Africa the new mortgage mecca The UK Financial Times says a number of banks in Africa have launched aggressive moves to expand their mortgage businesses just as housing markets in the US and parts of Europe falter. PAUL REDFERN reports THE EAST AFRICAN Middle class East Africans could find themselves unlikely beneficiaries of the escalating credit crisis in the West as large financial institutions look to new markets to sell their mortgage products. Until recently, home ownership was considered an unattainable dream even for many middle class people in Kenya, Uganda and Tanzania. But low rates of debt, improving economic indicators and high aspirations among the sector have led a number of banks to consider reappraising whether or not to expand their lending across the region. A detailed report in the London-based Financial Times newspaper says that a number of banks in Africa have launched aggressive moves to expand their mortgage businesses just as housing markets in the US and parts of Europe falter. One such example is Barclays Kenya, which is issuing a Ksh5 billion ($7.7 million) corporate bond to fund its ambitions in the sector. Although acknowledging that the African mortgage sector still remains tiny, in spite of huge pent-up demand, the report says that this is changing. At present, mortgages are available only in a dozen or so countries and the barriers to making them a mass-market product are formidable not least them the murkiness of property rights across much of the continent. Only a decade ago, banking in the region was rudimentary and housing finance was the preserve of a corrupt and aloof public sector, the report says. Now, the three big international banks active in East Africa Barclays and Standard Chartered of the UK and Stanbic, a division of South Africas Standard Bank are jostling to secure well-heeled mortgage clients in Kenya and Uganda. Their next battleground is likely to be Tanzania. The market boundaries are being pushed by young innovators such as Equity Bank, which is using capital secured last year when Helios, the London private equity group, paid Ksh11 billion ($169 million) for 25 per cent of the group. Behind the trend is a confluence of factors, the Financial Times says. Economic growth in sub-Saharan Africa has averaged almost 6 per cent a year since 2000, the best since the 1970s, powered by surging commodity prices and better macroeconomic management. Buoyed by that growth, African banks have captured more deposits, assembled bigger balance sheets and reported ever-higher earnings, as well as benefiting from the confidence instilled by better regulation. Mike du Toit, managing director of Stanbic in Kenya, said the appeal of mortgages was that they give banks the chance to sell other products on the back of the loan. Stanbic is the only group in Kenya to offer a 100 per cent mortgage, but otherwise the big players across east Africa are united in lending at interest rates of 12-18 per cent and specifying a minimum loan of about $30,000. The Financial Times acknowledges that, at present, banking is largely a service for the elite, and that 86 per cent of adults in Kenya do not use a bank. This creates difficulties for lenders because many clients do not have a credit history and work in informal roadside trades such as fruitselling or toolmaking. Equity Bank is one of the few players that says it has the risk tools and familiarity with low-income customers to enable it to identify creditworthy borrowers among the poor. But most banks restrict their mortgages to salaried customers and some even mitigate the risk of default by making deals with big employers to deduct repayments from wages at source in return for a lower interest rate for the borrower. African banking is still about exclusion, Mark Richards, a financial institutions partner at Actis, told the FT. A tiny proportion of people have a bank account and an even tinier proportion have a product like a mortgage. But things are changing, not least because of the growing realisation that, unlike in the West, banks have possibly been too prudent in their lending. What happened in the US was what happens when markets get close to saturation point and go beyond prudent risk procedures, Mr Richards said. Africa is at the other end of the spectrum and banks are still cherry-picking the very highest quality customers. The FT says that the banks move into a potentially lucrative mortgage niche underlines the extent to which Africa has been insulated from the credit crunch. This is said to be one of its great attractions to institutional investors from the US, Europe and the Middle East, which have flocked to the continent in the past 18 months in search of higher yields. Private capital inflows to sub-Saharan Africa were $53 billion last year, according to the International Monetary Fund. The figure, which includes foreign direct investment, portfolio flows and loans, has quadrupled since 2000. One factor that encouraged the boom in US subprime lending was a global surfeit of liquidity. But banks in Africa still need to be careful that they carefully consider customers ability to repay loans, experts say. Rick Ashley, former head of the asset management division at South Africas Old Mutual, raised the concern that African banks are falling over themselves to find ways to lend in a manner that bears some similarities to the subprime crisis in the United States. Pressure to do something with liquidity leads to marginal lending that can be risky. That is what the US showed, he said. But one difference in Africa is that the middle class is not already burdened with debt, so it is not necessarily unsustainable.