Sub Saharan Africa: The New Frontier For Mortgage Lending?
The sub-prime mortgage in the U.S. has been the topic of many conversations as well as articles. Market analysts have decided to blame the downward spiral of the credit market on the recent adverse credit conditions. Lenders are now extending home loans to individuals with less than impeccable credit ratings. In addition the borrowers have a less than impressive history with their finances. This effect in financial lending is now being seen in an unlikely country, a country not known for financial enterprise, which is Africa.
The current subprime crisis which could be accounted for by the liquid status of the financial market is also due in part to the billions of pounds in mortgages to individuals who had little or no chance of ever making repayment on such loans. Financial institutions felt they were in such a bind during the period of recession in the’90’s and 2000’s they made the choice to lower their standards in their lending practices. At that time, lenders had a surplus of money and were trying to devise new ways of marketing their finances to home owners and even to the first time buyers.
Desperate to earn some monies, lenders innovated new financial products to capture more customers than their competitors. Home loans were considered the safest bet of them all. After all, if the borrower failed to pay, the lenders could always opt for foreclosure and get back their monies. Their assumption was not far fetched, because around that period, real estate values had climbed up a few notches. In what followed this surplus liquidity, many people with adverse credit, including some first time homebuyers came into these rapids. A frenzied borrowing trend led real estate to dizzying heights, but eventually, when the first set of these poor credit borrowers defaulted, the real estate bubble just burst, and lenders found they’d been lending more than the actual worth of the property. They also realized that their products had contributed to this frenzy, and those foreclosure clauses were not adequate protection for them.
Some the biggest banks in sub-Saharan Africa are currently experiencing the same excessive liquidity the drove the subprime markets in the United States. While the sub-Saharan market it minuscule when compared to the United States and Europe some factors which were prevalent in those markets are emerging in many African nations today. This supports the viewpoint that Africa may be about to experience a boom in their mortgage markets.
The difference with the African market is that the home loan market is not flooded. This is because a lot of African people don’t even use financial institutions. There are very few people who have the ability or the desire to become home owners.
The African banks may also have an added edge in that they are not as likely to create adverse mortgage products. This advantage is due in large part to the African people’s lack of financial dealings. Most of them have never had loans or credit of any type and therefore have no negative credit history. Unlike conditions in the U.S., the African lenders only give credit to those individuals who hold a regular job and are paid a salary. It is also a customary practice for lenders to receive their repayment amounts directly from the borrower’s employer rather than waiting to be paid from the borrower himself. This system of repayment has made lending on the part of the financial institution much less risky. It has also led to rewards for the person borrowing as they often receive much lower interest rates because of it.
This means the lenders in sub Saharan region would not be allowing a mortgage market to run away. Instead, they will be investing elsewhere and earning profits on their investment. Mortgage market in the west, particularly, the home loan segment will take several years to recoup. In the meanwhile, it will be African banks that may rule the roost.
Graham McKenzie is the content coordinator for a leading South African leading Homeloans and Bond Origination portal which provides access to ABSA Homeloans.