Legal reforms set to boost the market for Islamic mortgages

IFN Monthly Article on Nigeria: August 2018 Issue

Legal reforms set to boost the market for Islamic mortgages


In Nigeria, property registration is a major constraint in mortgage creation thus despite a gaping housing deficit of 17 million units, there are only 50,000 registered mortgages in the country. In 2017, the Presidential Enabling Business Environment Council (PEBEC) noted that property registration requires almost twice the cost, time and procedures as other countries.

As at December 2017, Jaiz Bank, currently Nigeria’s only full-fledged non-interest bank, reported N6billion ($19.6million) in home finance credit, representing 15% of its investment portfolio. Home financing therefore appears to be a significant business for Nigerian Islamic financial institutions (IFI). This is perhaps due to the large un-met demand for mortgages and the relative ease in adopting Islamic finance contracts. IFIs currently offer mortgages using the popular diminishing musharakah and ijarah structure. However, under these structures, IFIs are often restricted to beneficial ownership of the property due to the existing hassles with property registration. In an event of default, the subsequent recovery process is often tedious, creating significant risks for IFIs.

One of the recent initiatives to address the challenge of property registration in Nigeria is the Model Mortgage and Foreclosure Law advocated by the Nigerian Mortgage Refinancing Company (NMRC). The NMRC’s mandate is to promote home ownership in Nigeria by deepening the primary and secondary mortgage markets. The model law seeks to reduce the cost and attendant processes of creating legal mortgages while making foreclosure proceedings more efficient. In particular, the law establishes a Mortgage Board and Mortgage Registry at the state government level and allows delegated government officials, asides the State Governor, to consent to mortgage deeds. As at August 2018, two states – Lagos and Kaduna, out of Nigeria’s 36 states, had enacted the new law while 13 states had expressed readiness to adopt the model law. Four states where Islamic commercial banks have established a presence, Kogi, Plateau, Kebbi and Gombe, are expected to adopt the model law as early as November 2018. With easier mortgage creation processes and efficient foreclosure proceedings, IFIs should have increased appetite to extend mortgage facilities.

As the domestic regulatory environment evolves, we hope to see specific regulation that recognizes the unique preferences of faith-conscious home owners and the dynamics of Islamic home financing contracts. At present, various mortgage and housing initiatives by government agencies such as the National Housing Fund, are still out of reach for many prospective home owners since the schemes are interest based. For the time being, we will have to take solace in broad based regulation such as the Model Mortgage and Foreclosure Law. Derivatives of the primary mortgage market such as mortgage-backed securities or sukuk could be the silver bullet the Islamic finance sector in Nigeria has been waiting for.