CHAPTER ONE

INTRODUCTION

1.1INTRODUCTION

Housing finance by its very nature is a capital intensive venture which if it is to be financed through personal financial resources will require slow and tedious accumulation of savings. However, since housing provides benefits over many years, longterm credit financing is a more logical option as it will spread the repayment burden. But this requires the availability of longterm funding, and for which must be institutional capacity, structure and mechanism that will allow a convenient and effective linkage between the savers/investors and the consumers of such funds.

Without an effective finance system, no housing policy can be effectively implemented. A financing framework which facilitates financial intermediation for housing finance consists of institutions as well as their relationship and the processes involved. However, the emphasis in this review will be on relevant institutions and their activities. Indeed the framework must effectively reconcile the affordability limitation of households with viability requirement of financial institutions.

In Nigeria, housing is typically financed through a number of institutional sources: Budgetary appropriations, Commercial/Merchant Banks, Insurance Companies, State Housing Corporations and the Federal Mortgage Bank of Nigeria FMBN: and now the newly established Mortgage Institutions all these constitute the formal institutions. Informal institutions such as thrift and credit societies, and money lenders who have contributed and are still contributing substantially to the finance of housing construction also persists.

The impact of these informal institutions however cannot be properly quantified because they are largely uncoordinated, scattered and varied in scope and operational depth.

In view of the above explanations therefore, efforts shall be made in this dissertation to conducts a comparative analysis of different financing channels, then aiming at the advantages and disadvantages in real estate financing practice; a concrete improved thinking is posed. Furthermore, based on the features of financing demand in different phases of real estate development, financing procedure and methods are thoroughly analyzed to demonstrate in detail how to draw out a rational financing plan with the integrated application of diversified financing channels.

1.2STATEMENT OF THE PROBLEM

The problem of housing has become an every day discussion in all quarters of the public and private services of the developing countries of Africa. It has become increasingly glaring that most of the urban population live in dehumanising housing environment while those that have access to average housing do so at abnormal cost. According to Onibokun 1986, Nubi 1991, rent in major cities of Nigeria is about 60 of an average workers disposable income. This is far higher than the 2030 recommended by United Nations.

Ekweme 1979, Iyagba et al 1998 explained that the rate of demand for new houses was in part predicated on the rate of formation of new houses and in part on the rate of replacement of old housing stock. With estimated population of 110million as quoted in1991 census report, Nigeria needs to produce 720,000 housing units per annum based on an estimate of 9 dwelling units a year per 1,000 of population. This is a very big challenge to the building industry.

Despite Federal Government access to factors of housing production, the country could at best expect 4.2 of the annual requirement from her. Substantial contribution is expected from other public and private sectors. It should be acknowledged that private sector developers account for 83 of urban housing Federal Office of Statistics, Lagos 1983. Unfortunately, the private sector is saddled with numerous problems which make supply always fall far short of demand. Of these, the most limiting is Finance.

Various studies have, at different times, revealed the problems of housing production. Teufic and Ural 1978 Ogundele 1989 Agbola 1987 Okpala and Onibokun 1986 recognized finance as part of housing problems but ranked land and building materials higher. This led to intensive researches in these areas. Their findings influenced government housing policies and subsequent establishment of some relevant programmes and institutions like the Site and Service Programme and the National Institute of Road and Building Research. The drought of information and working knowledge of housing finance operation is a major problem today.

In a tight money market, housing is the first area to suffer, since neither the builder nor the consumer can readily obtain finance for housing. Actually, many builders have difficulty obtaining capital for their projects even in normal times. Two of these problems the high interest rates that contribute to the high cost of housing and the difficulty in obtaining capital for home construction are examined more closely in this paper.

According to Onabule 1996 245 Primary Mortgage Institutions were established under the NHP between 19911996. Unfortunately, only 54 are now operating, mainly in South West part of the country and Abuja.

According to Abiodun 1999, National Housing Fund collected about 4 billion naira from the Mandatory Saving Scheme. Out of N300 million loan approved by FMBN, only N100million was advanced. The problem in this case is not availability of fund but stringent measures to prevent default. Hence, the housing problems persist.

In order, therefore to make proposals on financing of real estate project in Nigeria, questions will arise in the following areas

What are the existing or available funding structures

Are these structures available

If not, Why

What alternatives means are available for financing real estate development

How are the available structures being managed

Is the method appropriate and effective

What alternative approaches are available

What are the likely challenges associated with financing of project

Against this background, the focus of this dissertation is on financing of real estate project in Nigeria with a view to understanding the financing framework practices in the Nigeria system and likely change in strategy if more funding structures are provided.

1.3 PURPOSE OF THE STUDY

1.3.1 AIM

The main aim of this dissertation is to study the methods of housing finance in Nigerian system and suggest workable actions that may enhance the gross housing delivery.

1.3.2OBJECTIVES

In order to meet the above stated aim, the objectives of this study shall be

aTo examine the available financing option for the construction of housing in Nigeria given the existing financial structures and the framework specified in the New National Housing Policy.

bTo identify the problems and prospects associated with the current National Housing Policy and Housing Finance.

CTo evaluates common risks associated with project financing in housing Development

1.4RESEARCH HYPOTHESES

HYPOTHESIS 1

Null Hypothesis

H0 There is no Significant Relation between Markets / off Take Risk and the Modern Method of Finance

Alternative Hypothesis

H1 There is Significant Relation between Markets / off Take Risk and the Modern Method of Finance

HYPOTHESIS 2

Null Hypothesis

H0 The choice of National Housing Policy and Housing Finance has no significant impact on Housing as a social problem.

Alternative Hypothesis

H1 The choice of National Housing Policy and Housing Finance has significant impact on Housing as a social problem.

1.5SCOPE OF STUDY

This is limited to the study of housing finance in Nigeria with the focus on both the traditional method of financing and the modern method of financing in Nigeria.

This dissertation focuses on available housing finance in Nigeria and the need for reengineering. It does not consider operations of finance nor does it consider management of such fund.

Lastly, this work studies and suggested approaches for improving housing finance in Nigeria.

1.6SIGNIFICANCE OF THE STUDY

A study of this nature will be beneficial to a wide range of stakeholders in Nigeria. Recommendations made in this dissertation will enable the government take a serious look at the current Housing policy in Nigerian, its effectiveness, alternative strategy and alternative sources and the need for reengineering.

Also, corporate bodies and developers can use the information derived herein to further their work on development strategy.

Furthermore, this study is expected to give rise to further studies which will enhance knowledge in areas of housing development and the real estate profession as a whole.

1.7LIMITATION OF STUDY

In the course of carrying out this research work, several challenges were encountered. Some of these challenges are

i.Administering and gathering of questionnaires in real estate development firms was not an easy feat.

ii.The entire project was very capital intensive, gathering information on sources of project financing.

iii.Organizations are not ready and willing to review the source or sources of their project financing.