Investigating Barriers towards Access and Usage of Housing Finance in Ethiopia At Habitat for Humanity

Investigating Barriers towards Access and Usage of Housing Finance in Ethiopia

1. About Habitat for Humanity International (HFHI) – Terwilliger Centre for Innovation (TCIS)

Habitat for Humanity International (HFHI) is anchored on a fundamental vision of a world where everyone has a decent place to live. This vision has been the driving force in all HFHI’s actions and activities that have seen more than 29 million people around the world supported to build or improve the place they call home. To further fulfil this vision, HFHI established the Terwilliger Centre for Innovation in Shelter (TCIS) to Build and Expand Inclusive Housing Markets by supporting local firms to innovate and expand client-responsive services and products.

The TCIS understands that the role of local markets is critical in closing adequate housing gaps among the low-income and incremental market segment. Among The TCIS’s efforts over the past five years in Kenya include engaging stakeholders in the affordable housing market system to facilitate efforts to drive housing quality up and housing costs down, while taking cognisance of contextual realities in the country. The aim is to stimulate inclusive housing markets while generating expanded benefits to low-income households in a sustainable manner. The thrust of interventions is the market system development approach that focuses on systemic change aimed at stimulating the low-cost housing market system to innovate and replicate promising practices on a sustainable basis.

This approach has ensured partnering with key actors to identify impediments and opportunities in the subsystems and solutions and services for incremental housing markets and facilitating initiatives that strengthen competitiveness of private and public sector actors through market-based initiatives. By adopting the market systems development approach, focus is maintained on housing services and products with potential to be developed in an equitable and inclusive manner through the market leverage. The approach further ensures that efforts are driven with and through private and public sectors and other market-based actors where implementing partners are evident and strengthened to lead systems change even beyond the programme intervention.

1. About Habitat for Humanity Ethiopia (HFHE)

Habitat for Humanity Ethiopia (HFHE) is part of Habitat for Humanity International (HFHI), which is a leading global nonprofit organization working in local communities in housing for more than 70 countries. HFHI has been driven by the vision that everyone needs a decent place to live and raison d’être establishment. It began in 1976 as a grassroots effort on a community farm in Southern Gorgia, USA.

Habitat for Humanity Ethiopia started work in 1993 with the aim of assisting low- income and vulnerable families to move out of substandard housing. In line with this, it started the program in 1993 by constructing 34 mortgage houses in Addis Ababa, in Gerji Area. The Target beneficiaries were entirely vulnerable families of people with disability (PWD) working at Umbrella factory.

Habitat for Humanity Ethiopia has been able to diversify its areas of interventions to help families across the country. As a result of the efforts made over 28 years, Habitat Ethiopia helped 140,908 families (704,341 individuals) in 18 communities to move to decent houses, get access to water, and sanitation. About 32,200 families received hygiene awareness raising, saving and financial literacy training. The target beneficiaries are people with low income, vulnerable and marginalized groups (PWD), women headed families and elderly people.

In addition to housing, HFHE expanded its work focusing on Vulnerable Group Housing, Water Sanitation and Hygiene, and communal infrastructure such us walkways and ditches. Habitat for Humanity Ethiopia also joins the national efforts being made to help people affected by drought through its Disaster Risk Reduction and Response-WASH Resilience Building Project (DR3-WASH). Currently, HFHE is implementing its programs in Addis Ababa, Debrebirhan, shewarobit, Debreseina, Ataye& Kombolcha, towns in Amhara Region; and Arsi Negele districts in Oromia Region.

HFHE which has been working in partnership with town administration and community groups and beneficiaries in the past now would like to work with partners and other stakeholders looking to scoping of the housing finance ecosystem in Ethiopia, Identifying the critical barriers that hinder the housing finance growth and solutions to address those barriers to bring market wide impact particularly for Low- and middle-Income Household’s

1. Background

Global housing supply falls short of demand with more than a billion people living in slums or informal settlements with 80% attributed to three regions: Eastern and South- Eastern Asia (370 million), sub-Saharan Africa (238 million) and Central and Southern Asia (227 million). The United Nations further estimates that 3 billion people will require adequate and affordable housing by 2030. Rapid urbanisation is the key demographic force shaping current and future housing needs in most developing economies. The United Nations Department of Economic and Social Affairs (UN DESA) projects that the proportion of the world population living in urban areas will increase from 55% to 68% by 2050. An estimated 65% of Sub-Saharan Africa’s population is expected to live in urban areas by 20501. Sub-Saharan African economies are faced with growing housing deficits and affordable housing crisis. The continent’s housing backlog is estimated to account for at least 51 million units, while an estimated urban population of at least 238 million live in slum conditions2. Most of the projected urban population will join existing residents in inadequate housing or overcrowded conditions in urban peripheries. The World Bank estimates that there will be 4.5 million new residents every year in informal settlements across Africa.

The availability of and access to housing finance is a significant determinant in a household’s decision to acquire, build, or rent a house. It is estimated that less than 15% of Africa’s urban population can afford to purchase developer-built housing. In many countries in Global South, mortgage-finance systems tend to be underdeveloped, thereby limiting access to finance and contributing to higher borrowing costs. Functioning mortgage markets exist in only a few African countries, such as Morocco, Tunisia, Namibia, and South Africa, where the mortgage loans as a percentage of the GDP is 18%, 9.2%, 19% and 34% respectively. In Nigeria, Cameroon, Egypt, Côte d’Ivoire, Ghana and Tanzania for instance, housing finance amounts to less than 1% of GDP3.

Limited and expensive mortgages limit access to finance for housing. Ethiopian housing mortgage’s share of the national product is less than one percent (only 0.39 percent). Even though the supply of regular loans for houses is limited, the demand is high and the feasibility is also reliable and interesting, so real estate, which includes the house, rental and trade business, has the largest share of 65 percent of the investments that have been license approved and put into action in Ethiopia.4

On the supply side, developers need financing to build the mass housing projects that are needed to address the continent’s housing deficit. The financial service sector needs to diversify the breadth of products and services offered so that they increasingly target Low-Income Households.

It is presumed that most of the African population build incrementally hence financing through proceeds from business and farming, savings and credit from a variety of financial service providers and other mechanisms including family and friends and social groups. There are only a handful of formal financial institutions offering credit for incremental construction. Various market and institutional capacity.

4. Ethiopian House sector analysis

Globally, in 1990, there were 10 cities with 10 million people or more but by 2014, the number of mega-cities rose to 28, and was reached 33 by 2018. In 2018, 4.2 billion people, 55% of the world’s population, lived in cities and about 828 million people are living in slums areas and the urban population is expected to reach 6.5 billion in 2050. In the coming decades, this urban expansion of around 90% will take place in the developing world. About 80% of the global GDP has been generated in cities as these are played significant role in the economy. To make cities sustainable for all, the focus should be the creation of good, affordable public housing upgrading slum settlements, investing in public transports, and creating green spaces and getting a broader range of people involved in urban planning decisions. Accordingly, the United Nation (UN) has defined 10 Targets and 15 Indicators for SDG 11 from which Target 1 focuses on “Safe and affordable housing”. By 2030, ensure access for all to adequate, safe, and affordable housing and basic services and upgrade slums which can be measured using the proportion of urban population living in slums, informal settlements, or inadequate housing. A slum household is defined as a group of individuals living under the same roof lacking one or more of the following conditions: access to improved water, access to improved sanitation, sufficient living area, and durability of housing 6

In 2015, 19.4% of Ethiopia’s population was urban, one of the lowest even by developing countries’ standards. The rate of urbanization, estimated at 3.8% per year between 1994 and 2007, is still high despite its decline from 4.8% during 1984-1994. On the other hand, evidence shows a high growth rate of urban population of around 5.4%, which would result in a higher level of urbanization within a relatively short period due to high rate of rural-urban migration and demographic shift. This high rate of urbanization could also be due to changes in economic structure that considers expected increases in rural productivity and implementation of macro-projects with significant spatial impact. According to UN-Habitat, Ethiopian cities contribute to close to 40% of the national Gross Domestic Product (GDP). Urban productivity is more than double the national average and three times that of the rural average. The Micro and Small Enterprise (MSE) Development Program that has been under implementation in urban areas contributed to significant reduction in unemployment rate with understandable impact on poverty alleviation even though the current rate of unemployment is still high7. The coverage of water supply in most of the urban areas is above 90% with frequent interruptions as well as significant wastage (about 30%) that has an impact on urban productivity. The sanitation situation, however, is grossly inadequate in view of a significant proportion of households are without toilet facilities have limited storm water management service and lack absence of sewerage systems. Solid waste generation in urban areas is estimated at 0.4 kg per day as the volume and composition of solid waste generated in cities are expected to increase associated with changes in lifestyles and consumption patterns 8

Apart from this, concerning operational problem on investment in housing, Ethiopia is one of the developing countries to allocate a very low percentage on housing sector, which is estimated to be 2.5% of its national income. This figure is below the minimum standard set by the United Nations for developing countries, which is 6% of GDP9. In fact, one of the key problems to provide adequate housing facilities is associated with the difficulty to make adequate investment on housing. The lack of comprehensive data on the housing stock is seen as the major constraint for evidence-based policy making.

Current housing policies embrace a multi-actor scenario, but the actual focus of city administrations has been the construction of condominium housing under Integrated Housing Development Programme (IHDP) since 2006. More than 250,000 condominium units have been constructed and distributed under IHDP in the 27 cities. The main challenges faced during the implementation of IHDP include the general preference of residents towards low-store villa type houses, the slow pace of construction and transfer of condominium units, limited affordability, and the resulting ineffective targeting. The focus on condominium housing, which is also seen as land saving strategy, and the limited supply of land for construction by other actors is reckoned to have resulted in the proliferation of informal housing. Owner occupied housing and informal private rental arrangements that mostly entail unauthorized modifications of existing housing units are the dominant form of housing provision. Public rental units owned by Kebeles, which were nationalized in the mid 1970’s, are found in the worst physical condition due to, among others, low rental levels that could not allow generating sufficient resources to undertake regular maintenance. Absence of action titles and the high cost of construction materials are the major disincentives to improve housing conditions in case of privately owned housing units. Building regulations promote the use of imported construction materials and has led to the near abandoning of local construction technology in case of formally constructed houses, even though they are widely used in informally constructed units.

1. Housing finance and urban land markets

Ethiopia has an unmet housing demand of ~1.2m with 381 thousand housing units needed annually with only 165 thousand units produced annually. Currently, 22.17% of Ethiopia’s population is living in urban, one of the lowest even by developing countries standard. The rate of urbanization, estimated at 3.8% per year between 1994 and 2007, is still high despite its decline from 4.8% during 1984-1994. With the urban population at 22.17% and urbanisation rate being at 3.8%, most of the urban population rent homes (almost 60% of urban households renting in Addis Ababa). This has increased the demand for rental units where as many as 54% of urban formal units across the country are rented (Addis Ababa registering a higher number of more than 60%). Up to 75% of current rental units are being provided by private sector. 10

With only 16% of population receiving formal salary (which is a pre-requisite for majority of mortgages) and mortgages being only 1.87% of GDP with 8.3% of mortgages issued through the IHDP-Integrated Housing Development Program (which requires 10% – 40% upfront deposit). With around 20 banks in Ethiopia, 20% of all mortgages (in terms of value as of 2017) is with one Bank – Commercial Bank of Ethiopia, with around 41 MFI’s holding more than ten times the value of housing and construction projects than banks. 11UN Habitat estimates that 28.2% of Addis Ababa housing stock are made of cooperatives while WB estimates at 50%

In fact, most of the housing is financed through informal channels. Banks are still unable to offer affordable housing finance products to regular clients due to high risk associated with mortgage lending, inappropriate housing finance solution and a lack of long-term funds. Microfinance Institutions (MFIs) are slowing gaining market share in home finance loans although still appropriate housing finance solutions are few compared to the market demands

Since the early 1990s, urban land reform has been one of the cornerstones of Ethiopia’s transition to a market-oriented economy. All land in Ethiopia falls under government ownership, but the constitution allows for use rights to be separated from ownership rights. Land use rights in urban areas can be transferred to individuals, groups (communal holdings) and private entities on a leasehold basis. Rural land, meanwhile, cannot be transferred to others, except for family members. As such, the state continues to own the land while creating a tradable claim on urban land. This leads to the emergence of urban land markets.

Urban land markets in Ethiopia are not functioning efficiently and much remains to be done as the government has failed to meet the diverse and growing demand for urban land. The private sector has little direct access to formal land supply because most of the land is allocated for government-led priority programs. Therefore, land supply is not financially sustainable. In addition, slow implementation of the legal cadastre has limited protection and transaction of lease rights which is also not providing an enabling environment for a well-functioning land market. Restrictions and conditions in the leasehold rights have hindered their transferability and reduced viability of using leasehold title and complex lease pricing further limits market participation. On the other hand, the real estate industry is under-developed, with very limited professional standards or practices. Reliable, comprehensive, and up-to- date information about real estate transactions is lacking, which constrains rational decision making about property market transactions.

6. Objective

HFHE is seeking to engage a company/consultant to carry out a transparent and objective research to identify the systemic barriers towards access and usage of housing finance in Ethiopia.

The main objectives of this survey are to;

• • Perform a holistic assessment of the housing finance market. This includes. – all the market players (financial service providers and non-financial providers), including newly emerging Banks who are interested in housing finance such as Selam Bank and Goh housing Bank – current housing finance products available ((stand-alone products, tagged along products and undefined housing products), – current and future financial needs for other housing finance value chain actors (SME’s) – Unpack the demand and supply side housing finance needs, challenges and opportunities as well as assessing the support functions available to promote affordable housing finance – Review existing regulations, policies and laws that support and hinder housing finance – Give recommendations on opportunities to addressing the housing finance barriers that will bring impact to the market in the short, medium and long term – Identify potential investment opportunities in housing finance that will help the supply side in accessing capital/investments in housing finance initiatives. This should include. – Potential investors in housing finance in Ethiopia – Approaches towards investment to support housing finance

Results from this research will help HFHE to develop their short, medium and long term housing finance strategy and intervention areas. The research will help gain important insights regarding the systemic barriers that hinder development and growth of housing finance, opportunities to address those challenges, the partners to collaborate in addressing those challenges and resources required to bring the maximum impact in the market.

1. Scope of Work

The selected company/consultant must undertake the following activities:

1. 1. Market Analysis

The market analysis should cover Addis Ababa and major secondary cities. We believe that will be give a better country representation

• • • Map out all the financial and non-finance service providers in the market and other actors involved in the housing finance ecosystem. This includes those directly offering financial solutions to the consumer and those offering financial solutions to SME’s (actors within the housing ecosystem) – Map out all the products/solutions related to housing finance being offered in the market by the financial and non-financial service providers – Identify supply side financial needs and investment opportunities in housing finance – Through a defined sample size, identify the demand side housing finance current and future housing finance needs particularly for Low and Middle – Income Households (LIH’s) – Identify the financial needs of housing ecosystem value chain actors (SME’s) – Map out the current housing finance investors and approaches in the market

1. 1. Identification of Systemic Barriers

• Identify systemic barriers that hinder access to housing finance solutions from the demand side
• Identify systemic barriers that hinder provision of housing finance solutions from the supply side
• Identify regulatory/policy barriers that hinder the smooth provision of housing finance solutions to the market
• Identify market barriers (infrastructure/Data/etc.) that hinder the provision of housing finance products/solutions in the market
• Identify barriers that hinder investments in housing finance particularly availability of capital to the financial service providers

1. 1. Provide detailed recommendations

• Propose on how HFHE and other players can work to address the systemic barriers identified at different levels i.e. Demand side, Supply side, markets and Policy/regulatory
• Propose opportunities for the investments in the housing finance
• Categorize the recommendations in terms of short term, mid-term and long terms implementation based on impact
• Suggest on the partners whom, HFHE can work with to address those barriers

1. 1. Research Dissemination

o Dissemination of research results to the market. This will be discussed and agreed upon with HFHE and its partners during the inception reporting.

1. Deliverables and Milestone 1.5 Inception report: (2 weeks after contract signing)

• Prepare an inception report detailing on how the company is planning to undergo the research. This should include; deliverables, methodology and work plan
• Proposed structure for the supply and demand side assessment
• Detailed work plan and proposed methodology (sample design and market survey instruments), to respond to the objectives of the research
• 1. 1. Market Analysis Report: (2 Month after delivery of Inception Report)
• Supply side assessment: all the financial and non-financial service provides in the market that offer housing finance solutions to the public and housing value chain actors (SME’s), detailing available products/solutions related to housing finance in the market, and possible indications of accessibility requirements (Know Your Customer/due diligence) and cost structures
• Demand side assessment: providing detailed insights on the current behaviours, uptake, usage and needs of housing finance products/solutions as well as challenges, barriers and opportunities
• Regulatory and policy Assessment: clearly identifying gaps in the regulatory landscape towards provisioning of affordable and appropriate housing finance products/solutions in the market
• Market Assessment: providing investment/financing landscape and needs for the housing value chain actors (SME’s) including the current investment models/approaches

1. 1. Draft report (2 weeks after delivery of Market Analysis Report)

– A draft report detailing the systemic barriers identified and recommendations on how to address them to bring the impact anticipated.

1. 1. Final report (2 weeks after receiving comments on the Draft report)

– Final report on findings and recommendations considering all the comments that would have been shared in the Draft report

1. 1. Prepare Research Synthesis

– 2-3 pages concise research synthesis paper has to be prepared for disseminating the results of the study for quick reader.

Report Format:

• Market Analysis and Draft report should be delivered in PowerPoint format (soft copy only); and
• Final report should be in Microsoft word digital format (hardcopy if requested)

1. Eligibility Criteria

The research company/consultant should:

1. Have at least 3 experiences in conducting Systemic Market research/studies potentially in Africa
2. Assigned personnel should have the relevant qualification in the field of research, finance, economics, urban sector specialist and potentially investments
3. Understanding of market systems approaches
4. Experience working in housing/housing finance is an added advantage
5. Understanding of the housing finance in the context of Africa
6. Research Methodology

The research company/consultant shall recommend methodologies on how th research will be conducted depending on the terms of reference

1. • It is expected that the research methodology will be outlined in the proposals submitted in response to the terms of reference and that the final methodology will be determined in consultation with the appointed consultant
   • It is expected that the research will involve; comprehensive desktop review of players and actors while detailing the housing finance product/solution information and any necessary data that exists, Analysis of the data that will be captured; and Interviews with key stakeholders, specifically chosen for their insight into the market and their knowledge of the sector
2. Proposal Evaluation

Proposals will be assessed according to:

1. Relevant, demonstrated competence of firm
2. Demonstrated expertise of the company/key individuals
3. Content, quality and cost of the proposal Submitted Proposals must include:
   1. A response to the ToR, demonstrating familiarity with the subject matter, proposed methodology and key issues for consideration in the research
   2. A detailed work plan which includes timelines, demonstrating the feasibility of the proposal
   3. Statement of qualifications of the firm(s) as relevant to the research project
4. 1. Professional team composition and qualifications (i) for overseeing the work; (ii) for undertaking the research
   2. Methodology (quality of assessment tools)
   3. Fee proposal and costs estimates, indicating the basis of calculation of fees, including cost of travel if necessary
   4. Supporting documents for registered firms including at a minimum; company registrations and Tax clearance certificate(s).

The proposals will be assessed based on the following technical criteria which constitutes 60% while the financial proposal takes 40%

• • Understanding of the ToR (5 % scores) – Experience of the Firm in related work (15% scores) – Professional team composition and qualifications (15% scores) – Methodology (quality of assessment tools) (20% scores) – Time frame/Work plan (5% scores)

1. Proposal Submission

The deadline for submission is on or before 07 October 2022. Once the selection process has been completed, HFHE will issue a contract confirming the appointment of the service provider. Any queries should be directed to Daniel Mhina, who can be contacted at DMhina@habitat.org