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.

In the late 1990s and early 2000s banks and other financial institutions had so much cash that they were forced to lower lending and mortgage underwriting standards in order to put that cash to work. Increased liquidity in global financial markets was a major reason that lender developed mortgage products that allowed loans to be issued to borrowers that had little or zero change of repaying them. Lenders had so much cash available they were forced to create new loan products to market to home owners and first-time buyers in a marketplace already at full capacity.

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.

This same financial need to create a new market is what is currently being experienced by financial institutions in sub-Saharan Africa. Although Africa’s financial state is much smaller than that found in the U.S. or Europe, the same conditions that had emerged in the U.S. several years ago is now being seen developing in Africa. Africa is on the verge of seeing their mortgage market take an upsweep.

But the African residential mortgage markets, unlike the US and European markets are far from being fully developed. In these most of these countries only a small minority of the residents have a bank account or use any type of banking facility, let alone have a mortgage. In these markets the residential mortgage loan exclusive and generally only available to the upper class. But now there is a growing middle class demographic with the desire for home ownership.

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 Home loans and Bond Origination portal which provides access to ABSA Home loans.