BoN reviews policy on mortgage
The Bank of Namibia is reviewing the policy on mortgages with a view to reduce speculative tendencies in the housing market.
The bank said the current scenario in which bank loans are dominated by mortgage assets remains a concern.
Assistant Governor of the central bank, Michael Mukete, told Journalists Thursday that the bank is investigating the potential usage of “forward looking regulatory tools”, such as setting maximum Loan -to-Value Ratios in granting loans for second homes.
He said: “Practically, the regulation entails requiring borrowers to make a certain deposit for [a] second housing loan. This is one of the effective tools used by central banks to directly control the amount that can be lent against a given amount of collateral.”
Mukete said, although current policies and regulations of the Bank of Namibia are generally adequate in ensuring stability in the banking sector, there is need to introduce policies and regulations that are forward looking in order to strengthen risk management practices and to mitigate against this risk.
He added: “The concern of regulatory authorities is whether banks are lending money responsibly. In Namibia we would like to think that yes banks tend to lend money in a responsible manner because the level of default is very low. At the moment we are actually at very low levels of default which were last seen in 2008. So our banks are doing a good job in keeping that in check because people hardly default on their home loans. They rather default on something else.
“However, the ratios [house hold debt ratios] also indicate that people are using 21% of their income servicing debt, paying interest, and that becomes a concern. People tend to take up new loans when the interest rate environment is favourable, but they need to take into account that should interest rates increase, they could face challenges.
Mukete said the new policy, if implemented, will help to reduce the exposure of banks if property prices start to decline.
Despite the central bank’s concerns about liquidity challenges in the banking sector in the event that house prices starts to decline and properties lose value, Mukete said the good news is that, at the moment, there is a low risk of a housing bubble in Namibia as there is a huge backlog on housing, particularly in the low and middle income segment.
Notwithstanding the perceived low risk, Mukete said it is, however, prudent for regulatory authorities to start looking at policy interventions that will mitigate risks in the event of a bubble.
“As a policy maker, you would want to be pro-active and look at the tools that you can use to reduce, among others, speculation,” he said.
Although no specific date was given for the implementation of the “new policy”, the bank said it is hopeful that a policy paper on the new guidelines will be released for consultation with stakeholders before the end of the year.
Meanwhile, the Bank of Namibia Financial Stability Report for 2012 shows that private sector debt levels remained high, even though household debt to disposable income declined slightly from 85 to 84%. The debt servicing ratio remained unchanged at 21%.
The bank said these indicators are above the regional levels of around 60%, and are of concern which warrants monitoring, particularly should interest rates increase in the future.
The bank, however, said it was satisfied with corporate debt, that is predominantly domestic, which declined as a share of GDP from 44% in 2011 to 38% in 2012.
Mukete attributed the high indebtedness of locals to the lack of financial awareness and discipline.
He said: “If one is to rely more and more on debt to make a living of course that is not sustainable. I can attribute that to the lack of financial discipline, lack of financial literacy. In general it can also be an overselling of financial products. This happens at many levels not only at commercial banks, but also by other financial services providers. You will find somebody who, apart from taking a loan from the banks, visits also loan sharks. So in the end, lack of discipline causes high levels of indebtedness.”