Ghana Banking Failures Implication for Housing

The collapse of the eight banks whose licences were revoked by the Bank of Ghana (BoG) raises serious concerns about the health of the financial sector in Ghana. It also has significant implication for all sectors of the economy. The fact that the reported credit facilities granted to shareholders, related and connected parties of the banks were used to acquire private real estate properties leads us to ask “why didn’t they offer mortgages to potential home owners?”

According to the BoG these credit facilities were neither granted through the normal credit delivery process nor reported as part of the bank’s loan portfolio. It is hence assumed that the beneficiaries of these credit facilities did not pay interest, fees and charges to the banks over period they had the benefit of the credit facilities. This article illustrates the positive impact the amount involved in this scandal could have had on the housing sector.

Failures Impact on Housing Sector

Following the liquidation of the five banks a basic analysis was conducted to estimate the number of properties the banks could have financed with mortgages products. The table below illustrates the potential properties that could have been developed with the amount misappropriated by each bank.

The following assumptions were also made to guide the analysis. It was assumed:

1. A 3 bedroom affordable property cost US$35,000 as at 31 July 2018.

2. Exchange rates used were the Central Bank’s figures for May – July 2018.

All the figures in the table below are those published in the BoG August 2018 press releases including the liquidity support. An online mortgage calculator tool was used to calculate likely return on investments. The estimated figures show the country’s housing stock could have been increased by 61,961 (i.e. 3 bedroom houses). The potential profit, capital assets and other unintended benefits that the banks and economy could have received is also presented in the diagram below.

To illustrate the likely return on investments the figures derived above were based on the following assumptions - mortgage repayment interest rate was fixed at 7% over a 20yr period. Property taxes per annum calculated at 1.25%, home insurance is at 0.35% per annum and one time home expense is calculated at 3%. The figures show if the five banks had followed proper lending practices the US$3.2billion they received could have yielded over US$7billion after 20years. The projected interest accrued for the same period would be over US$2.5billion.

This shows the Housing Sector has the potential to invigorate the economy. Unfortunately the current financial institutions in Ghana do not include a well constituted capital market to provide the cash liquidity required to finance housing projects. Therefore the Finance Minister’s announcement in the July 2018 Budget Review on the establishment of the National Housing and Mortgage Fund is welcomed. This will provide cheaper local currency mortgages and construction finance to increase access to affordable housing.

However this does not go far enough because the Tier 2 & 3 pension funds are still untapped. The long term plans for these funds needs to be designed and implemented ASAP. Such internally generate funds can be used judiciously to finance housing development. Momentum for affordable housing is growing therefore initiatives aimed at solving the problems must also tackle the different aspects of the challenge facing the housing sector concurrently.