AN OVERVIEW OF THE RELIABILITY OF THE NIGERIAN STOCK EXCHANGE AS A VERITABLE SOURCE OF HOUSING FINANCE
BY
KUYE OLUSEGUN & ADELODUN ADEMOLA
ABSTRACT
The housing situation in Nigeria is critical and the government has responded to these housing problems through public housing provision with funds being provided by the Federal Government through its various agencies and mortgage banks. But despite the long history of public housing in Nigeria, over 90% of the housing stock in Nigeria is still provided by the private sector. The government housing programs/schemes are limited in scope while the few mortgage banks and other financial institutions cannot provide the much needed long-term mortgage finances because of the short-term nature of the loanable funds. Furthermore, mortgage lending is also not given priority in the loan portfolio of commercial, merchant banks because of their unsupportive and inconsistent fiscal and monetary policies. Consequently, there is need for every category of investors to seek alternatives to housing finance instead of seeking loan from the banks and/or waiting on government to provide funds for housing provision which the Nigerian Stock Exchange could readily provides. This paper looked at the possibility of the Nigerian Stock Exchange becoming an alternative option to housing finance through the adoption of finance instruments such as stocks and shares, real estate investment trusts (REITs) scheme and other related financial instruments with the conclusion that these instruments can provide the required long term funds in the housing sector on a sustainable basis. Finally, it was recommended that the general public need to be sensitized about the activities of the Nigerian Stock Exchange and their respective new products that are geared towards effective housing finance and urged the general public to patronize these products.
INTRODUCTION
Housing is generally accepted to rank second after food among man’s most basic need or necessity. Oxford Advanced Learners Dictionary of Current English defines a house as “a building made for people to live in usually for one family or a family and lodgers/guests (Hornby & Wehmeier, 2005). Technically, a house is defined as a building or structural edifice comprising walls with foundations, floors, roofs, etc., in which man lives thereby sheltering himself from the vagaries of the weather, wild animals and other elements of nature. A dwelling differs from a house in the sense that all dwellings are houses but not all houses are dwellings; for example, commercial and industrial houses whereas a dwelling is essentially build and made conducive for human habitation. A dwelling or shelter can therefore be described as something that gives safety or protection. Shelter, according to the Advanced Learners Dictionary, is a condition of being kept safe hence, could be infers that shelter is synonymous with protection or safety. What makes a house different from a dwelling or shelter is that it goes beyond mere protection from all the factors mentioned above, it is a right (bundle of rights), which can be enjoyed, transferred, mortgaged, sold, purchased, etc. Apart from these, housing is also seen as a right because of its importance in ensuring protection, safety and meeting the psychological and physiological aspirations of the people irrespective of age, sex, race, religion or any other means into which people, the world over, could be differentiated.
Furthermore, in the Britanica.com (2010), housing is defined as a house, flat, an apartment, etc., that people lived in. The World Health Organization (WHO) (1962) defined housing as the physical structure that man uses for shelter, and the environs desired for the physical and mental, health and social well-being of the family and Individuals. The Federal Government of Nigeria (1962) stated that housing is universally acknowledged as one of the basic human needs with a profound impact on the lifestyle, health, happiness, as well as productivity of the individual. The National Housing Policy of 1990 described housing as the process of providing a large number of residential buildings on a permanent basis and in addition, an adequate physical infrastructure and social services in planned, decent, safe and sanitary neighborhoods to meet the basic and special needs of the population. Housing is often described as shelter together with the environment. Housing includes all the supporting infrastructures and services such as water supply, electricity (electric power supply), recreational facilities, etc. According to Ughamadu (1991) in Windapo (2000), housing transcends shelter; it includes utilities and community services like electricity, water, supply, good access roads, sewage disposal facilities and access to employment. Simply put, housing can be described as the provision of habitable shelter in a decent environment for human beings.
Housing delivery system the world over is complex, tasking and highly involving. Housing is highly significant to the development of a nation. It is required for social, economic, welfare, political or prestige. It is not disputable that the production of housing is a function of land, finance, labor and materials. Subsequently, home ownership adds tremendous financial, economical and psychological value to those who are able to achieve this goal. One of the most important dreams of Nigerians is to own their own homes. Government is also aware of this fact and has always taken steps to increase the housing stock by building new houses through the Federal Housing Authority (FHA) and other government agencies to be sold to Nigerians.
As indicated in a World Bank Report (1993), urban population of the developing countries has quadrupled since 1950, growing from 300 million to 1.3 billion people in 1990. 2 billion people are expected to be living in urban areas by the year 2000 and 2.7 billion by 2010. This scenario is close to being true in Nigeria (by virtue of projection of 2006 population census, the population of Nigeria stands at about 150 Million people) creating a tremendous need for millions of housing units for her growing population. The global strategy for shelter for the year 2000 adopted by the United Nations in 1988 observed that more than 1 billion people worldwide have shelter unfit for human habitation and this figure has been rising by the day. The World Bank equally noted that the absence of formal financial arrangements is acknowledged to be a major constraint to the development of efficient housing (World Bank, 1993).
In a bid to find a lasting solution to housing finance problems, the Nigerian government promulgated the National Housing Policy (1991) and the National Housing Fund Decree (1992). The National Housing Fund Decree mandated all sectors of the economy and all workers to compulsorily save a stipulated percentage of their salaries towards housing finance. Till date, more than five (5) billion naira has been contributed but less than 400 million naira has so far been disbursed despite the fact that not many people have been housed under this programme. The question to be asked is, Is there any other option to housing finance? The failure of the formal financial institutions to provide finance for the poor calls for the emergence of another funding alternative that should be tailored towards meeting the need of financial requirements of the poor masses. In a difficult money market scenario, housing is the first area to suffer, since neither the builder nor the consumer can readily obtain finance for housing.
The human passion to own a home of their own drives people to work harder, save, create and become a more productive within a nation and society. A citizen, who has a vested interest in land, protects the normalcy and stability of that nation’s government. The creation of job and the resultant economic activity created by the construction and ownership of a single family home is both real economic wealth and a greater feeling of economic wealth among the people. With the numerous numbers of Nigerians not owning their own homes, there is continuing pressure build-up, creating risky levels of political, social and economic instability. Every industrialized nation – i.e. the government of the United States of America, United Kingdom, France, Germany, Italy, Japan, etc., have all realized the tremendous reality that people who own their own homes do not burn down buildings or destroy their properties because they know the purpose which those house serves them.
Without doubt, owning a house in Nigeria is becoming increasingly difficult as a result of the prohibitive terms of the credit facilities offered by the commercial banks and the limitation on loanable funds available from both the Federal Mortgage Bank of Nigeria (FMBN) and Primary Mortgage Institutions (PMIs). Under this difficult scenario, and housing being a very important human need, one other alternative that could be explored is the Nigerian Stock Exchange through shares, stocks, bonds other monetary instruments. Sourcing for funds through the capital market (Nigerian Stock Exchange) is another medium for housing finance aside from other financial institutions, which over the years have not been able to meet people’s expectation for housing finance. The question is this: In what way is the Nigerian Stock Exchange can become a veritable option through which finance for housing delivery could be raised? The answer to this important question is the focus of this paper.
Very little is known by the majority of investors in the housing sector about the possibility of financing housing projects through the Nigerian Stock Exchange. This paper brings to the fore the intricacies, opportunities and benefits of real estate finance through the Nigerian Stock Exchange. It affords better understanding of what the Stock Exchange really is, and explicitly explained how housing finance could be provided or sourced through the use of various new products from the Nigerian Stock Exchange.
OVEVIEW OF HOUSING FINANCE
Housing finance means finance for housing or real estate development, the source of the finance, the management of the finance, and all the various operations of the sources, management, procurement and utilization as well as repayment of such finance. Housing finance is a general term encompassing all the finance related transactions in the housing market. According to Onibokun (1985), housing finance in Nigeria is a victim of the general absence of well-developed financial system or institution in the country. In looking at the present housing finance systems, several issues stand out. First, households are not able to save substantially so as to affect the resources available for housing finance. This is because of the harsh economic realities of the present times. Second, the construction methods determine the methods of financial savings, which result in a lot of money being expended in building housing units. Third, the mortgage banks have not benefited the low-income households and presently they have almost become extinct (Oruwari, 2000) cited in Ogwu (2007). Fourth, the PMIs springing up presently cannot benefit the low-income households in urban areas, as their rates of interest are very high (over 25%). Also their prospective client is expected to satisfy hordes of conditions including an inconceivable collateral before they can get the maximum N5,000,000 statutory housing loan. As a result, the present housing finance system in the country serves mostly the high-income households. In the case of renters, for the benefit to reach the targeted group, it has to be indirect e.g. when entrepreneurs are encouraged through easy access to housing finance to produce houses patronized by the low income households. The only organization that can make this suggestion possible presently is the Federal Mortgage Bank of Nigeria (FMN).
Sources of housing finance
Ogunmola (2006) indicated that there are two sources of housing finance in Nigeria; they are public and private sources. The public sources of housing finance are the federal government, state government, local government, Federal Mortgage Bank of Nigeria (FMBN), and the States’ Housing Corporations among others. According to Ogunmola (op cit), the private sources of housing finance are through the formal and informal sources.
1. The formal sources: The formal sources comprises of institutions operating with the stipulated statutory regulations, guidelines stated by the federal government of Nigeria. some of which include Federal Mortgage Bank of Nigeria (FMBN), commercial banks, finance and investment institutions, insurance, and savings & loans banks or cooperatives,
2. The informal sources: The informal sources comprises of bodies, groups of people, societies, not operating under any institution or guided by any law. Prior to the colonial times, many methods of housing finance were adopted in various parts of Nigeria: esusu and ajo (popularly known as thrift), age grade associations, which ranges from men revolving loan association to town unions, social club contributions, aaro or owe were some of the common methods available to the people, and all these methods implies members to contribute in kind by providing labour on members’ site until the whole cycle is All these methods were successful in accomplishing the provision of finance for housing but with the growing complexity in the economic activity of the country, these methods faded away.
The Federal Mortgage Bank of Nigeria (FMBN) and the Primary Mortgage Institutions in NIGERIA (PMIS)
Over the years in Nigeria, government’s efforts in mortgage and housing delivery have brought about various housing policies, programmes and strategies that have been formulated to give Nigerians access to decent and affordable housing. Some of the initiatives included the taking over by Government of Nigerian Building Society (NBS) in 1970 with the aim of mobilizing long term funds for lending to deserving applicants while expanding services to all parts of Nigeria. In 1977, the Nigerian Building Society (NBS) transformed into the Federal Mortgage Bank of Nigeria (FMBN) with the aim of promoting the primary and secondary mortgage market, as the FMBN was conferred with powers to carry out both primary and secondary mortgage functions. The FMBN, in other words, was established to promote the growth of primary lending institutions. For the first time, the Federal Government was a major participant in housing by direct construction through the Federal Housing Authority as the implementation agency.
In 1978, Federal Government promulgated the Land Use Decree No 6 1978 which was aimed at making land readily for development. In 1981, a National Housing Policy was put in place following the oil boom of 1980-1982. The main aim of the policy was the direct involvement of Government in the provision of mass housing delivery. Also in 1989, a considerable attempt was made by the federal Government at establishing a vibrant mortgage market, whereby the Mortgage Institution Decree No 53 was promulgated to promote mortgage financing in Nigeria by assigning the Primary Mortgage Institutions (PMIs) with the responsibilities to carry out primary mortgage lending activities in Nigeria.
In 1991, the Federal Government launched the National Housing Policy, which was the first attempt to provide a codified framework to guide government intervention in the housing sector; this was for direct construction of houses. In 1992, Federal Government promulgated National Housing Fund Decree No. 3 to provide long term loans to mortgage institutions for lending to contributors to the fund and to encourage property investments. The Federal Mortgage Bank of Nigeria (FMBN) and the Primary Mortgage Institutions (PMIs) have been essentially operating as enterprise where potential home owners make periodic savings towards home ownership and are thereby qualified for a mortgage loan to make up the balance for buying or building a house. The impact this method of financing in Nigeria has also been minimal, as most homeowners have had to either save to build their own homes or raise the funds from the money market at very prohibitive interest rates.
As at 1998 in Nigeria, majority of the population earned less than N100,000 Naira per annum. As a result of this, majority of Nigerians are automatically disqualified from benefiting from a mortgage loan. The Nigerian mortgage finance system with its stringent lending terms and requirements has succeeded in excluding the majority of the populace from the existing housing loan scheme. Unemployment, under employment, lack of collateral security, general low income level, level of literacy, are some of the factors that have hitherto constituted barriers to those people not benefiting from the existing sources of housing finance. According to a study by the Federal Mortgage Bank of Nigeria (FMBN), about “N12 trillion Naira will be required to meet the shortfall in Nigeria’s housing needs, which is put at about 12 million housing units.” It has also been revealed that the major challenge facing housing financing system in Nigeria is the mismatch, which currently exists between sources and application of funds in the sector (Alile, 1997).
The Dearth of Primary Mortgage Institutions (PMIs)
As the financial resources of the National Housing Fund (NHF) can only be accessed and disbursed through Private Mortgage Institutions (PMIs), the operations of the Bank and the aspirations of prospective borrowers are effectively hampered by the insufficient number of PMIs and their poor spread. Currently, there are about 60 PMIs accredited to access the NHF facility (Loans and Advances Department, FMBN, June 2002). Of this number, only 12 (twelve) PMIs are owned by Federal/State Governments and their agencies. Majority of the other private ones are concentrated in Lagos and have presence in only a few other Nigerian cities. For easy access to the NHF facility, there should be at least one PMI in each state capital and at least one each in other major cities across the nation. FMBN has been encouraging State Governments to establish their own PMIs to facilitate easy access to housing finance and, especially to enable contributors to NHF in the various States to benefit from the NHF loan facility.
In order to achieve government desire of rendering an effective and efficient housing delivery to Nigerians, the desirable option is to employ the relevant instruments and products available in the capital market for this purpose. Achieving this feat will be made more possible through the instruments available in other advanced capital markets which include the real estate investment trusts (REITs) scheme and mortgage-backed securities (MBs) among other instruments.
THE NIGERIAN STOCK EXCHANGE (NSE)
According to Al-Faki (2006), the capital market is undoubtedly the best avenue for mobilizing the necessary funds for financing productive assets for economic growth and development generally. In every country there is a Stock Exchange Company e.g. Ghana Stock Exchange, American Stock Exchange, etc., where various instruments for raising long term capital is traded (bought and sold) and these funds can be raised through public offer or rights offer. The Nigerian Stock Exchange which was first known as the Lagos Stock Exchange was established in 1960. The head office in Lagos was opened in 1961 and started operation the same year with 19 securities listed for trading. In December 1977, it became The Nigerian Stock Exchange with branches established in some of the major commercial cities of the country. At present, there are six branches of The Nigerian Stock Exchange, each with a trading floor. Currently, there are 288 securities listed on the Nigerian Stock Exchange, which is made up of 33 government stocks, 47 industrial loans (debenture/preferences) stocks, and 204 equity/ordinary shares of companies, with a total market capitalization of over N5 trillion.
The Exchange uses the Automated Trading System (ATS) with bids and offers matched by stockbrokers on the trading floors of the Nigerian Stock Exchange through a network of computers. Transactions on the stock exchange are regulated by The Nigerian Stock Exchange as a self-regulatory organization and by the Securities and Exchange Commission (SEC), which is the apex regulatory authority. Securities and Exchange Commission (SEC) as a regulatory organization/agency of the capital market is empowered to register any shares, securities, etc., to be issued to the public in Nigeria. The instruments traded on the floor of the Nigerian Stock Exchange include the following: shares, stocks, bonds, securities, notes, debentures, etc.
a) Shares
Shares could simple be defined as a set of rights and obligations which a person has in a company, evidenced by a certificate or other generally acceptable instrument. The major types of shares traded by companies listed on the Stock Exchange are the following (Al-Faki, 2006; Alile, 1997 & Ekundayo, 1992):
- Founder’s shares: These are special shares usually allotted to the founders of a company to protect him (or them) from future expropriation. They are now phased out in public companies, as they are no longer allowed under the existing regulations.
- Preference shares: These are shares carrying special rights and which usually entitle its holders to a first right to dividends before the other categories of shareholders. Preference shares could be cumulative (the unpaid benefits of a particular year are added to those of the following year) or non-cumulative; redeemable (the owners could ask for the cash value of their shares at a future prescribed time) or non-redeemable; convertible (could be converted to ordinary shares) or Non-convertible. Usually, the portion of the annual profits to be distributed to Preference Shareholders is expressed in percentages.
- Ordinary shares: These are the predominant shares of a company. They usually have a standard value (par or nominal). In case of liquidation, ordinary shareholders are only paid after all other creditors and preference shareholders have been settled since they are regarded as the residual owners of the They usually constitute the majority of the shareholders. The premise here is that ordinary shares constitute about 95% of all the shares (equity) in the Nigerian Capital Market.
Benefits of investing in Shares: There are many derivable benefits derivable from investing in shares. Investing in shares helps to prepare for the finance of projects in the future as well as retirement. Even though one may not possess all the resources today to pursue ones dream of acquiring such items as land, building, car, etc., appropriate regular investments can greatly help someone in the realization of these dreams in the future. Furthermore, investing in shares could help protect ones savings from the effects of inflation.
b) Stocks
Another instrument that is traded on the floor of the Nigerian Stock Exchange asides shares is stock. A stock is also referred to as a share, which is commonly a share of ownership in a corporation. (Stocks are defined to mean a block of shares).
APPRAISING THE USE OF THE NIGERIAN STOCK EXCHANGE AS AN OPTION TO HOUSING FINANCE
The capital market (Nigerian Stock Exchange) has the capacity to pool vast long-term financial resources together from fund suppliers and distributes it to competing uses and users of such resources. But more importantly, the capital market has the mechanism for sourcing funds and allocating them to return-yielding investments. The capital market has the capacity to provide the necessary funding at market friendly interest rates, for the development of the housing sector, as well as boost housing delivery and private home ownership. However, governments at the Federal, state and local council levels, which are expected to be the prime movers of the capital market through their fund raising activities, prefer to finance development programmes using the traditional budgetary allocation from generated revenues thereby putting unnecessary pressure on the scarce resources.
Over the years, housing and home ownership has always been financed in Nigeria through one or a combination of several ways, among which are the following:
- Direct personal purchase by individual through savings,
- Loan from financial institutions, and
- Mortgage financing through the Federal Mortgage Bank of Nigeria (FMBN) and primary mortgage institutions (PMIs).
The inability to link the housing finance market to the capital market has been a bane in mortgage loan affordability. Federal Mortgage Bank of Nigeria (FMBN) can package products for raising funds in the capital market, which will supply liquidity in both primary and secondary mortgage markets. This can be done through issuances of debt securities against its own assets and government guarantee in line with its charter. These funds will be used to fund the commercial operations of the FMBN in promoting the development of affordable houses at market-determined rate in addition to NHF social housing operation. The fund will also be used in refinancing mortgages originated by PMIs and other players in the market. Also the funds will be put in use to purchase mortgages issued by originators, which it will keep in its portfolio preparatory to breaking them into pools for issuance to investors as mortgage backed securities (MBs).
Below are the various investments made by some States and Local Governments in Nigeria, making use of the financial instruments on the stock exchange as an alternative means of raising finance for their various housing projects:
States and Local Governments raised capital through Bonds
With the dwindling resources and greater demand for development financing, alternative- financing methods have to be created to gather funds for various state development projects. Government (both at the state and local level) has been able to carry out various yet little housing/building projects through Notes and Bonds issued as instruments of the Nigeria Stock Exchange.
- In 1988, the defunct Bendel State blazed the trail in sourcing capital market funds for housing development when it floated its first revenue bond of 20 million
- In 1989, the Kaduna State government also raised 30 million Naira through a 10 year revenue bond to finance urban renewal and market development.
- In 1992, the Lagos Island Local Government floated a revenue bond of 100 million naira to finance the Sura Shopping Complex.
- The year 2000 saw both Edo and Delta States governments accessing the capital market to raise 1billion & 5billion naira respectively to finance housing projects.
- Similarly in 2002, Yobe State government came to the market to raise a 2.5 billion 3½ floating rate bond to finance urban roads, drainages and the development of housing and industrial estates.
- In 2002, 4billion naira 4-year Ekiti State floating rate bond for housing and urban renewal was raised.
- The N50 billion bonds for infrastructural development floated by the Lagos State Government in 2008 was over-subscribed to by the general public.
In essence, the capital market has so far been accessed in the financing of housing delivery and infrastructural development in Nigeria. Even though it is minimal, it is worthy of note that some States Governments and a Local Government have successfully accessed the market for this purpose. The Federal government, on its part had preferred to finance housing development through the instrumentality of the Federal Mortgage Bank.
Real Estate Investment Trusts (REITs) Scheme
The concept of real estate investment trusts (REITs) goes back to the 1880’s but it never became organized until after the Second World War when need arose for large sums of real estate equity and mortgage funds to rebuild the dilapidated infrastructure. REITs is a security that sells like a stock on the Stock Exchange and invests predominantly, either through properties or mortgages. REITs was defined by David Harper, the Editor-in-chief of Investopedia Adviser, as a real estate company that offers common shares to the public. REITs share is similar to any other share that represents ownership in an operating business and is commonly found in developed property markets. They have a broad shareholder base and the profits gained are disbursed as dividends. REITs shares can be purchased on the stock exchange and orders can be placed through stockbrokers just the way ordinary shares are purchased.
REITs is a new investment vehicle in Nigeria. The Nigerian Stock Exchange (NSE) is promoting the introduction of REITs as a strategic initiative to attract more funding to the housing sector. Towards this end, the exchange has initiated discussions with the Lagos State Property Development Company (LSDPC) and two other financial Institutions for the creation of REITs to be listed on the Stock Exchange. The successful launch and operation of the product would depend largely on the cooperation of both the regulators and stakeholders in the securities industry. The capital market in collaboration with FMBN has however been able to successfully come up with a new instrument for effective financing of housing delivery in Nigeria, namely Mortgaged-Backed Securities (MBSs) (Suleiman, 2006 & Ojeme, 2004).
Mortgage-Backed Securities (MBs)
It is one of the most common forms of financing used in contemporary real estate practice. Nigeria is in the process of developing a secondary mortgage market, which if it succeeds, will boost the housing finance system but among other things, providing a mechanism for mortgage originators to replenish their funds and standardize mortgage instruments. MBS is the securitization of mortgage loans currently in the books of FMBN and PMIs for trading in the secondary mortgage market. The FMBN working with the Securities and Exchange Commission (SEC) hopes to sell these MBs to such institutional investors as insurance companies and pensions funds so as to generate more funds for on-lending to the housing sector. This way more funds will be created and more potential home owners will be able to access funds to build or buy their own homes. Furthermore, pressure will be lifted off the banking sector. MBs are essentially special bonds backed by a stream of cash flows coming from pools of mortgages. They could come in either (Ojeme, 2004):
- Collateralised debts: This is similar to conventional borrowing where the market value of the future stream of cash flow generated by the asset is pledged. This is currently been used in the United State America (USA).
- Pass through obligations: This entails direct equity interest in underlying asset pool. Assets are pooled into a special purpose trust, which issues certificates to investors buying direct equity claims on the underlying assets.
- Pay through structure: This allows the transfer of assets to a special purpose vehicle, which issues debt securities collateralised with the assets.
A joint Committee of the Nigerian Stock Exchange (NSE) and the Federal Mortgage Bank of Nigeria (FMBN) has been working towards the development of this market. Under this arrangement, the FMBN will issue Mortgaged Backed Securities (MBs) that will be traded on the floor of the NSE. It is believed that at the end of the day, schemes of this nature will further boost activities in the Mortgage sector and ease the pains of home ownership and housing delivery in Nigeria.
Securitization
Another tool/instrument is securitization. It is a complex financing technique has been found to be extremely effective in overcoming the liquidity problems of typical real estate investments especially in the USA, UK and Australia. Securitization began in the USA in the 1970s as a financing method developed in connection with single family residential mortgage loans made by the Federal National Mortgage Association. It has since gained popularity in other countries following the introduction of collateralized mortgage obligations (CMOs) in the 1980s. Securitization is the re-financing of existing income producing them into a tradable form through the issuance of securities. Godwin (1995) further defined it as the creation of tradable paper interests in underlying assets like property as an alternative to direct ownership of the assets. It involves collecting large numbers of illiquid loans or receivables into pools that are used to collateralize securities for eventual sale to investors. It has been described by Lawanson (1996) cited in Ojeme (2004) as a robust and valid therapy for the maladies of real estate finance; it has altered traditional (conventional method) financing of property investments in countries where it has been successfully applied so far. Mortgage loan assets and credit card receivables are generally considered to be most suitable for securitization because they provide regular payment streams and can be easily pooled together.
The process of securitization: A typical securitization process is complex and often laden with difficulties. A clear understanding of the stages involved and the nature of the relationships between the parties involved is therefore necessary. According to Dvorak (2000), there are several stages in the traditional domestic securitization process. First, the originator creates loan assets and sells them to a special purpose vehicle (SPV) – a specially organized entity separate from the originator so that it can be immune from fluctuations which may affect the originator. Secondly, the SPV uses the transferred assets to raise funds in the capital market at a lower cost than the originator would have obtained by issuing its own securities directly. The SPV pledges the assets to a trustee. Next, ratings are sought for the debts and if need be, a credit enhancement provider is introduced to enhance the rating. Once the pledge is concluded, the SPV sells its bonds to an underwriter/placement agent.
Conditions for successful securitization: For securitization to succeed in achieving its aim, the assets must have predictable cash flow i.e. regular payments at fixed rate of interest and without repayment of underlying obligations. Further, there is need for standardization of the documentation and security characteristics to facilitate pooling, ease of underwriting and serving processes. There should also be extensive payment history and in addition, the assets must not be such as require large terminal payments, such as in the case of balloon loans where payment of the largest proportion of the principal is left until the expiry of the repayment period. The underwriter then sells the securities to other public or private investors. With respect to the various parties involved in the securitization process, Lawanson (1996) cited in Suleiman (2006) lists the peculiar benefits it offers as follows:
Benefits of securitization: These are:
- To the borrower: cheaper costs of borrowing, greater managerial freedom, easier liquidity, and rational credit appraisal.
- To the lender, enlarged opportunity and increased profit potentials.
- To the investor: multiple investment instruments, freedom from managerial manipulation, good yield, liquidity based on tradability.
- To the regulators: more rational deployment of resources based on market situations; cost reduction, reinforcement of credit discipline.
- To the Estate Surveyors and Valuers: Increased market activity, boom in real estate business, greater production of real estate.
All the products discussed above, if property introduced and marketed to the general public, may help ensure a sustainable supply of funds to finance housing projects. The real estate investors will surely have have cause to smile as these instruments are some of the viable options to the existing but difficult to access loans of the banks and other financial institutions.
SUGGESTIONS
There is hope for housing finance both for the low and medium income earners. Some of the recommendations targeted at encouraging sourcing for housing finance through the NSE include:
- The sensitization of the general public on the activities of the NSE, their operations and their new products that are geared towards housing finance.
- The Federal government should encourage the general public including every level of government and agencies to patronize the finance instruments of the NSE in their numerous development schemes.
- These NSE finance instruments should be packaged in such a way that the low and middle income groups could access them as they are the most vulnerable groups as far as housing is concerned in the country.
CONCLUSION
For a long time, Nigerian’s real estate industry has been held down by a combination of legal and financial problems, with finance being a major issue in the development of Nigeria’s real estate industry. This paper looked at the new products developed by the Nigeria Stock Exchange such as mortgaged backed securities, securitization, real estate investments trusts (REITs) scheme, and the conclusion is that there is hope for housing finance asides the stringent bank loan and collateral options, which has discouraged investors in time past. So the capital market is ready to kick start trading on mortgage industry products that will become the engine of growth for our developing economy. Appraising the Nigeria Stock Exchange (NSE) as an alternative-financing framework for real estate has made it clear that the NSE has so much to offer. If these new product/instruments are properly accessed, the resultant effect will be a win-win situation as every stakeholder in the housing sector stand to gain.
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