Housing Finance in Tanzania: New Beginning or Deepening the Hole?

Table of Contents Abstractiii CHAPTER ONE1 INTRODUCTION1 Problem Statement2 Rationale for the choice of topic2 CHAPTER TWO3 LITERATURE REVIEW3 HOUSE FINANCE GLOBAL VIEW3 HOUSING STRATEGY4 CONDITIONS TO FACILITATE LENDING8 DEMAND AND SUPPLY FOR HOUSING8 TANZANIA HOUSING FINANCE THEORY10 CHAPTER THREE12 FINDINGS12 Demand for housing finance12 Current Condition in Tanzania12 Access to Housing Finance13 HOUSING POLICY AND HOUSING MARKET14

ACCESS TO HOUSING FINANCE MAIN CHALLENGES18 CHAPTER FOUR21 CONCLUSIONS21 References;22 Abstract We examine the extent to which markets enable the provision of housing finance across a wide range of Regions in Tanzania. Housing is a major purchase requiring long-term financing, and the factors that are associated with well functioning housing finance systems are those that enable the provision of long-term finance.

Across all countries, controlling for country size, we find that countries with stronger legal rights for borrowers and lenders (through collateral and bankruptcy laws), deeper credit information systems, and a more stable macroeconomic environment have deeper housing finance systems. These same factors also help explain the variation in housing finance across emerging market economies. Across developed countries, which tend to have low macroeconomic volatility and relatively extensive credit information systems, variation in the strength of legal rights helps explain the extent of housing finance.

CHAPTER ONE INTRODUCTION Because of its apparent social and political importance, housing finance for the poor seems an area ripe for policy and regulatory intervention by most governments. However, a survey of both developing and developed nations demonstrates that there is no clear model of an enabling policy and regulatory environment that sufficiently promotes equitable access to housing finance while policing practices.

In fact, virtually no common—let alone, “best”—practices exist with regard to the policies and regulations that govern housing finance for the poor. While some regulatory changes in the past decade (particularly with regard to general microfinance fiduciary regulation and land title regularization programs) are beginning to change this, the vast majority of the world’s poor still have limited access to housing finance and their nations’ policy and regulatory environments do little to correct this. The condition holds true for three interconnected reasons.

First, these policies cover a wide terrain of public policy (and politics) that includes overall macroeconomic strategy, regulations of banking institutions and products (including microfinance regulations, if they exist), home purchasing and transfer requirements, public housing programs, and even local land use and building codes. All of these governmental decisions affect either the cost of purchasing or improving a home, or of finding appropriate private financing for it. Yet, these are obviously vastly different areas of technical expertise and governance.

Second, the resulting likelihood of there being special policies focused on housing finance as a separate and unique social concern are high; in fact, many nations have created special housing finance institutions or policies and regulations that promote, restrict, or protect households from entering into financial relationships relating to homes. Of course, the majority of these special policies and regulations focus on the access to and practice of mortgage finance—a financial product that is unfeasible and impractical for most of the world’s poor. Third, policies and regulations related xclusively to housing finance for the poor are usually non-existent. Problem Statement We examine to what extent does Housing Finance policies comprehensively help the need. Have the microfinance regulations that have sprouted over the last decade helped or hindered the poor’s use of and access to housing finance? Rationale for the choice of topic The reason I choose the topic is based on the questions I asked myself regarding House finance. The questions are highlighted hereunder; • To what extent does special housing finance policies and regulations help the poor in Tanzania? How do non-financial housing policies and regulations indirectly, but just as significantly, affect the access to and practice of housing finance? CHAPTER TWO LITERATURE REVIEW HOUSE FINANCE GLOBAL VIEW UNHABITAT in their GUIDE TO PREPARING HOUSING FINANCE STRATEGY article expressed limited access to borrowings as the reason to not constructing/purchasing good houses. Loans are available only to middle and high income earners. The report continues, with the rapid growth of cities and urbanization in developing countries, the problem may worsen to the highest.

Countries have different factors affecting their ability to finance public house. The greatest effect many countries face is different mortgage rate and documents required. The ratio is reported for an array of countries in Figure 2. 1, using data generally around 2004. Figure 2. 1 RATIO OF OUTSTANDING MORTGAGE DEBT TO GDP IN SELECTED COUNTRIES The broad pattern shown in Figure 2. 1 is instructive, with expected dramatically higher values for industrialised countries. Malaysia’s ratio tops 20 percent in large part due to such lending being a long-term government priority manifest in the operation of its secondary facility.

While many countries have ratios in the 10-15 percent range, there is a rough negative relationship between per capita income and mortgage market depth. Surprisingly, the depth of mortgage lending is not closely related to either a country’s financial depth or to its financial efficiency. This is important because it reflects the reality that mortgage market development does not simply follow broad financial market development. HOUSING STRATEGY UNHABITAT defines housing strategy as a plan for deploying available resources (and if needs be, increasing them) to finance the demand for housing by different segments of society.

The purpose of the strategy is to have a maximum use of available resources. Emphasise should be put on involvement of all stakeholders in the whole process of formulation to implementation of strategy. The emphasis on stakeholder involvement and getting the process correct is clearly evident in the steps in the strategy development process shown in Figure 2. 2. The process starts by identifying the relevant stakeholders and ensuring their active involvement, beginning with defining the strategic objectives. Figure 2. 2 OVERVIEW OF HOUSING FINANCE STRATEGY DEVELOPMENT PROCESS

PREPARATION * Identify leaders of the process * Identify stakeholders and include them in all aspects of the process * Define work objectives and outputs * Define the analytic program and oversee it| | ANALYSIS * Identify housing demand segments and estimate current and expected demand in each segment * Document the current supply of housing finance, the segments of the market each services and impediments * to expansion in volume and market coverage * Identify gaps between demand and supply by segment| | STRATEGY FORMULATION| Identify options for closing the demand-supply gaps| | * Increasing the volume of lending. | | * Increasing the funds available for housing lending. | * Determine the most feasible and effective options| * Develop the action plan to implement the selected options| | IMPLEMENTATION MONITORING AND EVALUATION| Establish monitoring arrangements| | Monitoring the household side: who is receiving formal and informal loans. | | Monitoring the supply side| | | Loan and borrower profiles| | Delinquencies and defaults| | Term distribution of liabilities| | Define feedback mechanism|

The primary technical steps in strategy formulation are listed and described below * Be in acquaintance with housing situation in the country, including basic housing quality and related infrastructure conditions, the extent of preference for home ownership versus renting * Determine effective housing demand by income class and location (urban, rural) to identify and define market segments and the volume of finance required by each segment in the planning period (note that because loan terms differ across households with different incomes, there is no simple ratio to apply to income to reach a housing finance demand estimate). Inventory housing finance currently available – products and volumes, market coverage and lending policies (for example, treatment of different sources of income in underwriting standards, physical access, registration requirements) by market segment. This must include all sources – private, both formal and micro, and government. Find out where lenders obtain their funds, and the elasticity of these sources * Determine the gap between potential demand and current supply for each market segment * Prepare a plan for closing the gap that is informed by the information developed in the prior steps.

Furthermore the report addresses the issue of the strategy being comprehensive. The strategy should address all areas regardless of their status. The strategy should be designed in such a way that all concerned are addressed. The Housing Finance Strategy can be fulfilled by establishing conditions so that private sector lenders, formal and micro finance, can extend credit to most market segments without taking undue risk. Governments are in a unique position to execute two critical functions.

The first is to set enabling conditions in which private lenders are able to operate successfully. It is often not a matter of an absolute shortage of funds but rather the terms used by lenders in making lending decisions. Banks in Africa, for example, are often quite liquid (Honohan and Beck, 2007, pp. 74-5), but they do not lend because they employ archaic underwriting standards or believe the associated risks to be too great. Table 2. 1 gives two of many examples of actions that government agencies could take to promote increased lending by banks and micro lenders.

Second, governments are in the unique position to facilitate market development through three channels: * Legal framework and related supervision for Microfinance Institutions: mature Microfinance Institutions need the authority to attract funds as depositories and they need strong supervision to give confidence to lenders who can provide mid-term funding to them that is suitable for multi-year housing loans. * Insurance: Risk sharing between government and private lenders, with government taking the risk of exceptional events, e. g. oss rates beyond ex ante careful estimates. Examples include, mortgage default insurance and insurance to commercial banks in extending lines of credit for housing loans to micro lenders. * Creation of facilities critical to mortgage market development, which are too risky for the private sector to undertake in the current stage of market development. These might include a secondary mortgage facility or a credit rating agency. They are risky in the short-run because of the large up-front investment required and the relatively low volume of initial activity.

In summary, a housing finance strategy requires a clear statement of objectives, an understanding of local conditions, a sense of how policy and programme features are linked to outcomes and a plan for generating and applying the resources needed to implement the strategy (Mayo et al. , 1986, p. 198). Table 2. 1 EXAMPLES OF MORTGAGE FINANCE INHIBITORS AND POSSIBLE GOVERNMENT STEPS TO RESOLVE THEM Problem| Possible Solution| There is a mismatch between formal lenders’ underwriting standards and many borrowers’ qualifications.

Banks are lending only to salaried employees and have high minimum loan sizes. | The Central Bank and the Bankers’ Association agree to press for lower loan sizes and for lending to those with less easily documented incomes. It is recognised that this will make lending more costly and should be reflected in the interest rate charged. | Microfinance Institutions are short of lendable funds for housing. One option is larger lines of credit from commercial banks. Banks are concerned that the risk of such credit lines is significant because Microfinance Institutions are not strongly supervised. The Government moves supervisory responsibility for Microfinance Institutions from a social ministry to the Central Bank. The Central Bank will develop alternative standards for Microfinance Institutions compared with commercial banks but supervision will definitely be stronger for Microfinance Institutions than it is now. The risk level perceived by commercial banks in extending lines| CONDITIONS TO FACILITATE LENDING Conditions that should be in place to facilitate micro and formal lending include: Support for both micro and formal lending Reasonable macroeconomic stability – high or volatile inflation produces large interest rate risks; stagnate growth restricts the ability of borrowers to make payments * No interest rate controls on mortgage lending; they typically make lending unprofitable * Well-defined and protected property rights through a functioning registration system. Support for micro lending * Legal support and supervision for Microfinance Institution operations, including multi-level licensing based on capabilities and mission of the Microfinance Institutions; at the highest level they can be depositories and very strong financial stability.

The supervisory authority must have the same competence as the central bank (and indeed could be this agency). DEMAND AND SUPPLY FOR HOUSING We can view the housing finance sector in terms of supply and demand. Demand for housing finance is in a sense a derived demand that flows from the demand for housing, which in turn depends importantly on the rate of household formation and income levels. In addition, with housing costs typically being a multiple of annual income, housing is made affordable by spreading payments over time, so adequate housing finance must be longer term in nature.

On the supply side, one way to think about the provision of housing finance is to split it into two components: (i) the provision of housing finance by a lender who has ample funds at hand, and (ii) the mobilization of funds within an economy so that lending institutions have access to funds. For lenders with adequate funds to choose to allocate some portion to long-term housing finance, a number of preconditions should be in place: • Information on the Borrower. To adequately price a loan, a lender must have information on the creditworthiness of prospective borrowers that enables the determination of the probability of default.

The information could be produced by a standardized and accurate source of credit history—such as public credit registries or private credit bureaus. Best is if the source has a wide coverage of the population, and the most informative source would include negative as well as positive transactions. Absent standardized information of credit histories, standard banking relationships, in which a bank spends considerable resources acquiring information on potential borrowers, would work but would limit (at least geographically, if not in other ways) the loan-creation capabilities of the lenders and of the housing finance system as a whole. Ability to Value the Property. There should be an ability to determine the market value of the property. This is a natural outcome of a well-functioning housing market in which detailed information on housing transactions is maintained in a systematic way. For example, if data on the sales price and relevant features of the home (location, size, age, etc. ) are maintained in a mandatory property registry, appraisers can more accurately value prospective homes for the lenders and borrowers. • Ability to Secure Collateral.

The lender should to be able to secure collateral against the loan in case of default. The house itself is an obvious candidate for that collateral, providing that in the case of default the lender can seize the property. To seize the property requires that there is something resembling clear title and that the legal system allows the lender to seize collateral. • Macroeconomic Stability. The macroeconomic environment should be stable. If inflation is volatile, the lender would incur substantial interest rate risk if it lends at a fixed rate.

In an unstable environment, lenders will typically pass on this risk to the borrowers—who are less likely to fully understand it—by only offering floating rate loans. Substantial interest rate risk, no matter who bears it, will retard the development of the housing finance system, as either lenders will go out of business (e. g. , U. S. savings and loans in the 1980s) or borrowers will be unable to repay their loans (or both). If the conditions for long-term lending are in place, lenders must have ample access to funds in order to lend. • Sources of Funds.

In the primary market, deposit-taking institutions, such as banks, can fund mortgages through deposits. However, because deposits are short term, if this is the only source of funds housing loans will tend to be short term or at variable rates. 9 Short-term loans, given that housing is expensive, are unattractive to potential borrowers. Potential borrowers might find variable rate loans attractive, but will likely not be able to gauge the substantial interest rate risk they are bearing. In addition, a reliance on deposits implies that funding sources are limited geographically, which increases risk.

An important additional source of funds for the housing finance system is the secondary market, which buys the loans from the primary market and finds many ways to mobilize funds. One set of participants in the secondary market is mortgage securitizers, who bundle and repackage mortgages (or parts of mortgages) to create new securities, and investors in these mortgage securities. • Additional Sources of Liquidity. Whatever the usual sources of funds, it is important to have a backstop, such as a governmental liquidity window, in case of temporary liquidity crunches.

In summary, a basic infrastructure that can enable a well-functioning housing finance system includes factors that promote long-term lending (the ability to value property and to seize it in the case of default, information on the creditworthiness of potential borrowers, macroeconomic stability) and factors that promote the mobilization of funds (be it through savings and deposits, capital markets, a governmental liquidity window, or secondary markets). TANZANIA HOUSING FINANCE THEORY Historical Perspective

Since the 1960s, there have been a number of housing finance initiatives by the public sector but outcomes have been disappointing. The most notable effort was the establishment of the Tanzania Housing Bank (THB) in 1972. Weighed down by management problems and a poor loan recovery record, the bank was wound up in 1995 after only two decades of operation. Tanzania has since then not had a formal housing finance institution. An unfortunate legacy of the collapse of THB is that a part of the banking community still looks upon lending for housing with a measure of scepticism.

In the 1960s and 1970s, Government supported the formation of housing cooperatives as vehicles for mobilizing savings and issuing housing loans. In particular, such cooperatives were expected to grant loans to beneficiaries of sites and services schemes at one time popular in Tanzania and other developing countries. But by the 1980s, the earlier enthusiasm for housing cooperatives had waned. The National Housing Corporation, already referred to, started operations in 1962, acting as both developer and financier.

It was initially established to guarantee or provide finance to local authorities and individuals for the construction and improvement of buildings and approved housing schemes67. The Corporation also offered long-term repayment terms of 15-25 years for tenant purchase68 schemes but abandoned this approach due to poor loan recovery. Their current focus is to build and sell middle income houses, requiring a 50 per cent down payment from purchasers and repayment of the balance in one year. A programme in the pipeline aims to service land for subsequent sale to private developers.

A Revolving Housing Loan Fund for civil servants has had a chequered history. First established in 1965, it was phased out in 1972 and its portfolio transferred to THB. Although the fund was re-established in 1995 upon the failure of THB, its impact has been modest. Past financial reforms, starting in the early 1990s, have laid an adequate basis for the country to build a viable housing finance system. As Merrill and Tomlinson (2006) observe: “Tanzania is reasonably close to being able to develop both formal housing finance and microfinance for housing.

Many of the fundamentals are in place: an improved macroeconomic and regulatory environment; a restructured banking sector; adequate liquidity in pension funds and in many of the banks; and recent efforts to strengthen the capital market. There are major constraints, however, which are particularly serious with regard to the legal framework, titling and registration, and settlement planning and infrastructure provision. These problems are important, and a major barrier to housing lending, particularly in the formal sector, as there is not a coherent mortgage law69 to support collateralised mortgage lending.

Consumer lending by banks, some of which is for housing related purposes, will go forward, but banks remain unwilling to engage in much longer-term mortgage lending, thus constraining access and affordability”. The Mortgage Financing (Special Provisions) Act (2008), already referred to, addresses the legal problems of mortgage lending that Merrill and Tomlinson (2006) drew attention to. CHAPTER THREE FINDINGS Demand for housing finance Understanding the purchasing power – the effective housing demand – of households is fundamental to valid housing strategy preparation.

Preparing this part of the strategy is challenging mostly because of the data requirements. But leaving these aside, demanding estimations can be mechanical exercise that falls short of providing important insights into the current situation and future possibilities. The key step is to prepare an overview of current conditions to orient the analysis. Current Condition in Tanzania Tanzania is a low-income country in East Africa with an estimated population of 43 million14 people. Its economy is dominated by agriculture, which accounted for 45. 3 per cent of Gross Domestic Product (GDP) in 2006, followed by services (37. per cent) and industry (17. 4 per cent) 15. This dependency on agriculture exposes the country to the vagaries of the weather and unfavourable international prices for primary products. The recent global financial crisis has adversely impacted the economy, reducing financial flows in tourism, exports and foreign direct investments. The Tanzanian economy was in severe distress in the mid-1980s but has since been radically transformed. The International Monetary Fund (IMF) distinguishes three broad phases of this transformation: 1970-1985 which was characterised y Ujamaa (socialism) and economic decline; 1986-1995, a period of liberalization and partial reforms; and 1996-2006, marked by macroeconomic stabilization and structural reforms. These reforms have continued to the present. Following fifteen years of Ujamaa policy, the economy was gradually liberalized from 1986 to 1995 to remove state domination in production and promote private enterprise. Thus, prices were allowed to adjust to market levels, interest rates and the exchange rate were freed and restrictions on economic activities were phased out.

Specific reforms included: (a) restructuring the financial sector and licensing foreign banks thus expanding private access to finance for investment; (b) liberalizing trade, a move that triggered an export boom and restored the country’s foreign exchange reserves; and (c) denying credit to poorly performing public corporations and subjecting public finance to greater scrutiny and discipline. Reforms within the housing sector saw the winding up of a bankrupt housing bank in 1995, which had been created in 1972 as a part of government’s interventionist economic policy.

The IMF points out that a committed ownership of the reform process has been key to success, symbolized by Mkukuta, mainland Tanzania’s own growth and poverty reduction strategy. Before the reforms, Tanzania had one of the smallest banking systems in Africa, dominated by a single commercial bank and other state-owned financial institutions. After two decades of liberalization, two dozen commercial banks and many other private financial institutions were in operation, offering a broad range of financial services.

Since 2000, credit to the private sector has expanded at 30-40 per cent a year, supported by growing customer deposits, and bank performance has improved19. In spite of these reforms, household access to credit is appallingly low with a mere 9 per cent of the population reported as having access to financial services from the formal sector in 200620. The second generation of financial reforms, now underway, seeks to broaden the reach of financial services and expansion of housing finance would support this goal.

Although poverty is still deep and widespread, the economy has grown strongly, outperforming most of Sub- Saharan Africa. Real GDP growth averaged 7 per cent a year for the period 2001-07, more than twice the growth rate of the previous two decades21. Inflation was very high over the 1986-96 decade but it fell to single digits starting in the mid-1990s, one of the best performances in Sub-Saharan Africa. In October 2009 the exchange rate was Tanzanian shillings22 (TZS) 1,230 to the US$, having depreciated by 7 per cent over the previous year23.

The overall lending interest rate was 14. 76 per cent in October 2009, down from 14. 90 per cent a month earlier. The yield on Treasury bills peaked at 13. 33 per cent in March 2009, before falling sharply to 4. 21 per cent in September of the same year and rising slightly to 5. 17 per cent a month later. Access to Housing Finance Only a mere 11 per cent of the adult population has access to formal and semi-formal finance. Of the rest of the adult population, 35 per cent have access to informal sources and a staggering 54 per cent are completely excluded.

Source: Finscope 2006 Disaggregating the data by rural and urban spheres, an important distinction in a study of housing finance reveals a more nuanced picture as well as marked differences between the two categories. A substantial part of the rural economy is not monetized: a quarter of the rural population and a tenth of the urban population use only non-monetary services; * 18 per cent of the urban population are formally served compared to 5 per cent of the rural population; and, * 46 per cent of the urban population compared to 57 percent of the rural population are excluded from any financial services.

Finscope 2006 showed that education is the single most important driver of access: in other words, those without education – typically in rural areas — tend to have a poor understanding of, and little information on, financial products, and therefore limited access. Another key driver is occupational status, with those in formal employment having a far higher level of access to formal finance than those in other occupations. Yet another driver is entrepreneurial ability, although with far less impact on access than occupational status.

HOUSING POLICY AND HOUSING MARKET In line with other developing countries, Tanzania initially followed a “provider model” of housing delivery, which emphasized direct housing provision by the state. This strategy was consistent with Ujamaa, the country’s overarching framework for socio-economic development. But official policy was hostile towards urban informal settlements and these were often pulled down. In the rural areas, villagisation, the use of modern onstruction materials and communal production lay at the core of government’s housing strategy. Outcomes were disappointing all round and, starting in the 1970s, policy shifted towards sites and services projects in urban areas accompanied by official restraint from removing informal settlements. This transition was made possible by a national sites and services project financed by the World Bank but in the early 1980s this assistance ceased as a result of poor performance. In the rural areas, villagisation was abandoned.

In subsequent years, there was a policy shift towards an enabling approach which sought to reduce the state’s role in direct housing production, instead focusing government’s efforts on: (a) creating a supporting regulatory regime for secure tenure; (b) ensuring the delivery of physical infrastructure; and (c) promoting the supply of adequate credit for housing. Notable policy milestones were the National Housing Policy of 1981; the National Land Policy of 1995, which sought to use the market to allocate land32; and the National Human Settlements Development Policy of 2000, which aimed to create an enabling environment in the shelter sector.

Poor implementation was a common thread throughout the entire period of policy evolution largely as a result of budgetary constraints33. Still, these de jure policy statements were a signal that there was a measure of political will to address human settlements challenges. Government’s de facto housing policy is set out in a recent draft paper, which observes that investment in housing by both the public and private sectors has been inadequate. The draft policy also acknowledges the lack of a housing finance system since 1995 when the Tanzania Housing Bank was closed down.

An important policy objective, the paper argues, is to consolidate a demand-driven market system for housing delivery without losing sight of the plight of marginal groups not able to afford market solutions. Five broad prerequisites for policy implementation are noted: (a) A stable macroeconomic environment that supports poverty reduction; (b) Strong and efficient institutions; (c) A robust financial sector that promotes the establishment of mortgage banks; (d) Adequate infrastructure and services; and (e) An efficient regulatory environment.

The paper puts forward a wide range of policy statements that seek to support a housing finance system that addresses the housing needs of all income groups. The principal objectives are to: (a) Stimulate mortgage lending, especially through a re-financing facility that would extend term loans to primary lenders; (b) Promote housing micro-finance; (c) mobilize local savings for housing; (d) revise legislation so that pension funds can be used to collateralize housing; and (e) ensure that title deeds and residential licences are readily available.

Housing subsidies are envisaged but it is not clear how these will be financed and managed. (3@A;BC%HD:M9>A% Housing markets are typically found in urban areas where property transactions – selling, buying and renting of housing — are mediated by the market. It is therefore important to look into housing demand and supply and their implications for housing finance. It is also useful to draw attention to the inputs that impact supply, such as land and infrastructure. In rural communities, in contrast, housing markets hardly exist as there is limited buying and selling of housing, and virtually no demand for rental housing.

Indeed, as already noted, nearly a quarter of the rural sector falls outside the monetary system thus impeding market exchange. Housing demand: Housing demand, commonly referred to as effective demand, measures the willingness and ability of households to pay for housing. It is a function of many factors: household income; the price (or rent) of a dwelling; financing arrangements (including interest rate and the tenor of the loan); and household preferences for different attributes of a dwelling, such as location.

There is cross-country evidence that households are willing to spend more on housing if they are buying or building their own house than if they are renting. Housing demand is often contrasted with housing need, a socially derived concept that measures the number of dwellings required to house a population above an arbitrarily determined standard or norm, with no regard for the ability to pay. Estimates of housing need are commonly computed on the basis of the following: * Housing standards that are considered socially or politically acceptable, e. . the number of rooms per household of a given size or the minimum floor area per person; * The existing housing shortfall, taken to be the difference between the existing stock and the number of households. More sophisticated estimates also compute the number of rooms needed to decongest the existing housing stock to desirable densities in terms of the number of persons per room or some other measure; * An allowance for obsolescence to replace ageing dwellings; and * Projected housing need arising from population growth.

There are no estimates of effective housing demand for Tanzania. This information gap is explained by the lack, as in many countries, of robust data on household incomes and house prices as well as inadequate behavioural information on housing consumption and investment. Only few people in the top income group, which constitutes a mere 3 per cent of the entire population, are likely to afford mortgage loans.

Another 22 per cent have monthly incomes between TZS 51,000 and 200,000 (US$ 38-150) which qualifies them for housing microfinance as there are no pre-built houses in the market for this income range; and it is unlikely that those with monthly incomes below TZS 50,000 (US$ 38) can afford housing loans of whatever kind if only current income is taken into account. A full 28 per cent of the adult population did not or could not make reliable statements about their personal income and have been included in low income earners.

Another source, a survey of informal settlements in Dar es Salaam (N= 380), showed that up to 57 percent of households had monthly incomes below TZS 100,000 (US$ 75), again pointing to the difficulties of the majority to afford conventional housing financed with a mortgage loan42. If computations of affordability are based on current income alone, there is no doubt that the vast majority cannot afford any but the most basic shelter, built of temporary materials.

But there is a valid argument in the literature that where strong rental markets exist, typically in the large towns, future income from subletting should be factored into assessments of affordability and the ability of households to improve their housing. Evidence from upgraded settlements, such as Hanna Nassif (about 4 kilometres from downtown Dar-es-Salaam), clearly shows that rental income is key to the ability of poor households to raise their housing standards, primarily through house extensions and improvements to the building fabric.

Houses on primary access roads have the potential for especially high incomes for their owners, as they can be used to accommodate businesses such as retail trading, hair dressing and tailoring which command a higher rent than residential use46. In adapting to conditions with limited credit, some landlords have asked tenants to finance house improvements upfront, exempting such tenants from paying rent until the initial capital outlay has been recovered. This seems to be more common where the tenant intends to use the rented space for business purposes.

Low levels of income, even with future income taken into account, strongly suggest that effective demand for pre-built units is quite limited. If they have no access to finance, most households will continue to build in stages as they have always done stopping when resources run out and starting again when resources permit. In the event, the principal challenge is to deliver financial products that would enable households to accelerate the pace of improving the existing informal stock and building incrementally on new plots.

Housing supply: A rarely appreciated aspect of housing supply is that the existing housing stock provides the bulk of housing services. In the typical large town, the annual addition to the stock, in the form of new pre-built housing, is usually small relative to the existing number of dwelling units. It is therefore important to examine the quality of the existing stock for an understanding of its adequacy and how it is maintained and expanded through additional rooms. In particular, how households improve their existing housing stock is critical as it has implications for the tailoring of financial products to their needs.

For instance, small repeater loans are better suited to poor households seeking to improve their houses, than are large “one-off” loans. As the vast majority of the housing stock is in informal settlements it is on this stock that most attention should focus. We start with macro data on the quality of the housing stock. Next we look at the micro level for insights into how households maintain and modify this stock. Third, we discuss the supply of new housing through informal and formal channels. Finally, we look at public sector efforts to boost supply through land delivery as well as settlement upgrading. %? 3@A;BC%=;BDBE9/%>? 9%HD;B%E? DQQ9BC9A% ACCESS TO HOUSING FINANCE MAIN CHALLENGES This section summarises the main challenges that will need to be addressed to broaden access to housing finance in the country. AFFORDABILITY Urban areas: Only a minority of the population can adequately meet their housing needs as current household incomes are very low relative to housing costs. But rental income from subletting, if taken into account in assessments of affordability in urban housing markets, would substantially improve affordability.

This revised approach to affordability would enable financiers to reach more people. Second, as housing microfinance is generally affordable by the majority, it holds great potential for helping the poor to improve their current housing stock. After all, it is the existing stock that supplies the bulk of housing services. Besides, housing microfinance would help accelerate new construction, reversing the trend of incomplete houses that dot new building sites. Rural areas: In rural communities, there are no housing markets ruling out the use of rental income in the affordability calculus.

For this reason, a different financing approach is needed. PTF lending has shown that housing loans should only be made on the back of successful microenterprises to ensure that there is adequate income to meet the repayment of housing loans. In the wider context, improvements to rural infrastructure services, such as water and sanitation, are probably the more critical elements in raising the standards of rural habitats. Still, the design of appropriate housing finance solutions for rural and peri-urban localities is an important challenge.

BARRIER TO EXPANDING HOUSING SUPPLY Expansion of the housing stock is held back by a whole range of financial and non-financial barriers. The lack of a formal housing finance system, a serious policy constraint, severely limits the supply of all categories of housing, from low-income to up-market dwellings. In particular, finance is not readily available for incremental construction in the low-income market and housing stock improvements and new construction take years. Yet the capacity is lacking for mainstreaming quality incremental construction.

In the middle and high income markets, a poorly developed mortgage sector suppresses the supply of pre-built units. In all cases, supply is hampered by the limited supply of land with access to infrastructure services. Bridging finance exists in the banking sector, but to unlock it, end user finance would have to be assured. CAPACITY IN THE HOUSING MICROFINANCE SECTOR Field investigations strongly pointed to the lack of capacity to expand housing microfinance operations. First, there are only a few micro-lenders in housing and their initial concern is to pilot feasible approaches.

Second, poor capacity to provide technical support services will continue to restrain lending operations, a point emphasized by WAT and supported by secondary evidence. In particular, as HFHT point out, microfinance is an industry with a high staff turnover, particularly of credit officers, which can disrupt operations. Measures to contain this operational risk are therefore needed, such as competitive compensation packages. Third, although the larger MFIs, such as PRIDE and FINCA, have the capacity to reach more people, their market knowledge of housing microfinance is limited.

Fourth, there is little capacity to structure financial ‘deals” between commercial banks and housing micro-lenders, undermining the ability of the latter to leverage wholesale loans. Such deals will continue to be frustrated by the lack of good market intelligence by commercial lenders as to the risks and returns associated with housing microfinance. SMALL LOANS HIGH COST Small loans are saddled with high transaction costs, often making them an uneconomical area of business for commercial lenders such as banks.

But micro-lenders that have a community focus, such as NGOs, are often able to reduce lending costs because of their smaller overheads and their group lending methodology. Until there are an adequate number of such micro-lenders it will be difficult for housing microfinance to go to scale. CULTURE OF NON-PAYMENT OF DEBT A culture of non-payment of debt by households has been reported in the literature103 and allusions to this problem came up during interviews. The reasons for this behaviour are varied.

Some commentators have blamed the predominance of state provision in the past, arguing that the moral compunction to meet the costs of publicly provided goods and services is often lacking. The lack of “ownership” of the housing process has been observed even where private providers are involved. HFHT has reported that where the financier offers technical assistance for house building, clients are reluctant to service their loans should they later consider construction standards to be unsatisfactory. Allowing the client to take charge of the construction process, HFHT argues, would increase “ownership” and the willingness to repay loans.

This challenge will need to be addressed through client education so that lenders can change their present perception that financing housing carries a high credit risk. Separating the financing and technical assistance roles, as HFHT and WAT have done, would also alleviate the problem. For pre-built housing bought with mortgage finance, the lack of straightforward foreclosure procedures dilutes the credible threat that borrowers stand to lose their properties if they default104. This problem is expected to recede once the Mortgage Financing (Special Provisions) Act (2008) is in force.

REGULATORY AND POLICY BARRIERS The regulatory and policy environment has been substantially reformed over the last two decades, laying the basis for creating an efficient housing finance system. But the impact of these reforms on housing finance needs to be put to the test. LINKING SETTLEMENT UPGRADING AND HOUSING MICROFINANCE Experience from Dar es Salaam, where there is an extensive programme to upgrade community infrastructure, points to limited coordination between the municipal authorities in charge of upgrading and the NGOs that are starting to provide housing microfinance.

Coordination would ensure that housing microfinance operations give first priority to those sites where upgrading has started, and thus complement public investments in community infrastructure. Limited Sector Data There is inadequate sector data on many aspects. Examples include: income distribution by main town; house prices and rents, disaggregated by principal town; portfolio information on mortgage lending, including details on lender portfolios and the number of loans per year; and micro lending for housing including information on portfolio size and performance; and property transactions in the housing resale market.

This type of data should be collected by the Department of Housing in collaboration with the National Bureau of Statistics. CHAPTER FOUR CONCLUSIONS Tanzania has a weak housing finance and property market. But a resurgent economy and the deep seated and wide-ranging financial reforms of the last two decades provide a solid foundation for building a housing finance system that responds to the needs of all households. Such a housing finance system would also energize the property market by boosting house re-sales as well as the development of new houses.

At the lower end of the market, housing microfinance, currently being piloted, will need to be scaled up for it to have an impact on housing for the poor and for lower-middle income households. The potential for scaling up will increase as links are developed between wholesalers of finance and housing micro-lenders. In this regard, the use of both conventional and community-based guarantees as tools for credit enhancement will need to be expanded and evaluated from time to time. Savings are an important element of housing microfinance and MFIs will generally only lend to those who have saved towards their housing.

To MFIs, savings act as a means of containing credit risk since, in the event of default by the borrower, they can be used to offset losses. Moreover, savings are an indicator of the borrower’s commitment to improved housing as well as the ability to repay loans. Serious constraints continue to retard the growth of housing finance. In the housing microfinance sector, poor market knowledge and limited institutional capacity are barriers that will need to be brought down. Moreover, insecurity of tenure discourages the extension of housing microfinance into some of the settlements occupied by the poor.

The regularization of such settlements, where feasible, and the recent changeover to 5-year residential licences are likely to play an important role in mainstreaming housing microfinance. In the wider financial sector, access is undermined by a whole range of factors: low education levels; occupational status, with formal workers having an advantage over their informal counterparts; and entrepreneurial ability which improves access. With regard to secured lending, the lack of term capital and the difficulties surrounding foreclosure, unless tackled quickly, will continue to restrain mortgage lending.

The proposed liquidity facility and the Mortgage Financing (Special Provisions) Act (2008) are expected to address these challenges and foster the growth of this segment of the housing finance system. Another area of concern is the limited capacity to issue new land titles, to establish and manage a registry for sectional titles under the Unit Titles Act, and to register mortgages. Yet another bottleneck is that the consent to transfer titles, traditionally the responsibility of the Commissioner of Lands, has usually taken very long, delaying the processing of mortgage loans.

The recent decentralization to municipalities of the authority to give consent should help speed up this process. References; 1. UN-HABITAT Guide to Preparing a Housing Finance Strategy First published in Nairobi in 2009 2. Bank of Tanzania (2009) “Monthly Economic Review”. November, 2009. 3. Butler, S. B. et al. (2007) “Tanzania: Action Plan for Developing the Mortgage Finance Market”. Report on legal and regulatory issues in the mortgage market in Tanzania. The Urban Institute, Washington DC 4. Finscope 2009 5. Finscope 2006). 6. IMF (2009) “Tanzania: The Story of an African Transition” African Department, IMF: Washington DC 7.

Jorgensen, N. (2008) “Housing the No-income Group: The Role of Housing Finance in Alleviating Urban Poverty. ” Housing Finance International, Vol. XXII No. 4, pp. 41-45. 8. Kombe, W. J. (2000) “Regularising housing land development during the transition to market-led supply in Tanzania” in Habitat International 24 (2000) 167-184. 9. Martin, R. (2008) “Development of Appropriate Housing Finance Products to Support Upgrading Activities” AUHF Final Report 10. Mathema, A. S. (2007) “Quantitative study: Household interviews, Dar es Salaam, Tanzania”. Report for AUHF 11.

Merrill, S. and Tomlinson, M. (2006) “Housing Finance, Microfinance, and Informal Settlement Upgrading: AnAssessment of Tanzania”. An Urban Institute report prepared for the United States Agency for International Development and the African Union of Housing Finance 12. Milinga, A. (2006) “The social and economic impact of DCB to the Community in Dar es Salaam”. Centre for Microfinance and Enterprise Development. 13. Mosha, L. H. (2008) “Architectural planning lessons from previous rural human settlements policies in Tanzania” in Journal of African Real Estate Research Vol. , Issue 1, Jan 2008, pp 49-53. 14. National Bureau of Statistics (2009) “Household Budget Survey 2009” 15. Nnkya, T. J. (2007) “Housing conditions, borrowing and lending in informal settlements in Dar es Salaam”. Report for AUHF 16. Precht, R. (2005), “Informal Settlement Upgrading and Low-income Rental Housing: Impact of Untapped Potentials of a Community-based Upgrading Project in Dar es Salaam, Tanzania”. Paper presented at the 3rd World Bank Urban Research Symposium on: “Land development, urban policy and poverty reduction”, Brasilia, 4 – 6 April. 17.

Sheuya, S. A. (2007) “Reconceptualizing housing finance in informal settlements: the case of Dar es Salaam” in Environment and Urbanization; 2007; 19; pp. 441-456 18. Sulle, E. and Nelson, F. (2009) “Biofuels, land access and rural livelihoods in Tanzania”. International Institute for environment and Development. 19. Triodos Facet (2007) “Tanzania: Country Scan – Microfinance”. Report for Hivos/Microned. 20. UN-Habitat (2005) “Improving access to domestic capital for slum upgrading and low income housing projects” Slum Upgrading Facility Working Paper. 21.

UN-Habitat et al. (2003) “Re-establishing Effective Housing Finance Mechanisms in Tanzania: The potentials and Bottlenecks”. HS/694/03E. ISBN:92-1-131683-3 22. United Nations Department of Economic and Social Affairs, Population Division (2008) World Urbanization Prospects: The 2007 Revision, United Nations, New York 23. United Republic of Tanzania (2005) “National Strategy for Growth and Reduction of Poverty”. 24. United Republic of Tanzania (2009) “Tanzania Housing Development Policy” Draft VI, Nov. 2008. 25. World Bank (2009) “Country Brief, November 2009”.