Housing Finance in Kampala, Uganda To Borrow or Not to Borrow

Abstract: Housing is an important part of development processes and typically requires long-term finance. Without long-term financial instruments, it is difficult for households to smooth income over time by investing in housing. However, in developing countries the use of long-term loans is limited, particularly among the middle-class and lower income individuals. Most people in developing countries build their houses incrementally over time without long-term loans. The limited use of long-term loans is generally seen as a symptom of market failures and policy distortions. This thesis empirically explores constraints to increase housing loans and factors that determinate the demand for different types of loans for investment in land and residential housing. The study is conducted in Kampala, the capital of Uganda. The thesis looks at supply and demand of loans. Most of the data on the supply side is collected through interviews and literature studies. The demand side is investigated through questionnaires to household where data is collected in four surveys targeting different household groups. The findings indicate that in the context of Kampala, there are factors affecting the demand for housing loans that have not previously been fully explored. The surveys on the demand for housing loans among middle income groups suggest that a main reason for not taking a long-term loan is not limited access but the risk of losing the property due to the foreclosure process in case the borrowers fail to pay back the loan on time. Therefore they prefer to take short-term loans, so called salary loans that are not secured on their property, even though they are more expensive than a loan secured on their formal land ownership. The findings from the informal settlements show that the low demand for loans is more dependent on affordability and the short maturity of credits that they can access. Other findings are more in line with earlier international studies, such as inefficient land administration as a constraint for formalizing land and using land as security. The distribution of land rights and the system of land administration and management requires upgrading of land policies and their impacts. Information asymmetries also undermine the identification and credit rating of borrowers. Lack of long term funding is another constraint to increase long- term loans. A general conclusion that can be drawn from the findings is that those that need and can afford a loan for investment in land and/or housing prefer to take short-term loans instead of a larger long-term loan secured on their land. In doing so, they avoid exposing themselves to the risk of losing their land due to the foreclosure process in case they fail to pay back the loan disbursements on time. These findings contradict much of the concerns that both scholars and financial providers have expressed about households choice of loans. Even though there are obstacles on the supply side, understanding the demand side is very important.