secondary mortgage market (including securitisation). Key differences between a liquidity facility and securitisation include that liquidity facilities are generally less complex, involve lower levels of risk transfer (the risk of default remains with the bank/lender), and that the bonds are not directly linked to the underlying mortgages. These differences combine to make liquidity facilities more appropriate for emerging markets. Figure 21 describes how a liquidity facility fits into the mortgage market.

Figure 21: Mechanics of a liquidity facility

Source: Genesis Analytics

Bank A

Long-term funding providers

Bank N LT FundingLoan

Loan

Liquidity Facility (LF)

1. Borrowers cede their property as security for a long-term mortgage loan

1. Bank provides loan from its balance sheet

2. When necessary, the bank sources funding from the liquidity facility, using the mortgages as collateral

3. Either receives wholesale loan from the LF (using mortgages as collateral) or “sells” the mortgage portfolio (but the default risk remains with the bank/lender so as to avoid moral hazard issues)

1. LF then issues bonds – the bonds are not directly linked to the underlying mortgages. Unlike with securitisation the bonds can be issued at any time as there is no need for an existing portfolio of mortgages waiting to be funded

2. A key difference to securitisation is that the risk of default remains with the bank/lender

Bond

1. Institutions with medium to long term liabilities would buy the bonds issued by the LF

2. The LF may initially carry a guarantee (potentially government funded) in order to stimulate demand

3. The bond would typically carry a small margin above government securities

36

6.2.3.1 BENEFITS

Liquidity facilities have notable benefits and have proved successful in boosting some stagnant/constrained mortgage markets in the past (see Table 3 for country examples) ,50 51.

Notable benefits include the following:

• Liquidity facilities can provide lenders with lower cost funding than they would be able to access individually. This is especially beneficial to second tier banks, which suffer the most from liquidity constraints. In turn, this enables lenders to improve interest rates offered thus improving end user affordability

• In the absence of a liquidity facility only financial institutions with good credit ratings or extensive branch networks (with sufficient deposits) could meaningfully participate in the mortgage industry. However, because liquidity facilities enable smaller banks and non-bank financial institutions to participate in the industry, a more competitive environment can exist

• Liquidity facilities increase the leverage of existing funding, allowing short term deposits to (more easily) be converted into long term assets, with the safety net of the liquidity facility to deal with liquidity risk issues

• Although Uganda is not yet ready to move to full securitisation, a liquidity facility can act as a first step in linking mortgage markets to capital markets but without the same levels of complexity and risk transfer as a fully fledged secondary mortgage market (while still allowing the mortgage market to grow in the absence of the infrastructure necessary for a more developed secondary market)

• A liquidity facility provides long term investment opportunities in which long term liabilities can be invested. This is particularly useful for pension funds, life insurance companies and social security funds. These institutions often invest directly in mortgage or real estate markets with limited success (as these areas do not lie within their core areas of expertise)

• Policy objectives such as the promotion of affordable housing can be supported by the liquidity facility (for example by offering different terms for the refinancing of loans to the targeted group (i.e. low income communities)). However care must be taken to avoid distorting the market

50 Essentially lenders in the these markets became much more willing to extend the terms of their mortgage lending once the liquidity management tool was offered. The process has usually included one or two lenders being convinced to extend maturities, and the broader market following soon thereafter, usually extending terms to as long as 15 years.

51 This section relies heavily on previous work done by Douglas Diamond, a pioneer of the liquidity facility concept, as well as a paper by the Housing Finance Unit of the World Bank, “Mortgage Liquidity Facilities”, O. Hassler & S. Walley.

37

Table 3: Country examples of successful liquidity facilities

Source:(Hassler & Walley)

Country (Introduction of liquidity facility)

Context of liquidity facility

Operational aspects Key observations

Malaysia (1986) • Both banks & national treasury suffered from liquidity constraints due to macroeconomic constraints

• Public/private partnership• Central bank has 20% ownership &

provides key staff• Implicit government guarantee• Does not require overcollateralisation

(resulting in a somewhat riskier position)

• Both banks & nonbanks are able to borrow from the facility

• Rates are either fixed or variable over 3,5 or 7 years

• Rates are attractive – generally 0.25% above government securities

• Has been very successful & currently provides between 15-30% of total funding with the mortgage market increasing by US$51bn from1987 & 2005

• Typical loan taken is for 3 years at a fixed rate indicating that the facility is typically used as an ALCO tool

• Facility remains competitive through innovation - since 1994, additional products such as refinancing of lease agreements, fixed rate loans & Shariahcompliant products have been introduced; while in 2004, it entered into the securitisation market

Jordan (1997) • Government introduced facility to encourage economic reforms –market had previously been dominated by state bank which prevented effective competition in the mortgage market

• Supported by a World Bank loan• Used Malaysia example as a guide &

thus operates in similar manner• Key difference is Jordan’s

requirement of overcollateralisation of 25%

• Successfully contributed to the reform of the banking sector

• Players in the mortgage market increased from 2 to 10 within a few years

6.2.3.2 DETERMINANTS OF SUCCESS

The success of a liquidity facility depends on the market demand for term funds. As depicted in Figure 22, the potential shortfall in term funding has been loosely estimated at UGX198.6 billion (US$115.8m), and has been based on the difference between core deposits (best practice) and the mortgage/lending book of the smaller banks (e.g. DFCU, HFB and Centenary)52,53 and MDIs (e.g. UML). Assuming that 20 percent of this shortfall can be funded by alternative mechanisms, and that the shortfall will be eliminated over 5 years, this gives an estimated potential yearly demand for bonds from a liquidity facility of UGX32 billion (US$18.5m).

52 As previously noted, only demand of the smaller banks is considered as the larger banks are not currently liquidity constrained (in terms of the difference between best practice core deposits and the current size of the housing finance loan book for each bank).

53 The majority is stemming from the shortfall of HFB.

38

Figure 22: Estimating the market demand for funds

Source: Genesis Analytics

Estimated potential yearly demand for funds (& therefore bond issuance by LF)UGX bn

Core deposits (best practice) versus mortgage/housing finance bookUGX bn

This suggests a shortfall in term funding of UGX198.6 bn(US$115.8m),

(US$18.5m)

In addition to the above estimated demand, other non-bank financial institutions (MFIs and MDIs) are likely to add to the potential demand especially if regulations change in line with the recommendations herein (see section 7) to allow them to lend longer than 2 years. Furthermore, it should be noted that for home improvement loans, the term does not need to increase to 20 years - an increase to 5 or 7 years would have a significant effect on affordability (see Section 2 for illustrative example).

Box 3 investigates the possible interest rates associated with a viable liquidity facility in Uganda.

Box 3: Estimated rates of liquidity facility

Source:

Rate paid to investors

Government securities (3 year – 5 year)

15.45% (5 years) –16.40% (3 years)

Margin above government (to stimulate demand -limited additional risk if government guarantee is offered)

0.5%

Estimate price LF would need to pay on bonds issued would be:

15.95% - 16.90%

Rate charged to banks/other housing financiersPlus credit risk 0% - as risk will remain

with lenders to avoid moral hazard issues

Plus operating expenses – issuing & servicing costs

0.3% per annum (based on 5 year bond)

Plus admin costs 0.3%

Return on capital 0%Thus rate charged to banks/other lenders between:

16.55% - 17.50%

Genesis Analytics; BOU (Average Yield-to-Maturity in the Secondary Market, February 2009)

39

Demand for these bonds will most likely come from the NSSF and other emerging asset

n the other hand, rates charged to lenders for using the facility should cover the costs of

sing the 3 year government bond rate59 (16.40 percent) as a base rate, implies a minimum

managers and potentially some of the bigger banks54. Interestingly, experience from other markets, such as Malaysia and Jordan, would suggest that the bigger banks could be a major source of the funding for the liquidity facility55. Ultimately, these investors will only consider the liquidity bonds if interest received is over and above what they would receive from investing in government paper56. Ooperation but also be low enough to attract lenders to use the facility. The current high yields available from government securities (especially on 3 year bonds) are a risk to the success of a liquidity facility, as they drive up the rate required to attract investors to the liquidity facility, and thus drive up the rate charged to lenders. This in turn limits the spread between the rate at which lenders can access the liquidity facility and the housing market lending rate (which currently ranges between circa 17.5 and 28 percent), diminishing the attractiveness of the facility. Complicating this process further is the potential volatility of interest rates, which is typically one of the major reasons why banks prefer to invest primarily in short-term government debt57,58. Urate that the liquidity facility would need to pay investors of circa 16.90 percent and a rate charged to banks and other lenders of circa 17.50 percent (assuming a total budget for operating and administrative costs of only 0.6 percent of the outstanding bonds in issue). These estimates would allow a total budget for operating and administrative costs of only approximately UGX 123 million (USD 72 thousand) in year one, however this budget would increase by UGX 123 million per year until year five when the income will stabilize at circa UGX 617 million (US $ 360 thousand) per annum (these estimates are rough, having been developed using simplifying assumptions - a full business case and financial model would need

54 As such these institutions should be engaged to gauge potential demand (at various prices).

55 Assuming the state would be providing a guarantee for these liquidity bonds, it would effectively be creating substitutes for medium term government bonds (with the liquidity bonds being treated as government bonds from a regulatory perspective).

56 It should also be noted that the success of the liquidity facility is likely to be hampered unless pension reform occurs in the long run and the investment mandate of NSSF is altered in the short run (i.e. NSSF’s investment portfolio needs to shift away from direct investment in real estate (currently targeting 60 percent) and towards fixed income/long term funding to banks).

57 Solving this problem may require the introduction of variable interest rates on longer-term loans (although this step is surprisingly rare) and encouragement of fixed-rate term deposits that will smooth out the cost of funds. In many countries, this issue has been addressed through lending in foreign currencies, if such have been a major portion of the deposit base. This approach, though, shifts the foreign exchange risk to the borrowers

58 Douglas Diamond (1996)

59 Given that the rate for the 5 year Government bond is lower than the rate for the 3 year bond, the 3 year bond is seen as more of a threat to the liquidity facility than the 5 year bond. As such, the following calculation has been based on the 3 year bond.

40

to be developed where more detailed estimates of the associated administration, issuing and servicing costs could be developed). It is therefore likely that a government subsidy may be required in the first few years of operation (until the liquidity facility is able to issue more volume). In addition, the return on capital has been placed at 0 percent, and would need to be covered by the Government of Uganda. Further research is also required to gauge the level of demand at these rates. The liquidity facility is also likely to require a government guarantee, especially in its early

eedless to say, a government guarantee would come at a cost to the government and the

• The government should not guarantee the full bond but rather split the risk with the

• e should be for a limited period only as a key reason for its presence will

• overnment’s budget and should be as

Finally, as ti nd the market develops, Government would do well to decrease

6.3 ONCLUDING REMARKS ON FUNDING STRUCTURES

As outlined in Table 4, a liquidity facility appears to be the most suitable tool to increase the

Moreover, and in light of the above discussion, it appears that a liquidity facility would not be

stages of development. The government guarantee would protect investors in the facility from losses, and would therefore be important to encourage early take up and to keep the rate paid to investors (and therefore the rate charged to banks/lenders) at a more reasonable level. If the facility is not guaranteed investors in the fund are likely to require an additional 200-300 basis points, which would take the rate charged to banks and other lenders to between approximately 18.55 and 20.50 percent. This would further limit the spread between the rate banks pay the facility and the housing finance market lending rate. Nefficient functioning of the market in that a guarantee could potentially delay the improvement of the primary market. A liquidity facility guarantee should therefore be treated with caution, subject to the following conditions:

investors so as to avoid moral hazard and decrease the potential risk (and cost) for the government The guarantebe to stimulate initial demand from investors Guarantees should be budgeted for in the Gtransparent as possible

me progresses asubsidisation and eventually increase private ownership in the facility.

C

availability of long term funds for the mortgage market (based on Uganda’s current market environment). However, the current high yields on government bonds will make it difficult for such a facility to be successful as they limit the ability of the fund to attract investors at reasonable rates

viable in the medium term without a commitment from the Government of Uganda to provide a

41

potentially significant subsidy to the facility. The subsidy would be required at least until the scale of the facility is able to cover the overhead costs60.

Table 4: Summary of potential funding structures

Source: Genesis Analytics

Methods/Tools to increase long term funds

Key observations

Retail

Wholesale Funding

Rank

Saving products linked to housing finance

• Similar products already exist in the market• Success of products hampered by poor real returns

and limited geographic reach

Depositor insurance • BOU offers an explicit depositor insurance scheme • Unable to effectively operate due to other, more

problematic, obstacles in the market

Not currently relevant for Uganda

Would work in Uganda without needing to make any changes to the Ugandan environment

Institutional term funding • Funding is limited to one major player, NSSF, an institution which is restricted by both its balance sheet and investment mandate

• Implementation of a supportive credit guarantee programme has been unsuccessful due to inappropriate pricing and guarantee levels

Securitisation • Uganda capital and housing markets are not yet sufficiently developed

• Requires larger volumes than present• Government paper crowding out other investments• Possible future solution as market develops

Liquidity facility • Is suitable for emerging markets• Is viable with smaller volumes• Can assist in the development of a full secondary

market for mortgages• Has been successful in other emerging markets• Biggest obstacles include high yields on

government bonds and lack of an appropriate legal framework

7 POLICY AND REGULATORY ISSUES The backbone of any mortgage market is its regulatory framework. Therefore, it is particularly important to have the right framework in place. This section is divided into five parts, each one of which deals with a particular theme of mortgage-related regulation with respect to the Ugandan environment: liquidity, reporting, mortgage legislation, risk weights and MDIs, respectively.

60 As aforementioned, a more detailed business case and financial model would be required as part of a liquidity facility feasibility study.

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7.1 LIQUIDITY

The lack of term deposits in the Ugandan market inevitably hampers the ability of financial institutions to provide term lending products such as mortgages. In response to this shortage, some reliance has been placed on identifying core deposits, which could be used as an alternative source of long term funds. Although BOU does provide some guidelines for liquidity management (i.e. banks to maintain liquid assets amounting to no less than 20 percent of deposit liabilities, denominated in local and foreign currencies), BOU does not provide specific guidelines for the identification process of core deposits. This has resulted in banks making different assumptions on what constitutes core deposits – some merely applying a random pre-determined ratio of demand deposits, whilst others are engaging in-depth statistical analysis61. The central bank, itself, relies on a maturity ladder to assess the mismatches between maturing assets and maturing liabilities, in which both contractual maturity and anticipated maturity62 is measured. To encourage uniformity across the sector, it is suggested that BOU provide detailed guidelines to the banks on how to reclassify demand deposits to core deposits on the maturity ladder. Currently, the FSA (at a very general level) suggests that no more than 15 percent of demand deposits should be represented as core deposits. However, it is best for each country to perform an individual analysis to establish the average percentage of deposits deemed prudent to be allowed to be regarded as “sticky” (or core) and reclassified into longer maturity buckets. Obviously, the percentage will vary according to diverse country environments. Further to the above point, it has been noted (see Section 4) that despite identifying core deposits, some of the smaller banks are not effectively using these deposits to provide long term loans. That is, according to bank interviews, a significant portion of the housing finance portfolio of some of the smaller banks is funded by borrowed or administered funds, rather than deposits. As such it would probably be useful for BOU to educate the smaller banks on both the identification of core deposits as well as appropriate uses of core deposits. It has also been noted that presently BOU does not require banks to perform stress tests or engage in contingency planning. In order to encourage and support sound liquidity management, these activities should become mandatory. Stress testing different scenarios (e.g. in a going concern environment or in the event of a bank specific crisis) forces banks to answer pertinent questions such as “which sources of funds will likely stay with the bank under difficult circumstances, and which sources of funds are likely to run off gradually and at what rate?”. Having answers to these questions will allow a bank to be sufficiently (if not fully) prepared in the event that such scenarios ever came into play. Contingency planning, on the other hand, enables a bank to better understand its ability to withstand liquidity crises. It should

61 As discussed in Section 4.4.1

62 Used in determining the level of core deposits available

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be noted that in the design and implementation of its contingency plan, a bank should adopt a conservative stance in estimating the extent and availability of its sources of funds.

7.2 REPORTING

Statutory returns do not require for banks to report mortgage loans separately. Rather mortgages are included under private loans even though they are a form of secured lending. In order to monitor the growth in this asset class and to assess its performance relative to the rest of the lending book, mortgages should ideally be separately reported upon in local and foreign currency, including the separate reporting on the asset quality of this asset class. Secondly, BOU does not require for banks to report assets and liabilities in maturity buckets longer than 12 months. To better identify longer term assets and liabilities, we recommend that BOU require for banks to provide a breakdown of the maturities of assets and liabilities beyond 12 months (e.g. into one to three year, three to five year, above 5 year buckets).

7.3 MORTGAGE LEGISLATION

There has been considerable apprehension amongst banks over the passing of the Mortgage Bill, a piece of legislation which has been observed as one of the chief deterrents for mortgage suppliers to enter or even remain in the market. Concern has mainly been attributed to:

1) legislation that will require spousal consent before a mortgage can be granted on a matrimonial home (which is extremely problematic given i) the absence of data on spouses and ii) the unclear definition of a matrimonial home (a person could have more than one matrimonial home and decide to mortgage all of them at once))

2) power that could be given to courts to re-open and change the terms of a mortgage, complicating the currently straightforward eviction process

3) allowing customary land63 to be mortgaged (communities that live on the land are vulnerable if the borrower fails to make loan repayments)

It should be noted, however, that subsequent to bank interviews, the Mortgage Bill was passed with several positive amendments that may encourage mortgage market activity64. Amendments include narrowing the definition of a matrimonial home to the principal matrimonial home only and allowing customary land to be mortgaged on the condition that it has a individual/family/clan tenure (and the borrower has consent from his/her spouse and children).65

63 Customary land can have two types of tenure: communal tenure or individual/family/clan tenure.

64 As interviews with banks took place in November 2008, reactions to the subsequent passing and amendments to the Mortgage Bill are not included in this report.

65 See http://allafrica.com/stories/200903300110.html

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7.4 RISK WEIGHTS

Risk weights for private dwelling mortgage loans have not yet been reduced to 50 percent66, in line with Basel I requirements. This is unusual as most regulators accept that retail mortgages can be treated differently from corporate or other forms of lending, for the following reasons:

• Portfolio diversification: a retail mortgage portfolio is normally comprised of a very large number of small loans thus presenting greater diversification of risk

• Sectoral diversification: retail mortgages are granted to people from a wide range of employment backgrounds thus diversifying the sectoral risk of the lending institution. Furthermore, in Uganda many of the borrowers will be employed by Government or related institutions, whose employment (and ability to service a mortgage) is not exposed to the cyclical pattern of the economy

• Collections: as most mortgages are granted to individuals of modest means, their ability to fight lengthy and costly legal battles is generally less than for corporate entities

In the case of Uganda, the high risk weight is possibly due to the central bank’s expectation that foreclosure is a difficult procedure to enforce. Interviews with banks, however, suggested that they do not necessarily share this perception. As most banks will attach a capital charge to any facility that represents its risk weighting, and determine whether the income earned over and above what could be earned on a risk free asset (Government Treasury Bills), risk weighting has a major impact on the banks desire and willingness to participate in the market. As aforementioned, banks currently have very little incentive to participate in the mortgage market as the yields on Government paper (zero risk weighting) are in line with the kind of prices consumers are willing to pay for mortgages. Thus without a substantial downward shift in the yield curve (unlikely) or a change in the risk weighting (i.e. 50 percent in line with Basel 1) on mortgages, banks will have little incentive to provide housing finance.

7.5 MICRO DEPOSIT-TAKING INSTITUTIONS

MDIs are currently important providers – if only on a small scale – of home improvement loans, which are known to directly benefit households with modest income. However, current regulation, recognising the small and immature retail deposit base of these types of institutions, stipulates that MDIs should not provide loans for longer than two years. This regulation constrains the extent to which these institutions can provide home improvement facilities, which typically require a longer maturity period to be affordable. Not only are MDIs unable to provide affordable housing finance products because of the term length restriction but they are encouraged to become commercial banks to avoid it67. We

66 Mortgage loans in Uganda are currently weighted at 100 percent

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believe that this quantitative regulation should become more qualitative in nature by allowing MDIs to provide loans of up to five years, on condition that they:

• can secure matched term funding, or • develop term savings products that generate matched deposits, or • demonstrate that they have sufficient core deposits and adopt the improved

measurement and reporting standards as recommended in this report

8 RECOMMENDATIONS This section outlines several recommendations that, if implemented, will contribute to a healthier and faster growing housing finance industry. More specifically, recommendations aim at creating a complementary and supportive regulatory framework as well as a reliable source of long term funds.

8.1 RECOMMENDATIONS FOR FUNDING STRUCTURES

This report has noted that the Ugandan housing finance market is largely hampered by balance sheet constraints experienced by smaller or second tier banks together with the lack of external long term funds available in the market. Unlike the larger or first tier banks, smaller banks do not have the advantage of trusted reputations and/or large branch networks which attract depositors. As a result, larger banks are generally not liquidity constrained, having a substantial depositor base, and thus a sufficient level of core deposits which can be used for mortgage lending. Furthermore, these larger banks are probably strong enough to issue unsecured medium-term bonds themselves. Therefore, it is the second tier banks that require a solution to their impeding liquidity limitations. A series of options for the market were considered (including savings products, deposit insurance, external institutional funders, and securitisation), but were ultimately deemed (currently) inappropriate (see Table 4). It is therefore advisable for the Bank of Uganda to give further thought to the introduction of an external funding structure in the medium term.

As aforementioned the key argument for an external funding structure revolves around the liquidity constraints that the smaller banks and MDIs are currently facing, coupled with their seeming inability to access the capital markets on viable terms on an institution by institution basis. Of the options commonly in use elsewhere, a liquidity facility (from which the smaller banks and MDIs can borrow on a medium term basis to manage their respective ALCO mismatches) is probably the most appropriate format. It should be noted that this facility would

67 This development may have an unknown impact on microfinance for housing, which is discussed in greater detail in the Task 1 Draft Report.

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be particularly supportive of those banks providing home improvement loans which typically have a term length of approximately 2 to 5 years. There are a number of reasons for this judgment:

• It has been successful in other emerging markets such as Malaysia and Jordan, and is currently on-trial in Tanzania

• It is a good vehicle for introducing a state guarantee on mortgage funding without exposing the state to moral hazard in mortgage lending (unfortunately, it can be turned to riskier purposes if not constrained sufficiently)

• It can significantly expand the mortgage lending of smaller banks and thus the degree of competition in the sector

• The alternative of a fully developed securitisation market is not viable in the foreseeable future

It should however be noted that given the expected demand for the facility (noting that only the smaller players are likely to make use of the facility in the short to medium term), the scale of the fund is insufficient to cover the overheads (at least for the first few years of operation). As such the Government of Uganda would most likely need to subsidise such a facility (at least for the short to medium term). It is therefore recommended that a thorough business case and financial model be undertaken to further gauge the viability of such a facility in the Ugandan context, prior to any decisions being taken.

There are also some other constraints to a liquidity facility which need to be taken into consideration. Perhaps the mostly pressing issue is the high returns currently available on Government Securities. In this regard the Government of Uganda needs to review its strategy with respect to Government Securities to ensure that Treasury Bonds do not ‘undercut’ other investment and lending opportunities. Other constraints include the lack of an appropriate legal framework, the need for better liquidity management and finally, the underdeveloped capital market.

8.2 POLICY AND REGULATORY RECOMMENDATIONS

BOU could improve the framework for housing finance by amending some of the regulations relating to liquidity management, reporting, mortgage legislation, risk weightings and MDIs.

8.2.1 LIQUIDITY MANAGEMENT

Banks in Uganda show little uniformity when calculating their respective level of core deposits. To create consistency and reduce uncertainty around the ability of the banks’ balance sheets

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to provide long term funding, BOU could provide more detailed guidelines to the banking sector on how to reclassify demand deposits to core deposits in the maturity ladder. Currently, best practice suggests that no more that 15 percent of demand deposits should be reclassified as core deposits. In addition to better guidance on the identification of core deposits, BOU would also do well to educate the smaller banks on appropriate uses of core deposits, as it seems that some of the smaller banks are not effectively using core deposits to provide long term loans. Although bank specific crises should not occur on a regular basis, it is still a good idea to be prepared in the event that it does. To protect banks, consumers and BOU itself, regulation should require banks to perform stress tests on different scenarios to determine which sources of funds are likely to stay with the bank under difficult circumstances and the rate of those that will tend to run off gradually. Similar to the point above, BOU could also require banks to perform contingency planning so as to be properly prepared for any possible liquidity crisis.

8.2.2 REPORTING

Currently, commercial banks and MDIs are not required to report mortgage / housing finance loans and foreign currency loans separately (from other loans). This prevents BOU from being able to monitor the respective asset classes and the relative quality versus the rest of a bank’s lending book. To have a better understanding (and control) of the market, BOU could require banks to report mortgage loans separately and in addition, distinguish between local and foreign currency loans. Secondly, to better identify longer term assets and liabilities, it is recommended that BOU require for banks to provide a breakdown of the maturities of assets and liabilities beyond 12 months.

8.2.3 RISK WEIGHT

Private mortgage loans are currently risk weighted at 100 percent - comparatively higher than standard practice elsewhere. The high risk weighting hampers the mortgage market, deterring banks from actively engaging in the mortgage market and opting for low risk assets, such as Government paper, instead. It is strongly recommended that BOU considers reducing the risk weight for private dwelling mortgage loans to 50 percent in line with Basel 1 requirements. This would allow for mortgages to be priced appropriately and subsequently encourage banks to lend to the market. Fifty percent risk weight is deemed appropriate for the following reasons:

• The borrower will do everything in his power to keep his home • The equity built up in the home acts as a buffer for the institution • There normally will be a secondary market for developed properties

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• The lending institution normally has a history of the borrower’s ability to service the debt

8.2.4 MDIS

MDIs are unable to offer loans beyond a term length of two years, restricting their ability to efficiently serve the market. This encourages MDIs to upgrade to commercial bank status (like UML), which could possibly hurt the microfinance industry and their many customers. To support the industry, it is recommended that BOU relaxes (and ultimately removes) the restrictions on the term length, on the condition that the MDI can demonstrate that it has sufficient term funds and adequate ALCO processes in place.

8.3 GOING FORWARD

Based on this report’s findings and recommendations, a number of possible FIRST Initiative follow-up projects are suggested to better encourage housing finance in Uganda. These include:

1. Study of core deposits This project would provide banks with technical assistance to create a model to determine their core deposit base

2. Technical assistance for banks to develop stress tests

3. Technical assistance for banks with underwriting and servicing methodologies for micro-finance loans

4. Draft Business Plan for a potential liquidity facility (if still viable)

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BIBLIOGRAPHY Diamond, Douglas B., “Creating A Secondary Mortgage Facility For Jordan”, Housing Finance International, June 1996, Vol. X No. 4.

Hassler, O., & Walley, S. Mortgage Liquidity Facilities. World Bank.

Hoek-Smit, Marja, and Douglas B. Diamond, An Illustrated Guide to Housing Finance Subsidies, Chapter 8 (Secondary Market Funding), Wharton International Housing Finance Program, 2006

IMF. (2009). World Economic Outlook Update January 2009. IMF.

Kayiira, D., & Kalema, W. (2008). Access to housing finance in Africa: Exploring the issues, No.4 Uganda. FinMark.

The Competitiveness and Investment Climate Strategy . (2008). CICS Policy Brief 06/02: Reforming the Pension Sector and Improving Social Security in Uganda. The Government of Uganda.

The Steadman Group (U) Limited. (2007). FinScope Uganda: Results of a National Survey on Access to Financial Services in Uganda. Financial Sector Deepening Uganda (DFID).