By Toyin Are

Homeownership remains a significant challenge for the average Nigerian worker, persisting as a long-standing issue due to multiple economic and institutional factors. Some of these challenges include, but are not limited to, the high cost of housing, bureaucratic land acquisition & documentation processes, inadequate infrastructure, and an underdeveloped mortgage financing system.

The high cost of purchasing or building a home is beyond the income or accumulate funds of the average worker, making home ownership unaffordable. In addition to this, the Land Use Act of 1978 vests land ownership in state governments, making land acquisition and obtaining proper documentation is expensive and very bureaucratic. Furthermore, inadequate infrastructure—including road networks, electricity, and water supply—even in urban centres, exacerbates the situation.

The provision of these basic infrastructure by private developers significantly increases the cost of the housing units. The mortgage financing system in Nigeria is also largely underdeveloped. High interest rates, often above 20%, coupled with stringent eligibility criteria set by the banks limit access to mortgage loans. Consequently, Nigeria faces a severe housing deficit, estimated at over 20 million housing units, in a country with an estimated population exceeding 200 million people. This crisis is further aggravated by rising inflation in consumer goods and construction materials, many of which are imported with an unfavourable exchange rate.

Over the years, the Nigerian government has implemented several reforms to address some of the above challenges, so as to help workers own their own homes. One of such notable initiatives was the introduction of the National Housing Fund (NHF) in 1992, requiting workers to contribute 2.5% of their monthly emolument to the Fund. The Federal Mortgage Bank of Nigeria (FMBN) was tasked with managing the Fund and providing mortgage loans to eligible workers. Additional initiatives include the construction of low-cost housing schemes for civil servant and low income earners, as well as public-private partnership for the development of affordable housing units. Some state governments equally introduced land reforms aimed at streamlining property registration processes and reducing the costs associated with land ownership.

Despite these interventions, numerous challenges persist. For instance, NHF/FMBN loan applications and approvals processes remain bureaucratic and slow. Many contributors are unaware of the actual status of their contributions so far and if there has been a growth or otherwise in the value of their contributions, as they are not being updated. All they know is that their employers simple deduct the 2.5% directly from their monthly emolument. As a result, most workers often retire without accessing housing loans or receiving refunds of their contributions, leading to a perception of financial exploitation.

As far as such workers are concerned, the purpose of the contribution were not being achieved. The government low-cost housing projects only benefit a very small fraction of workers, leaving the majority without access to affordable housing. Additionally, corruption, mismanagement, improper supervision and inadequate funding have led to the abandonment of several projects. High interest rates on mortgage loans from primary mortgage institutions and commercial banks further deter homeownership. The continued challenges surrounding land acquisition and property rights further exacerbate the situation, making homeownership unattainable for many workers.

Addressing these challenges necessitates extensive mortgage and housing finance reforms, coupled with strengthened private-sector collaboration. This paper presents a sustainable approach that will involve the adoption of a structured model akin to the Nigerian Pension Reform Act of 2004, which was later amended in 2014. The successes of the pension reform, which include improved transparency and accessibility, could be replicated in the housing finance sector by ensuring better mortgage accessibility, improved funding mechanisms, and enhanced regulatory oversight. The implementation of the proposed reforms will guarantee the creation of a sustainable path to affordable homeownership for workers.

The Proposed Housing Financing Reforms

The reform will involve the creation of proper structure for the housing financing sector. The reform will necessity the creation of a national hosing financing scheme. For effective implementation of scheme, below is the summary of the institutional structure required. i. Introduction of a regulator for the Housing Financing Sector. The Nigerian Housing Finance Commission (NHFC)

ii. Introduction of Operators in the sector. To be registered by the regulator: Recognized National Housing Developers; Recognized Mortgage Finance Providers; Recognize Home Mortgage Insurers; Housing Fund Administrators; and Housing Fund Custodians.

iii. Workers and Employers Housing Fund Contributions.

The Regulator: The Nigerian Housing Finance Commission (NHFC)

The primary mandate of the Commission is to regulate, oversee, and ensure the efficient administration of all aspects related to the national housing financing scheme in Nigeria. Specifically, the Commission’s responsibilities include, but are not limited to, the following: Overseeing and regulating the National Housing Financing Scheme; Establishing and issuing guidelines for the investment and utilization of housing funds; Granting approvals, issuing licenses, regulating, and supervising housing fund administrators, custodians, and other relevant institutions involved in the housing financing scheme, as determined by the Commission; Setting standards, regulations, and operational guidelines for the effective management of housing funds; Conducting public awareness campaigns and educational initiatives on the establishment and management of the scheme; Receiving, reviewing, and investigating complaints regarding misconduct or malpractices involving registered operators within the scheme.

Registered Operators into the Scheme: Recognized National Housing Developers

Housing developers opting to participate in this scheme may register as individual companies or as a consortium of firms with specialized competencies. These consortia may also include government partnerships, providing additional financial strength and technical expertise. Their primary responsibility is to deliver high-quality and affordable housing units.

Participation in this initiative offers developers several benefits, including government incentives aimed at reducing housing development costs. In addition to tax reliefs and incentives, the government can collaborate with developers through shared financing models, the provision of subsidized land, and the development of essential infrastructure—such as roads, electricity, and water—around designated housing project areas.

These incentives will further reduce the overall cost of housing units, making them more accessible to potential homeowners. Furthermore, developers enrolled in the scheme will have a structured platform to engage with the government and advocate for favourable policies.

Notably, housing units under this scheme do not need to be fully completed before purchase. However, essential construction phases, such as roofing, initial plumbing, and wiring, must be completed. The level of completion at the point of purchase will be determined by the buyer’s financial capacity, which is influenced by their equity contribution and mortgage eligibility. This approach ensures that housing units remain within the financial reach of workers, thereby enhancing affordability and accessibility.

Recognized Mortgage Finance Providers

These are Primary mortgage institutions licensed by the Central Bank of Nigeria, as well as government-established mortgage financing entities. To participate in the scheme, mortgage finance providers must be registered with the NHFC to ensure compliance with regulatory guidelines and gain access to government incentives.

Apart from tax reliefs and incentives, the government can use the platform to provide other incentives that will make home loans more affordable. Digitizing the mortgage application, approval, and disbursement processes will help minimize delays traditionally associated with paperwork, thereby increasing efficiency. In addition, participating mortgage finance providers will be required to offer loans at a fixed annual interest rate determined by the NHFC. A worker’s equity contribution combined with the loan advanced (where applicable) will cover the full cost of the housing unit. The loan will be repaid through amortized installments— annually, biannually or monthly, depending on the worker’s income structure.

The repayment schedule must ensure full loan repayment at least six months to one year before the worker’s retirement age to prevent undue financial burden post-retirement. Until the loan is fully repaid, the mortgage finance provider will retain custody of the housing unit’s title documents.

Furthermore, the mortgage loan component should not exceed 25% of the total value of the housing unit. The emphasis of this reform is on fostering savings accumulation for homeownership rather than burdening workers with excessive debt obligations beyond their retirement period. This approach ensures financial sustainability and promotes long-term affordability.

Recognize Home Mortgage Insurers

These are insurance companies that are licensed by the Nigerian Insurance Commission’s (NAICOM) or government-established entities dedicated to offering housing insurance services. To ensure compliance with the scheme’s guidelines and qualify for associated incentives, all participating insurance providers must be registered with the NHFC. Their primary function is to offer insurance coverage that safeguards the interests of recognized mortgage finance providers concerning purchased housing units. The premium rates and terms for compensation will be established by the NHFC to ensure standardization and affordability while mitigating risks for mortgage lenders.

Housing Fund Administrators

A housing fund administrator shall be responsible for the following functions: Establishing housing savings accounts for all employees, each assigned a unique Personal Identity Number (PIN); Investing and managing housing funds in compliance with regulatory guidelines; Maintaining accurate financial records of all transactions related to the housing funds under its management; Providing regular updates on fund performance to beneficiaries of the housing savings accounts; Offering customer support services to employees, including on-demand access to account balances and statements; Facilitating the disbursement of housing savings account balances as part of the beneficiary’s equity contribution toward the purchase of a housing unit; Possessing the discretion to advance additional funds as part of the beneficiary’s equity contribution, based on an evaluation of the present value of the beneficiary’s expected future contributions to the housing savings account, as well as their retirement age or maximum years of service. In such cases, the beneficiary’s periodic contributions at the time of the advancement will be used to estimate future contributions, with a fixed discount factor rate determined by the regulator.

Housing Fund Custodians

A housing fund custodian shall be responsible for the following functions: Receiving the total contributions remitted by employers on behalf of the housing fund administrator selected by the worker; Notifying the designated housing fund administrator upon receipt of contributions from the worker’s employer; Holding housing funds and related assets in secure custody on behalf of employees and beneficiaries of the housing savings accounts; Performing investment-related functions on behalf of the housing fund administrator, including transaction settlements and the collection of dividends; Submitting periodic reports to the Commission on matters concerning the assets held in trust for any housing fund administrator.

Workers and Employers Housing Fund Contributions

The employer is expected to contribute a minimum of 7.5% of the employee’s monthly emolument to the housing fund scheme as the employee’s contribution and another 7.5% as the employer’s contribution, making a total of 15% contribution on a monthly basis. Withdrawal from the Housing Fund Savings Account.

Withdrawal from a worker’s HFSA shall only be permitted under the following conditions on the following circumstances: as equity contribution for the purchase of a housing unit. If the available equity contribution is insufficient to cover the full cost of the property, the shortfall may be financed through a recognized mortgage finance provider. In this case, an insurance cover for the housing unit shall also be contracted from a recognized home mortgage insurer.

Upon retirement, the remaining balance in the HFSA shall be transferred to the beneficiary’s designated bank account. However, if a worker retires earlier than expected and has outstanding mortgage obligations, all or part of the HFSA balance will be used to settle the remaining mortgage payments. To ensure sufficient equity accumulation for housing purchases, withdrawals for this purpose shall not be permitted until the worker has contributed to the HFSA for a minimum period of five (5) years from the commencement of the scheme.

Boost to Equity Contribution

The guideline by the National Pension Commission (PenCom) that workers can access 25% of their balance in their retirement saving account (RSA) will further boost the value of the worker’s equity contrition towards the purchase of a housing unit. It is expected that there will be more areas of collaborations between the proposed regulator of the PenCom with regards to further boosting the worker’s equity contribution and seamless of transfer of fund.

Apart from the percentage of the RSA, the worker can boost the value of his equity contribution from his private savings, thereby ensuring the reduction of the percentage of the mortgage loan to the total value of the housing unit to be purchased.

Transitional Arrangements Legacy National Housing Fund (NHF)

• The amount contributed by each worker still in employment, who has not accessed the legacy mortgage financing by the FMBN should be ascertained and the balance transferred to his housing fund savings account (HFSA), managed by his preferred housing fund administrator.
• For a worker who have accessed the legacy mortgage financing by FMBN, his mortgage liabilities should be ascertained and the terms of the agreement should be allowed to run it normal course. From the commencement of the scheme, new housing fund saving account will be opened for the worker by the FMBN, while is liabilities to the existing mortgage is being determined. His subsequent contributions will them be paid into the new savings account. After his mortgage obligations have been fully discharged, the worker can then elect his preferred housing fund administrator for the management of the housing fund account.- When all mortgage obligations have been paid off or the tenure have elapsed, the FMBN should then be restructured to either provide housing mortgage financing or act as s fund administrator but not both at the same time.

Alternatively, the bank can be restructured to only provide loan to recognized housing developers (instead of worker), at a very considerable rate and arrangement. This will go a long way in drastically reducing the total cost of developing housing units. One of such considerable arrangement is that the total amount of the principal loan and interest payable is allocated to the number of housing units developed. In this scenario, the repayment of principal and the interest element on each housing unit is tied to the sale of such unit rather than being time based. This arrangement will provide enormous relief for recognized housing developers and reduce the pressure associated with repayment of loans from commercial banks.

Exemption from the Scheme

Those who have three (3) year of less to retirement from the date of commencement of the scheme and who have not access the previous NHF loan, may elect to be exempted from the scheme. In this case, there shall be no more deductions from their monthly emolument in relation to housing fund. For those that do not elect to be exempted, the new deductions will be in accordance with the requirement of the scheme. Upon retirement, they will then instruct their housing fund administrator to transfer the balance of their HFSA to their preferred bank account.

Existence of Other Housing Loan Arrangements

The proposed reform does not invalidate or replace existing initiatives designed to assist workers in acquiring land or housing units. Such initiatives may include staff housing loans or financial support from staff cooperative societies. However, it is essential to emphasize that contributions to the housing fund savings account, as well as the repayment of mortgage loans obtained from recognized mortgage finance institutions, should take priority over any other financial obligations related to housing acquisition

Summary of the Reform

This paper presented a sustainable and efficient way of accumulating funds in ensuring that all workers in Nigeria can own at least a housing unit at or before retirement. The reform proposed a mandatory contributory fund which is managed by registered professionals from the private sector, as against being managed by a government institution, as was the case with is epileptic and inefficient previous scheme. The reform advocates for an increase in the mandatory contribution rate from the current 2.5% to 15% of a worker’s monthly earnings, with equal contributions of 7.5% from both the worker and the employer.

A proposed drastic shift from the old system, was the establishment of a regulatory body that oversee the entire housing financing mobilization, management and utilization. As such, all parties that want to provide any related service such as housing development, home mortgage financing, mortgage insurance, fund management and fund custody must be registered the regulator of the scheme. The emphasis of the reform is the accumulation of equity contribution as against heavy dependent on mortgage financing. Mortgage financing is limited to just 25% of the value of the housing unit to be purchased. This ensures that Nigeria does not experience the home mortgage crisis that was experience in the US in 2007 which later snowballed into a global financial crisis that effect financial system of many economies of which Nigeria is not exempted.

One of the key tenant of the reform was that the housing unit to be purchased need not be fully completed, the stage of contrition will be as prescribed by the regulator. It is however, pertinent to note that at least the roofing and initial plumbing and electrical work must have been done. This requirement will help in keeping the cost of the housing unit with the reach of the worker. The worker’s equity contribution will receive a further boost from the percentage of the worker’s retirement savings account that is permissible by PenCom. For a worker who begins contributing to the Housing Fund Savings Account (HFSA) simultaneously with contributions to his Retirement Savings Account (RSA) and has at least 15 years remaining to repay a mortgage before retirement, two possible scenarios illustrate the structure of their total housing unit purchase price.

In the first scenario, where the housing unit is valued at ₦100 million, the worker’s equity contribution must be at least 75% of the total cost. This means his HFSA balance would be ₦60 million, while 25% of their RSA balance would amount to ₦15 million, leaving a mortgage component of ₦25 million. Assuming an annual interest rate of 18%, the amortized annual repayment would be approximately ₦4.91 million.

In the second scenario, where the housing unit is valued at ₦70 million, the HFSA balance would amount to ₦42 million, and 25% of the RSA balance would be ₦10.5 million, resulting in a mortgage component of ₦17.5 million. At the same annual interest rate of 18%, the annual amortized repayment would be approximately ₦3.437 million.

In both cases, the mortgage component could be significantly reduced if the worker supplements his equity contribution with private savings or if the housing unit’s value is lower than the amounts stated. Additionally, the annual repayment amount is dependent on the prevailing/adopted interest rate at the time. Furthermore, the worker has the option to use his HFSA balance to fully repay any outstanding mortgage at the time of retirement, ensuring that no financial burden is carried beyond retirement and guaranteeing full homeownership upon retirement.

Apart from tax reliefs and incentives, among the other incentives to be available for recognized housing developers, there is also access to housing development loans to be offered by a government agency specifically dedicated to proving loans to recognized housing developers at a very concessionary rate and repayment arrangements. For instance, the total amount of the principal loan plus interest payable is allocated to the number of housing units to be developed.

The repayment of principal and the interest element on each housing unit is dependent to when sale of such unit are made rather than being based on specific period of time. This arrangement will provide enormous relief for recognized housing developers and reduce the pressure associated with repayment of loans obtained from commercial banks. The FMBN may be transformed as such government agency, depending on when all the transitional issued have been addressed. Recognized mortgage finance providers will also enjoy some form of incentives that will make home loans more affordable. The use of digital mediums rather than the traditional paper process is encouraged with respect to mortgage application, approval, and disbursement. This will help in eliminating delays associate with processing with traditional method.

Conclusion

The proposed reform constitutes a critical step toward establishing a robust foundation for the growth and sustainability of Nigeria’s housing finance sector, which is essential for broader economic development. In addition to these foundational changes, several complementary policy reforms are necessary to enhance the effectiveness of the sector.

One such complementary reform involves policies that promote local production of building materials. Encouraging domestic manufacturing of housing construction materials will significantly reduce reliance on imports and alleviate the demand for foreign exchange. This, in turn, will lower the cost of housing production and improve affordability. Another critical area for reform is the simplification of land registration and records management through the adoption of blockchain technology. Implementing blockchain-based systems will enhance efficiency, transparency, and security in land documentation processes, facilitating seamless land ownership verification. Such reforms will create a more investor-friendly environment for real estate development and improve access to credit for developers, as land assets will serve as more credible collateral.

The successful implementation of these reforms will contribute to the development of a secondary mortgage market, enabling mortgage loans to be securitized and traded as mortgage-backed securities. This will, in turn, enhance liquidity within the housing finance sector. Additionally, such structured investment products will encourage Nigerians in the diaspora to invest in real estate development, either directly or through investment securities specifically designed for the sector.

Dr. Toyin Are is a seasoned financial market expert, an economist, a chartered accountant, and a certified information system auditor with over 23 years working experience. He is currently working with one of the financial services regulators, wrote in from Abuja. [email protected]