An Assessment On The Interest Rate On PMI's Financing Housing Development In Abuja

ABSTRACT

This paper asses the interest rate of mortgage finance on housing delivery in Nigeria. One of the major goals of PMIs is to boost investments and engender increased housing growth among 36 States of Nigeria and the Federal Capital Territory. In this study, we investigated how primary mortgage institutions had impacted on investments in housing sector in Nigerian.. We employed the ordinary least square (OLS) estimation in analyzing a modified finance model. The Johansen co-integration test was also utilized. From the unit root test, evidence of long-run relationship was found to exist between mortgage finance and housing delivery over the period studied – both at the instances of the Trace statistic and the Max-Eigen test statistic. The results of the OLS found that mortgage deposit had a positive and significant impact on housing delivery in Nigeria, while mortgage loan exerted negative and non-significant influence on housing provision in Nigeria. This study concludes that while housing is an important sector that can drive the Nigeria economy, inadequate supply of mortgage finance to the sector stifles its growth and overall economic impact. We therefore, recommend that the government and monetary authorities should make crucial policies to improve activities of PMIs for optimal performance; access to PMI mortgage loans should be made easier and at lower interest rate.

CHAPTER ONE

1.0                                              INTRODUCTION

1.1                                BACKGROUND OF THE STUDY

Housing is globally acknowledged as one of the fundamentally important requirements for existence and survival of human race, as well as a critical component of a country’s economy. Okidi and Ellah (2013) regard housing as one of the three primary necessities of humanity, and is the most essential requirement for physical survival of people together with food and clothing. A robust housing programme creates the enablement for stable rural and urban communities in combination with social inclusiveness (Amao et al, 2014). In that regard, the right to occupy a decent shelter is paramount and the availability of decent and affordable housing interest rate should be one of the distinguishing marks of a developed economy. On the contrary, significant growth in the housing sector in developing countries including Nigeria seems one of the “knotty issues” hampering human and national development.

Since there is no “free lunch” anywhere, economic agents (individual, household, firm and government) usually obtain loan to acquire assets like real estate. They depend on informal financial institutions such as age-grades or formal institutions like mortgage bank for financial support. In most cases, loan recovery strategies are put in place by lending institutions to guard against default. As a precautionary measure, properties are mortgaged and the lender enjoys the lien (legal claim on borrower’s property) to keep or sell the property as security for the debt (Microsoft Encarta Dictionary, (2009, DVD). Nwankwo (2014) sees mortgage financing model as a panacea for solving housing related problems in Nigeria.

In compliance with the position of housing in the very well-known Abraham Maslow’s hierarchy of needs hypothesis, the government of Nigeria ostensibly created the National Housing Fund (NHF) Scheme in 1991. In order to actively drive this financing model for greater efficiency, FGN established the Primary Mortgage Institution (PMI) so as to deepen liquidity of housing business (Acha, 2007). Sanusi (2003) and Nwankwo (2014) clearly substantiate the essence of housing thus:

“… it is one of the three most important basic needs of mankind, the others being food and clothing. Second, housing is a very important durable consumer item, which impacts positively on productivity, as decent housing significantly increases workers’ health and well- being, and consequently, growth. Third, it is one of the indices for measuring the standard of living of people across societies.”

PMIs gather long-term funds with interest for the development of housing (Onoh, 2012). For this reason, the National Housing Policy (NHP) launched by the government in 1992 was intended to further improve activities in this sector. Workers in public and private service, banks and non-bank institutions were required to contribute to housing development. These funds were to be lent to PMIs by the Federal Mortgage Bank of Nigeria (FMBN) for on lending. The PMIs besides gathering their own deposits also grant borrowers access to loans in line with NHP. However, the performance profile of PMIs so far towards desirable housing delivery in Nigeria is below expectation (Amao and Odunjo, 2014). Acha (2012) ascribes the cause partly to weak corporate governance, for example lending for non-housing purposes. Similarly, Okonjo-Iweala (2013) observes that in spite of the various reforms introduced in the mortgage institutions in Nigeria by government, the sector has remained inactive and irrelevant owing to inability of the market to lend considerable financial support to potential house owners. Moreover, Sanusi (2003) opines that the perception that PMIs mandate to intermediate funds for adequate housing delivery has been satisfactorily accomplished to date is arguable. It is against that backdrop that our paper intended to examine the extent PMI activities had promoted the housing sector in Nigeria.

The problem associated with our research topic is not far-fetched. Mortgage financial institutions in most circumstances play a unique role in every economy in order to satisfy a psychological need. It is worthy of note that in developed economies such as the United States of America, United Kingdom, Canada, France, Denmark, among others, the common practice of owning a house is by means of an established mortgage system. It is likely therefore that their mortgage scheme is not being ineffectively and inefficiently managed. In contrast to the near perfect mortgage system of developed world, there is yet to be consensus on issues relating to housing in Nigeria among scholars, policymakers, administrators and the public (Sule, 2006 cited in Udoka and Owor, 2017). Besides, fewness of scholarly works on influence of primary mortgage institution on housing delivery in Nigeria has seemingly created a gap in knowledge. Against that backdrop this paper sought to contribute to the existing literature in order to at least ascertain both direction and magnitude of the relevant dependent and independent variables that make up the model of this study.

1.2                                                              PROBLEM STATEMENT

Housing finance by its very nature is a capital intensive venture which if it is to be financed through personal source will require slow and tedious accumulation of savings. In order to deal with these problems, government has pursued a range of successive programmes and policies. One of such programmes as contained in the National Housing Policy (2006) is providing fund for housing development through housing and mortgage finance institutions. Mortgage financial institutions in most circumstances play a unique role in every economy in order to satisfy a psychological need.

Long term credit facility for home acquisition is supposed to come from two sources; one being the National Housing Trust Fund (NHTF) and the second being the private financial institutions. The NHTF operates on a depository arrangement whereby civil servants and self employed persons contribute 2.5% of their monthly income into the fund through their employers or directly to the federal mortgage Bank of Nigeria in order to access the loan. The concept is to ensure continuous flow of long term fund for housing development and to provide affordable loan for housing with low interest rate.

Different studies have been conducted on the sources of finance for housing development in Nigeria. According to Sanusi (2003), there is evidence of declining activities in housing finance generally and there are 9million workers who are to be registered and therefore not making contribution. But despite this decline, housing developments are being embarked upon by Nigerians. Recently in Abuja, there is an upsurge in the number of residential layouts and new developments across residential neighbourhoods. There is little information on the contribution of housing finance institutions to housing development in this town. The performance of the various housing finance institutions cannot be adequately measured if the issue of accessibility to finance by the people is not determined. It is this issue that the study seeks to investigate in Abuja.

• AIM AND OBJECTIVES OF THE STUDY

The aim of this research is to assess the interest rate on PMI’s for housing development in Federal Capital territory. the specific objectives that provided directions to this study were:

1. To examine the effect of PMIs’ deposits on mortgage investments in Nigeria, and
2. ascertain the interest rate of PMIs’ loans for financing housing development  in Nigeria

• To examine the challenges to accessing housing finance for housing development in Abuja.

1.4                                     RESEARCH HYPOTHESES

In conformity with our research objectives, the following hypotheses were tested:

1. deposits collected by PMIs did not positively and significantly affect mortgage investments in Nigeria over the sampled period.
2. loans granted by PMIs did not positively and significantly influence mortgage investments in Nigeria over the sampled period.

1.5                                                              SIGNIFICANCE OF THE STUDY

The study is significant in many aspects. This study will contribute to the process of developing a better housing finance strategy that will be more accessible to all Nigerians. The study will contributes towards a better understanding of how fund for housing development is being accessed Abuja. This will lead to a more accurate result of the rate at which housing finance and mortgage is being accessed. The study will contribute towards improving the current shortage of data on the level of access to housing finance and mortgage in Nigeria which will be useful to policy makers and researchers. It will also shed light on how lender and borrower can manage private mortgage insurance (PMI).

1.6                                                     SCOPE OF DELIMITATION THE STUDY

The study seeks to examine how to access finance for housing development in Abuja. It is limited to answering the following questions: what are the sources of finance  for housing development in Abuja? what are the interest rate on PMI’s loan for assessing housing  in Nigeria and challenges of accessing finance for housing development in Abuja?

1.7                                   LIMITATION OF STUDY

As we all know that no human effort to achieve a set of goals goes without difficulties, certain constraints were encountered in the course of carrying out this project and they are as follows:-

1. Difficulty in information collection: I found it too difficult in laying hands of useful information regarding this work and this course me to visit different libraries and internet for solution.
2. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet).

• Time Constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8                                                         PROJECT ORGANISATION

The work is organized as follows: chapter one discuses the introductory part of the work,   chapter two presents the literature review of the study,  chapter three describes the methods applied, chapter four discusses the results of the work, chapter five summarizes the research outcomes and the recommendations.