The two major shareholders in Uganda’s Housing Finance Bank (HFB) plan to inject an additional Ush60 billion ($16.4 million) to grow the lender’s mortgage book and raise its liquidity levels.
Under the re-capitalisation plan, the National Social Security Fund (NSSF) and the Ministry of Finance, Planning and Economic Development will contribute Ush30 billion ($8.2 million) each.
The decision was reached after months of discussion between the management of the country’s leading mortgage provider and its top owners.
NSSF and the Finance Ministry own 50 per cent and 45 per cent shareholding respectively in HFB.
The National Housing and Construction Company holds a five per cent stake.
The EastAfrican has learnt that the recapitalisation plan was delayed partly because NSSF was reluctant to contribute more in return for increased equity.
The Fund’s investment rules discourage equity ownership of more than 50 per cent in any business due to recapitalisation pressures that arise in case of financial difficulty.
Faced with financial pressures, the Finance Ministry is reported to have converted some Ush30 billion ($8.2 million) it collected from the sale of government houses in the early 2000s into new capital for the lender.
The cash had been deposited in HFB. Back then, the government resolved to sell a number of public houses in order to recapitalise HFB. The more than 2,000 units were sold at varying prices based on location of the property, design features and depreciation levels.
While NSSF’s support helped to shore up Housing Finance’s capital base and minimise liquidity challenges, the Finance Ministry’s desire to retain some control in the business without investing additional capital delayed the final decision on recapitalisation.
In March last year, NSSF injected some Ush30 billion ($8.2 million) into HFB, increasing its shareholding to 50 per cent, from 46 per cent in 2013, insiders said.
Out of the total cash, Ush6 billion ($1.6 million) was in unpaid dividends covering three years that the Fund opted to preserve in the lender’s books in order to contain liquidity pressures, while the balance of Ush24 billion ($6.6 million) was paid in cash.
Fresh capital is expected to help the lender expand its retail mortgage book amid rising demand for decent housing units among middle class Ugandans. HFB holds a dominant market share of 50-60 per cent of the local mortgage sector.
Uganda’s housing deficit is estimated at 1.6 million units while local demand is projected at 200,000 residential units per year, real estate experts say.
“The Cabinet has approved Ush30 billion for recapitalisation of the bank but that decision is subject to parliamentary approval,” said the Fund’s managing director Richard Byarugaba.
“The government’s contribution to the recapitalisation exercise will protect its shareholding from dilution and also maintain our stake at 50 per cent in line with our investment guidelines.”
The fresh capital is also expected to strengthen HFB’s balance sheet and boost its negotiating position with future lenders based on higher equity levels, a factor that lowers default risks attached to a borrower.
“The additional capital will help lower the cost of funding by at least 50 basis points in future by strengthening the bank’s equity base,” said a non-executive director at HFB who requested anonymity.
The bank’s net profit before tax rose from Ush14.6 billion ($3.9 million) in 2015 to Ush18 billion ($4.9 million) in 2016, while loans and advances grew from Ush367.8 billion ($100.5 million) to Ush401.4 billion ($109.7 million).
Its customer deposits grew from Ush306 billion ($83.6 million) to Ush353 billion ($96.5 million) iver the same period.
HFB’s assets on the other hand expanded from Ush618.5 billion ($169 million) Ush680.2 billion ($185.9 million), according to the lender’s financial statements published in April this year.
“Higher equity funding in its books means the lender will enjoy access to cheaper money needed for issuing mortgages with little stress from deployment of short term deposits.
“However, the local mortgage market remains small and the bank would need at least 10 times more money to realise a big impact,” said the director for financial stability at Bank of Uganda, Dr Charles Abuka.