IF YOU are planning to build a house soon, think twice. While the cost of building materials has nearly doubled over the last one year, the price of a finished house has almost halved over the same period. So, spending Shs200m on building a new house may be less smart than visiting your local banker to see what Shs200m can get you amongst properties listed for foreclosure.
As a matter of fact, Sunday Pepper has been running back-to-back stories; listing myriads of properties banks are set to auction due to the failure of the owners to meet their loan obligations. It’s a pity our banks have become, by and large, real estate companies; brokering land and houses instead of coming up with new ways of collateralising debt.
Getting a business loan from a bank without developed land is like trying to squeeze water out of stone. They all sing the same chorus and dance to the same tune: property! You give them your house, they give you a loan; you repay, they return your property title, you default, they foreclose the building. But then we ask ourselves; how many Ugandans stay in houses they own, with the land titles under their mattresses? May be 10% of all households.
So what happens to the 90% who either rent or have no acceptable documentation for their houses? Are they not implicitly barred by banks from borrowing to start businesses? It’s high time banks came up with new ways of collateralising loans outside the usual property addiction. Banks have the potential to design safeguards and protect their investment against loss without necessarily holding onto somebody’s house or property. How about incorporating insurance services within their packages or partnering with insurance companies to spread risk on loans? They can together design products that will insulate the bank in case of a financial disaster engineered by borrowers who default. There are many subtle ways banks can manage risk without turning into land and house brokers. That’s not their core business and the more they pile up property the more risk they are bringing to their door.
It’s also worth noting that the more property they throw onto this circulated market, the more they kill the value of those particular properties and the entire real estate market in Uganda. The mortgage industry will eventually collapse and banks and their customers will all lose. We have to recall that the 2008 recession, that brought the world to its knees, started with banks which leveraged property to unacceptable levels. They believed that the value of houses would always be going up; until borrowers started to default en masse.
Panic resulted into trying to sell millions of houses at the same time; which was impossible of course; the value of houses took a nosedive and both banks and borrowers lost trillions of dollars. God forbid but at this rate Ugandan banks may cause the same avalanche upon us. Fortunately not all banks are high on property; some are sober enough to look at business plans, cash flow, bank statements, audited books of accounts and so forth.
These banks, no doubt, realise they are not “Property Masters” and don’t intend to hold trillions of Shillings in real estate, an industry they barely understand. These are the new game changers and believe you me; they will have the last laugh. Let’s support them