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Feasibility Studies

An interesting feature of the mortgage market in Ghana is that the major player of mortgage finance is the HFC Bank, whose operations are concentrated in Accra and Kumasi.

The implications of this are that many more qualified customers outside these areas may not be served, as the remaining eight regions in the country are not covered by the HFC Bank. Potential customers in these areas often rely on the commercial banks, which give mortgage loans to only trusted customers with a credible credit history. The result is that the mortgage markets continue to operate on a very small scale covering only few qualified customers.

Furthermore, the mortgage markets in Ghana serve only high-income earners. Many middle- and low-income groups are priced out of the market because of the requirement of an initial deposit of 20-30% of the total mortgage facility. For example, for a house that costs about
c (Ghanaian cedis) 200,000,000, a customer will be required to make an initial deposit of 40,000,000 before the facility is granted him.

Research conducted by the Ghana Centre for Democratic Development (CDD) in 2002, indicated that 76% of Ghanaians live in households with a combined monthly income of less than US $56.00. Just 5% of Ghanaian families live on incomes of more than US $100.00 per month. Sixty-six percent of households do not rely on a regular wage or salary for their livelihood and only 18% are able to save money monthly.

Another 21% said they resort to spending their savings or borrowing to make ends meet. Thus, in a country where incomes are generally low as this, an initial deposit of 30% is enough of a deterrent for middle- and low-income earners, as they cannot afford it. The effect of this is that the mortgage market does not grow, as many people are restricted from entering the market due to the high initial deposit requirements, which their incomes cannot support.

In addition, the mortgage market in Ghana is segmented into mortgages denominated in the domestic currency, the cedi and the US dollar, with customers saving and repaying respectively in the domestic currency or the foreign currency - the second usually by non-resident Ghanaians. The depreciation of the local currency has made transactions more expensive since investors want to make the most profit, it was no longer safe to trade in the local currency and hence the foreign currency.

Perhaps the most important of characteristic of the mortgage market in Ghana is the weak macroeconomic environment.

The formal mortgage market in the country started within a weak macroeconomic environment. The Economic Recovery Programme (ERP) and the Structural Adjustment Programme in the 1980s and 1990s pursued by the government, was affected by a global downturn as well as sharp increases in oil prices. These engendered macroeconomic imbalances, spiralling inflation and high interest rates as well as deteriorating terms of trade. This was met with increasing budget deficits, which made mortgage lending unstable.

Undoubtedly, the most important variable affecting the mortgages available and the pricing of these mortgages is inflation and the associated currency depreciation risk.

The problems are two-fold - anticipated inflation increases money interest rates and therefore nominal payments, and also generates a front-loading payment problem in compensating for the loss in purchasing power of the income over time. The possibility of unanticipated inflation increases the real interest rate that both savers and lenders require, increasing the real cost of mortgages.