SEYCHELLES: Shifting the Role of State in Housing Finance
In the typical housing finance market, the private sector (commercial banks) provides housing finance to upper- and middle- income segments, while lower-income segments of the housing market are served by development finance institutions or through some form of social welfare safety net. Usually challenges associated with access to housing finance relate to a housing finance gap, which normally occurs at the intersection where commercial banks are not comfortable to lend and where development finance institutions believe there is no longer a need for the state to facilitate or subsidize market making. The Seychelles housing finance market displayed distinct differences from the typical construct. The housing finance market was dominated by the state-owned Housing Finance Company (HFC), which provided well over 90 percent of all housing loans. Housing subsidies reached very high in the income distribution, well above the 70th percentile of the income distribution. Instead of appearing in the annual budget, these subsidies were opaque, fluctuated with financial market conditions, and impaired the growth of the financial system.
The government of Seychelles needed to redefine HFC’s mandate, introduce smart subsidies schemes, and find ways to engage the private sector in the provision of housing finance.
The FIRST TA project Seychelles #10254: Housing Finance was built on an earlier FIRST TA project, Seychelles #9023: Review of Publicly Owned Financial Institutions. The earlier project recommended reforms of HFC, among other publicly owned financial institutions.
To tackle the challenges, the Housing Finance Project focused mainly on three areas:
- A newly defined mandate for HFC
- A smart subsidies scheme
- Engagement of the private sector (including commercial banks) to encourage it to play a more prominent role in the provision of house financing
HFC required restructuring to operate in a commercial way while meeting its social mandate. The smart subsidies scheme aimed to separate subsidies from loans that are made at market rates. This would permit a public company like HFC (and future participating banks) to deliver targeted subsidies to qualified households without crowding out private.
The FIRST TA delivered by the World Bank shared international best practices and advised the government to introduce smart subsidies. Smart subsidies have an inverse relationship between the subsidy amount and the beneficiary’s income level, with lower-income earners qualifying for higher subsidy amounts and vice versa. This promotes a greater opportunity for private sector lenders to reach out to upper-middle-income groups and upper-income groups, while focusing the developmental mandate of HFC to cover lower-income groups.
The private sector (including commercial banks) needs to play a more prominent role in the provision of housing finance. FIRST facilitated the engagement of the private sector by organizing policy dialogues with commercial banks. The discussion focused on how the private sector can reasonably provide the intended financial services on commercially sustainable terms and conditions, and what impediments to the provision of housing finance exist. Recommendations were made to provide financial incentives to commercial banks such as a housing savings scheme and a limited guarantee on defaults. The supply of housing is also important, and the development of multifamily housing for middle-income borrowers, through legal improvements and public-private partnerships, should be facilitated.
The smart subsidy scheme has had an impressive start since it was rolled out in January 2014. HFC was responsible for 94 percent of approved subsidies by number, and 95 percent of subsidies by value. The remainder of the subsidies were accessed by the commercial banks, a share that needs to grow. Overall, the share of HFC in the provision of housing finance came down to 42 percent of total mortgage financing (by value) in October 2014 while the commercial banks contributed to 58 percent. The use of smart subsidies and the associated role of HFC enabled subsidies to be targeted more toward lower-income groups. The smart subsidy scheme enables first-time homeowners in the target group to “buy or build a residential dwelling of a value higher than the value they would have otherwise been able to afford in the absence of the subsidy.”
Some of the recommendations from the project are being considered for implementation through a proposed World Bank development policy loan to Seychelles.