GRM 2010 GRM 2011

Abstract Details

 
AUTHOR NAME
 
Family Name:
Hessler
 
First Name:
Olivier
 
ABSTRACT OF PAPER
 
Title of Paper:
Secondary Mortgage Market in MENA
 
Paper Proposal Text :
It is of the essence of a housing finance system to provide long term resources to households. The purchase or construction of a house is a large investment, in general the largest of a life time, and spreading its cost over a long period makes it affordable. In many economies, offering this financial service is a challenge on both the primary and secondary markets.
The main source of funding available to lenders is deposits. The maturity mismatch creates a liquidity risk for banks, and interest rates generate a more acute problem. Floating rates can create a solvency problem for borrowers and a credit risk for lenders. If the latter offer fixed rate products, they incur mismatches that can jeopardize their financial stability. There are 3 options to mitigate this risk:
• Hedging instruments, unavailable most of the time
• Government funding, a generally limited and often distortive solution
• Mobilization of fixed rate resources from the capital market.
The availability of the latter option is therefore critical for the development of a sound and sustainable housing finance system.
BRIEF OVERVIEW OF MENA CAPITAL MARKETS
1. Volumes: fixed income markets are small in comparison with other regions. Private bond segments are especially underdeveloped. Few and relative exceptions: Morocco, Jordan, sukuks in GCC countries (but mostly international transactions)
2. Analysis of demand/ and supply conditions
a. Demand, resulting in particular from high loans–to-deposits ratios of banks - very high in some countries (Morocco, Tunisia, GCC) ; from the funding needs of non deposit-taking, specialized lenders; and needs of capital relief
b. Supply: the paper will provide an overview of the development of institutional investors bases and mutual funds. Both sectors are generally underdeveloped, with rare exceptions (Morocco), and sporadic reforms in recent years (e.g. KSA, Egypt).
3. General view of the functioning of bond markets, including depth of government segment, availability of a yield curve, international vs domestic transactions, degree of secondary trading, etc.

SPECIFICITIES OF MORTGAGE LENDING NEEDS
The main factors shaping the development of secondary mortgage markets are:
1. The importance of fixed rate lending: predominant in certain countries or market segments, sometimes due to regulatory requirements (e.g. Tunisia, Kuwait, Morocco and Egypt for low income borrowers)
2. The role of housing linked savings systems (Algeria, Tunisia)
3. The market share of specialized mortgage lenders (GCC, Egypt)
4. The importance of Government housing funds (e.g. KSA, Kuwait)
SPECIFIC CAPITAL MARKET INSTRUMENTS
The paper will present the use and discuss the value of 4 instruments:
1. Securitization: frameworks exist in only a few countries, and where available their use has been limited (Morocco, Tunisia)
2. Mortgage Refinance Company: Jordan (successful), Algeria, West Bank & Gaza, Egypt
3. Covered Bonds still ignored. Morocco is the only country in the process of introducing this tool
4. Sukuk bonds (GCC): after a period of growth in the mid-2000's, the market was deeply affected by the global crisis. Recently it seems to be coming back.
CONDITIONS FOR THE DEVELOPMENT OF CAPITAL MARKET FUNDING
1. Promote sound primary mortgage market: reliable extensive land registration systems, credible security rights, adequate regulation and oversight, real estate market transparency- in particular development of price indices.
2. Expand institutional investment bases and capacities.
3. Strengthen investors’ confidence in the case of securitization and sukuks: increased fiduciary duties, portfolio information, due diligence evaluations, market transparency.
4. Develop long term yield curves and pricing benchmarks (government bonds).
 
 
 

WITH THE GENEROUS SUPPORT OF