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Can West African households dream of purchasing a home?

27.03.2017Caroline Cerruti, The World Bank & Olivia Caldwell, Affordable Housing Institute

110 million people currently live in the WAEMU region; over the next twenty years, an additional 100 million more will be born. Most of them will be urban dwellers, as the area is experiencing rapid urbanizing. This trend is aggravating an already large housing deficit, which mostly affects lower income groups in a context of widespread poverty (about 43 million live below the extreme poverty line). In Abidjan alone, 40,000 additional new households come to the city every year. Municipalities are struggling to keep up with population growth and rapid urbanization and as a result informal settlements and slums are growing.

So how can the growing housing deficit be addressed?

Making housing finance more affordable will enable a greater number of households to purchase a home. The latest data (2013) indicates low mortgage penetration with region-wide residential mortgage lending at just 15,000 new loans, despite a documented need for nearly 800,000 homes a year. WAEMU governments are acutely aware of the demand-supply challenges, and most have developed ambitious programs to build affordable housing; however, these are not enough to meet the existing demand and the quantum of public spending required is not sustainable. Instead, country and regional policies should leverage the resources of the financial sector to grow effective demand by increasing affordability via reductions in monthly required payments.

Fortunately, the WAEMU region presents some of the best conditions in sub-Saharan Africa to develop housing finance. The peg of the FCFA to the Euro has imported low inflation and favored macroeconomic stability creating an ideal environment for lengthening loan tenors. By contrast, rates in Nigeria, Kenya, Uganda and Ghana are double digits, reaching above 30% in Ghana.

Short loan tenors present one of the greatest constraints.

Currently, average mortgage interest rates are 7.5% with loan tenors of 7 to 8 years. If we consider the cheapest formal house priced of FCFA 7 to 11 Million (USD 11,300 to 17,800), a household needs a minimum annual income of USD 6500 to 10000 in order to afford it. When the loan tenor is lengthened to 15 years, the income required is lowered by 40%. Extending tenors with fixed rate loans has a much greater impact than lowering the rates themselves. We have estimated that by increasing tenors to 20 years, up to 1.5 million additional households will be able to afford the cheapest currently available houses on their local market.

So what can be done to lengthen tenors and increase affordability?

Five years ago, the WAEMU governments and the private sector acted by establishing the Caisse Regionale de Refinancement Hypothecaire (CRRH), a public-private regional liquidity facility that refinances banks' mortgages by borrowing in the domestic markets. Since 2012, it has issued six bonds, which helped provide ten year loans to banks to refinance their mortgage portfolio, thus allowing them to make customers' mortgages affordable by extending the tenor.

These efforts should be encouraged. The CRRH has so far only refinanced over 4000 loans, which is little compared to the needs. Longer term financing into the CRRH would allow it to refinance banks at longer maturities. At the same time, the CRRH should look at ways to refinance the large microfinance and cooperative networks which are in good standing and are interested in extending housing loans. Over 70% of WAEMU households work in the informal economy, are excluded from the banking sector and rely on microfinance networks for their financing needs. Supporting the CRRH with long term financing will enable banks and microfinance institutions to gain access to long term liquidity. The results will be directly captured by households who will have access to longer term loans and thus increase their home purchasing power.

Will this be enough?

The housing value chain in the WAEMU region presents many weak links that need to be addressed in order to promote a healthy housing market. Access to clean property titles remains a significant issue which continues to curtail both the supply and the demand side of the value chain. Though some countries have implemented reforms to improve their land systems (new Code Foncier in Benin in 2013, Reform Sheida in Niger in 2006, and digitization of the tilting agency in Cote d'Ivoire), these reforms have yet to pick up speed and be implemented at the regional level. The construction of affordable housing must also be supported as government programs have proved slow and mostly target public sector employees. Finally, rental housing should not be left behind as home ownership is not the only option to promote a better quality of life.

The affordable housing sector is in the process of being catalyzed. There is now a widespread awareness in all WAEMU countries that something must be done to address the urbanization and population growth. Steps are being actively taken to address the housing deficit across the region. We believe that through the supported development of CRRH, the dream of buying a home is at last within grasp.

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About the Authors

Caroline Cerruti is a Senior Financial Sector Specialist in the Africa region of the World Bank. She works primarily on housing and infrastructure finance, financial sector restructuring issues, and financial inclusion. She has been involved in various financial sector assessments jointly with the IMF. Before joining the World Bank, Caroline worked for the French Treasury on trade and financial regulation issues, and for three years as a banker in the European Bank for Reconstruction and Development. Caroline was educated at the Institute of Political Science in Paris (Sciences-Po), the Ecole Nationale d'Administration (ENA) in Paris, and is a CFA Charterholder.

Olivia Caldwell is Project Manager at the Affordable Housing Institute (AHI) where she focuses on housing development and finance in Sub-Saharan Africa and Haiti. Before joining AHI, Olivia worked with CEMEX and Bayer's Inclusive Business Platform, where she helped develop energy efficient affordable housing and infrastructure projects in Latin America and South East Asia. Olivia holds an Executive MBA at the London School of Economics and an MA in Sustainable Development from the United Nations Mandated University as well as a BA in Anthropology from McGill University.

Message from the MFW4A Partnership Coordinator

30.01.2017David Ashiagbor

Dear Readers,

Let me begin by wishing you all a very happy and prosperous 2017, on behalf of all of us at the MFW4A Secretariat.

2016 was a rewarding year for MFW4A. We were proud to host the first Regional Conference on Financial Sector Development in African States Facing Fragile Situations (FCAS) in Abidjan, Cote d'Ivoire, jointly with the African Development Bank, FSD Africa, and FIRST Initiative. The conference attracted some 140 policy makers, business leaders, academics and development partners from over 30 countries, to discuss the role of the financial sector in addressing fragility. The conference has already led to several initiatives by MFW4A and our partners in the Democratic Republic of Congo, Liberia, Sierra Leone and Somalia. We expect to build on this work in 2017.

Our support to the Conférence Interafricaine des Marchés d'Assurances (CIMA), the insurance regulator for francophone Africa, helped them to secure financing of EUR 2.5 million from the Agence Française de Développement. The funding will help to expand access to insurance in a region where penetration rates are less than 2% - well below the average for the continent. We worked closely with a number of our funding partners to help define their strategies in Digital Finance and Long Term Finance. These results are a clear demonstration of how the Partnership can directly support the operations of its membership.

With the support of our Supervisory Committee, we took steps to ensure the long term sustainability of the Partnership. The approval of a revised governance structure which fully integrates African financial sector stakeholders, public and private, was a first critical step. The ultimate objective is to expand membership and build a true partnership of all stakeholders in Africa's financial sector.

2017 will be a year of transition for the Partnership. It marks the end of MFW4A's third phase, and the beginning of its transformation into a new, more inclusive partnership, with an expanded membership. We will focus on revamping our value proposition to provide more focused, needs based services with the potential to directly impact our current and potential membership. In so doing, we hope to consolidate MFW4A's position as the leading platform for knowledge, advocacy and networking on financial sector development in Africa.

In closing, I must, on behalf of all of us at the MFW4A Secretariat, thank all our funding partners, stakeholders and supporters, for your constant support and encouragement over the years. We look forward to working together to strengthen our Partnership.

With our best wishes for a happy and prosperous 2017,

David Ashiagbor
MFW4A Partnership Coordinator

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 5

25.10.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this fifth instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at how innovative instruments and partnerships can help mitigate the risks facing financial institutions in fragile situations in Africa.

In case you missed it, you can read parts One, Two, Three and Four.

What Role for Risk Mitigation?

Participants noted that the perception of the risk of doing business in Africa is higher than warranted by recent economic progress such as the relatively higher GDP growth in many countries. As a result tools to help mitigate risks can play a role in financial sector development.

Ms. Cécile Ambert of the African Development Bank (AfDB) presented the AfDB Credit Enhancement Facility (CEF), which was established in 2015 to increase private investment in countries perceived to be high risk, especially for long dated investment. The facility is part of the AfDB's strategy to increase its loans to non-sovereigns including in fragile countries. It uses a risk sharing model rather than risk mitigation because risk is not lowered but shared, which allows the AfDB to take more risk on its balance sheet. Initial seeding was used as cash collateral to take exposures that are off-balance sheet exposures for the Bank. That cash collateral served as the equity base that was leveraged three times. Risk-taking capacity stands currently at about $700m with 19 transactions ($300m) approved at the board. The facility does not provide payment insurance but default guarantee as it only pays when there is default. Risk and revenues are shared to ensure sustainability and the facility is now seeking diversity in terms of regions, sectors, size, and maturity.

A lesson from the establishment of the CEF is the need to manage the risk of maintaining an arm's length relationship so as to avoid having only bad assets allocated to the facility. Without an arm's length relationship, the sustainability of the facility would be at risk. Also, to achieve the objective of scaling up the CEF, it will be necessary to balance its exposures and not focus only on one sector, be it fragile countries or renewables only or women only investments. The challenge is to mitigate the propensity to layer objectives over objectives.

The CEF does not focus only on fragile countries. Its main objective is to provide capital relief with a view to stretch the balance sheet. The same project that consumes four times in a fragile capital consumes three times in a low-income country (LIC) in terms of risk premium. The vehicle is leveraged so had it focused only on fragile countries, it would have not have been able to leverage as much as it did. Also its projects are large scale e.g. power plants which requires scale. It also needs to achieve a risk rating and for that needs to establish a track record. Ultimately the objective of the facility is not to subsidize the AfDB's loans.

Mr. Henry Morris of the Africa Finance Corporation noted the prevalence of short-term finance instruments and the dearth of tools to mitigate the risks of medium term project finance. He stressed the need to consider the level of coverage for the different phases of a project. In particular, the construction phase is the riskiest part of the project cycle and instruments and enhancements are critically needed at the early phases of projects. He added that Africa is in need of infrastructure but bankability is a problem. As a result, it is crucial to think about the type of support needed at the developmental stages of projects. In short, the focus should be not just on transactions but also on development. Mr. Morris suggested that because risk sharing and participation can come in various forms, stronger partners should take a wider stake in the risk participation and not on a pro-rata basis.

There is a need to think beyond the typical infrastructure sectors and developmental projects need to be widened in their definition. For instance, exploration for crude and gas could be included in this category as gas-to-power projects are also important for infrastructure. Concession-type projects like in a public-private partnership (PPP) could be encouraged as was done for the Henri Konan Bedie Bridge in Côte d'Ivoire. Finally, Mr. Morris stressed that liquidity risk can be important in fragile countries such as in the Nigerian foreign exchange markets.

Mr. Cedric Mousset of the World Bank stressed that capacity is a big constraint in fragile countries and there are no easy solutions. Capacity building should be done when there are incentives for financial institutions to reform, such as incentives to leverage market opportunities and improve markets. The supervisory and regulatory framework is key as it allows for adequate competition, restructuring, and the adoption of international standards such as the Basel standards. Mr. Mousset flagged the Conflicted Affected States in Africa (CASA) initiative through which the IFC provides assistance to fragile African states to rebuild their financial sector and improve the business environment.

Mr. Franck Adjagba of the GARI Fund noted that the Africa Guarantee Fund-the largest guarantee fund in Africa-recently purchased the GARI fund. The AfDB and UNECA helped to establish the AGF in order to help micro, small, and medium enterprises access finance. AGF offers two types of products to banks and private equity firms: portfolio guarantees and individual guarantees (for instance for large infrastructure projects). AGF also helps banks raise long-term funds including through guarantees.

Ms. Consolate Rusagara of the FIRST Initiative also discussed the role of credit guarantee schemes in a context where governments intervene in sectors that are deemed as risky such as SME finance. How do authorities design public guarantees that are sustainable? How do they design them so as not to create the wrong incentives by destroying the credit culture? How can we help design public guarantees?

The principles for public credit guarantee schemes (CGS) sponsored by the First Initiative and the World Bank Group help governments answer such questions. The 16 principles cover four key areas: (i) the legal and regulatory framework (foundations for a CGS); (ii) corporate governance and risk management (building blocks for effectively designed and independently executed strategy aligned with CGS mandate and objectives); (iii) the operational framework (provide essential working parameters); and (iv) monitoring and evaluation (how CGS should report on their performance and evaluate the achievement of policy objectives).

A survey of key stakeholders has highlighted a number of important issues:

  • Most CGS were founded as public enterprises but it would be good to have CGS as public-private schemes.
  • Who supervises CGS? The board? The central bank? It is important to have a supervisory authority.
  • Mandate of CGS is not very clear: supporting SMEs? Agriculture? Typically there is mission creep and layers are added to layers. It is important to include a very clear mandate.
  • Claim management process needs to be very clear to avoid the death of the credit culture.
  • Performance evaluation: accountability by management is needed and performance should be measured.

In short, CGSs are important instruments for risk sharing but the role of government and its objectives need to be clear and funding should be sustainable. CGSs are only one tool to manage risks and should not be used by governments for subsidies. CGSs do not replace prudential regulation. Instead, credit risk management by banks and microfinance institutions should be adequate.

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You can download all presentations on the conference website.

You can view a selection of photos here.

You can watch the conference in our YouTube channel here.

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 3

26.09.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this third instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at some of the major takeaways of the conference, including the role for governments, financial institutions and investors.

In case you missed it, you can read here Part 1 and Part 2.

What are governments doing to address the challenges of financial sector development?

Participants noted that macroeconomic stability is a precondition for financial sector development (FSD). Against this background, fragile countries have elaborated FSD strategies along with or including strategies for microfinance and financial inclusion. FSD strategies typically start by "cleaning up" the banking system to address nonperforming public banks. Bank resolution typically takes the form of public asset management companies ("good" vs. "bad" bank) and privatization. FSD strategies also aim at addressing the lack of product diversification by encouraging new activities such as leasing and supporting the development of capital markets. FSD strategies also focus on broadening access to credit, including through mobile finance.

The existence of an FSD strategy is not a guarantee of success however and participants discussed the importance of strategy implementation. In this regard, Mr. Koné (Government of Côte d'Ivoire) stressed the need to identify needs and formulate strategies, involve key stakeholders, and execute FSD strategies while leveraging strong leadership. As an example, a new financing lease law was passed in Côte d'Ivoire within 5 to 6 months from the time of the elaboration of the draft law to its passing in parliament.

What Role for financial institutions and investors?

Private sector participants stressed that they should be consulted and that they are too often ignored in spite of their impact. Mr. Koroma (Union Trust Bank) noted the role of banks in reducing employment and contributing to economic growth. For instance, opening a branch involves expensive decisions in terms of staffing, telecommunication and electricity infrastructure. Fragility can also be an opportunity for capacity building as for instance when local staff is trained by domestic firms and multinationals.

Many participants highlighted that the difficulties inherent to operating in a fragile environment can be managed. Mr. Lodugnon (Emerging Capital Markets) noted that for private equity firms and regional banks, a portfolio approach can help in reallocating capital in support of fragile countries when there is a shock (for instance after a Boko Haram attack in Chad or after the Ebola pandemic in Liberia). Similarly, Mr. Diarrasouba (Atlantic Business International) explained the very difficult operating environment in Côte d'Ivoire during the conflict. There were de facto two governments and banks, including the regional central bank's national agency, were being nationalized. ATMs were being attacked and banknotes in agencies needed to be stored outside the central bank agency. Bankers were not allowed to travel out of the country. He noted that in such a situation of "force majeure," regulators should be supportive to banks. This was for instance the case recently in Mali where the repatriation of banknotes from the north of the country to the south was facilitated by the regulator. In contrast, Mr. Diarrasouba noted that bank regulation remained unchanged during the Ivorian conflict although clients were accumulating government arrears and asset quality was deteriorating.

It was also noted that the private sector could play an important role in helping intermediate remittance flows to fragile countries.

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You can download all presentations on the conference website.

You can view a selection of photos here

You can watch the conference in our YouTube channel here.

What we learned from the Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 1

19.07.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

Last month, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this first instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at some of the major takeaways of the conference.

What is fragility?

Using a "harmonized definition," the African Development Bank (AfDB), the Asian Development Bank, and the World Bank classify states as being fragile when they exhibit poor governance or when they face an unstable security situation. For practical purposes, governance is measured by the quality of policies and institutions (states with a CPIA score less than or equal to 3.2) and insecurity is assessed by the presence of United Nations or regional peace keeping operations (PKO). In sub-Saharan Africa most fragile states are also low-income countries (LICs).

While the focus of the "harmonized definition" is on institutions and insecurity, participants stressed that fragility is a multi-faceted concept. In particular, fragility implies weak state institutions, poor implementation capacity, underdeveloped legal and financial infrastructure as well as low social cohesion and the exclusion of a large share of the population from financial and other services. The nature of fragility is also fluid and fragile states face situations ranging from violent conflicts to post-conflict economic recovery. The sources of fragility go beyond poor governance, low GDP per capita, and conflicts to include vulnerability to commodity shocks and other macroeconomic shocks, and exposure to the risk of pandemics.

The need to broaden the definition of fragility was further explored with reference to a quote from President Ellen Johnson Sirleaf of Liberia "fragility is not a category of states, but a risk inherent in the development process itself". Mr. Sibry Tapsoba, Director of the Transition Support Department of the AfDB argued for a multidimensional approach, which applies a fragility lens to (i) look beyond conflict and violence; (ii) focus on inclusiveness and institutions; (iii) recognize the importance of the private sector; and (iv) recognize the presence of asymmetries in resources, policy, and capacity.

Participants also insisted on the need to go beyond the negative connotation of fragility and recognize instead that fragile states are in transition and present opportunities for human and financial sector development.

What role for financial sector development (FSD) in fragile countries?

Empirical evidence points to the positive role that financial sector development (FSD) can play in fragile countries. There is a positive correlation between financial sector and economic growth, poverty reduction, and inequality reduction. FSD can be a driver of growth through increased job creation and it can help mitigate risks through increased savings, loans, and insurance.

A key finding stressed by Ms. Emiko Todoroki, Senior Financial Sector Specialist at FIRST Initiative is that fragile countries fare worst in all macro and financial metrics, except one: the share of adults with mobile accounts. Digital financial services are offering solutions in fragile states and there is a need to understand better their role.

In the same vein, Ms. Thea Anderson, Director at Mercy Corps argued for the need to focus in on micro issues such as the role of delivery channels, payments infrastructure, insurance, and blended finance (including impact investment), and Islamic finance. As she noted, FSD is relevant even in the more volatile security situations. For instance, refugees and internally displaced persons (IDPs) can be viewed as a market segment and their financial inclusion can be kick-started with the use of functional identification (which also help comply with Know Your Customer (KYC) requirements). Mr. Paul Musoke, Director of Change Management at FSD Africa also highlighted the role of markets and market building in a difficult context. He noted the need to look for scale, sustainability, and systemic change. As markets are dynamic and not predictable, taking a systems approach can be useful. Such an approach includes asking questions such as what factors are going to play a role in the future? Who is going to pay for infrastructure? What level of development should we target?

Lastly, Mr. Cedric Mousset, Lead Financial Sector Specialist, World Bank reminded the audience that governance remains a key dimension of fragility. Weak governance in fragile countries exposes them to a higher risk of non-compliance with regulations such as anti-money laundering and combating the financing of terrorism (AML-CFT) regulation. Improving governance, although it may be a slow process, is needed to support FSD. Measures to support political stability, improve the business and macroeconomic environment, ensure legal security, and build capacity remain important.

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You can download all the presentations on the conference website.

You can also view a selection of photos here.

For more information, please contact:

Pierre Valere Nketcha Nana
Email :p.nketcha-nana[at]afdb.org

Abdelkader Benbrahim
Email: a.benbrahim[at]afdb.org

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