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Equity contribution and the paradox of bring money to take money

Housing
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Except in the informal economy where documentation and financial technicalities are overlooked or, at least, taken for granted, giving and taking of money always is always a serious business and has to do with security or collateral from he who takes.

In some cases, however, in the informal economy, depending on the size of the money that is given and taken, an eyewitness is often required from both parties involved in the transaction and the aim of this is to have a third party who will tell the story in case of default.

But the story is different in the formal sector, especially in the mortgage market where the business is largely about lending and borrowing.

The mortgage market is structured in such a way that even when high interest rate, which is a big challenge, is removed from mortgage business, borrowers will still have some hurdles to cross and one of such hurdles is equity contribution, usually demanded by mortgage institutions before they can advance loans to borrowers.

Equity contribution is the financial commitment, always calculated in terms of the percentage of the money to be lent out, is the money which a lending institution, a mortgage bank, that is, demands from somebody seeking loan to enable him buy, build or renovate a residential building.

To the man on the street, the idea of equity contribution does not square up. He does not understand why somebody that is looking for money to borrow is required to bring money in order to get that money. The question he frequently asks is ‘why borrow if I had money to give?’

But the lender, the person who gives out the money, thinks differently and so has an answer to give to the question.

Before now, mortgage loans were given at very high interest rate of between 20 and 25 percent and the borrower is also required to bring about 30 percent of the loan amount he wants to borrow as equity contribution.

The street man wonders why somebody who wants to borrow N10 million, for instance, is required by the lender to bring upwards of N3 million in order to access the N10 million. He argues that if he had such money, he probably would not have gone for the loan in the first place.

Mortgage banking operators, however, say there are reasons they demand equity contribution. One of these reasons is for the contribution to act as “a hedge against loan repayment default”. Equity contribution, they say, is fundamental to mortgage lending just as regular flow of income is.

Equity contribution is fundamental because there are institutional and regulatory developments that are still being expected in the industry. There is no sound data-base of Nigerians yet; the national ID card remains largely unreliable and foreclosure laws are still not strong.

All these issues, according to mortgage operators, have compelled mortgage banks to demand for equity contribution and they argue that if they had all the above issues resolved, they would give people mortgage based on their credit rating.

Because mortgage banks do financial intermediation, it is their responsibility to protect depositors’ money and for them to protect those deposits, they have to ask for something that would act as a back-up to the money they give out to borrowers.

“If we had development funds, the kind of funds that we have in the manufacturing and agriculture sectors of the economy, where government gave out intervention funds over a period of 15 years at a single digit interest rate; if we had that kind of fund in the mortgage banking industry, it would be very helpful in a number of ways”, says a mortgage bank CEO who does not want his name mentioned.

Anthony Owuye, a finance expert, notes that “the banker and the borrower are in the same market in which case both suffer a common problem; we should not forget that we are all trading in one commodity which is money, and the trading is done in such a way that you sell according to how you buy”.

Another argument by mortgage operators is that the credit the banks, including the mortgage institutions, have are short term in nature. So, they can’t lend long term and they do business in an environment that is very costly.

Time is now for the federal government, through the CBN, to do something about high interest rate charged by both the commercial and mortgage banks if the housing demand-supply gap is to be bridged.

In other economies, there are special interest rates on loans to real estate. Nigeria can do the same and the relevant authorities should look critically into the whole issue of equity contribution demanded from home loan seekers, especially the low income earners who cannot afford such loans.

Equity contribution is reason for the huge housing deficit and low home ownership level in Nigeria today. It could, perhaps, be reason too for the a performance of the Federal Mortgage Bank of Nigeria (FMBN).The apex mortgage bank administers the National Housing Fund (NHF) and is responsible for the disbursement of mortgage loans from contributors to the NHF.

 

Chuka Uroko

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