Home  / 

1. Housing loans for bank employees and their impact on the housing market

In recent years, several non-governmental organizations (NGOs) have been providing their employees with housing through housing loan arrangements with banks. The banks offered them discounted rates to have more foreign currency income. Banks have also provided their staff with housing loans. Although these loans are considered as employee benefits, they affect the housing market considerably.  

Banks claim that loans provided to employees are used as incentives to keep them happy and satisfied with their positions. “The loans we give are not done based on collateral; they are given because employees are guaranteed to pay back those loans. As of right now, our employees can start the process of asking for a loan and it will be approved but the money will not be allocated because current policies don’t allow us to.” said manager of a private bank in Addis Ababa who chose anonymity.

Before the government banned loans all together a couple of weeks ago, banks were giving out housing loans to their employees. One can argue that there is coincidence of cycles in credit and property markets. Increased credit/loans for housing are bound to create a demand in the housing market; Ethiopia’s market being what it is (heavily influenced by agents and brokers) the market spikes anytime mass loans are given out.

However, a study entitled “Effects of bank lending on urban housing prices for sustainable development” states that the direction of causality between bank lending and property prices needs to be looked into. From a theoretical point of view, argues the study, causality may go in both directions. Bank lending may affect property prices via various liquidity effects. Property can be seen as a durable good in temporarily fixed supply. An increase in the availability of credit may increase the demand for housing if households are borrowing constrained. With supply temporarily fixed because of the time it takes to construct new housing units, this increase in demand will be reflected in higher property prices. The price of property can also be seen as an asset price, which is determined by the discounted future stream of property returns. An increase in the availability of credit may lower interest rates and stimulate current and future expected economic activity. As a result, property prices may rise because of higher expected returns on property and a lower discount factor.

When we look at the reality of things though, these loans given to employees might have an effect on the housing market at a macro level but in the larger picture, its significance might not be of major concern. “If we ask ourselves how significant these loans would be on the general market, the answer is probably not a lot. These employees do not make up the majority of the city's population. Even if we assume a couple of thousand bank workers get these loans, their impact wouldn’t be as vast as one would imagine,” explained Wasihun Belay, an economist.

We could consider the rise of Eritrean residents in the city as a factor for the spike in rent. Wasihun analyzes that these two events have a macro effect on the market but when considering the big picture, their effect is like a drop in an ocean. These factors are not as significant as they’re painted out to be. “Banks give loans to financially well-off individuals. Their housing demands are nowhere close to the housing demands of the masses; so chances of it affecting the general housing market is slim to none.” added Wasihun.

A 2019 Cepheus capital report indicates that there were close to 90,000 employees at all commercial banks by then. With branch expansion taken as a major step towards raising the accessibility of financial services by Ethiopian banks, the number would surely increase over the couple of years since then. Some banks The Reporter spoke to claim that they have completely provided their staff (between 8,000 and 9,000) with housing and car loans. Considering only half of the employees at all commercial banks have accessed housing loans, the number would indicate that 45,000 employees have accessed the loans. Sources indicate that staff loans are the third biggest loans in some banks following export and import loans.

While the rapid pace of urbanization in Ethiopia could generate many benefits, it is driving an urgent need for adequate, resilient and affordable housing. That also brings the challenge of urban sprawl, which must be met through the delivery of compact urban development. Stable house prices are critical to a healthy housing market and sustainable development. House prices in Addis Ababa and its surroundings have increased dramatically in the past decades.

Residents of Addis Ababa are stuck in a limbo of having to pay off ever growing rent expenses. There aren’t any major rental guidelines that could at least protect residents from unreasonably spiked prices. The development of a formal rental market is hindered by limited regulations and a lack of transparency between landlords and tenants.

Economists suggest that controlling lending rates would be effective as a long-term measure of controlling housing prices at the national, regional, and city levels. Whereas controlling the lending supply would be effective as a short-term measure for cities, they also speculate that housing prices cause lending supply changes for many regions in the long run. This indicates that credit policy often lags in response to housing price changes and that indirectly means the effectiveness of bank lending largely varies at the city level.

Contributed by Yosthena Aynalem