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PARLIAMENT OF THE REPUBLIC OF

PARLIAMENT OF UGANDA

REPORT OF THE COMMITTEE ON FINANCE, PLANNING AI{D

ECONOMIC DEVELOPMENT ON THE MOTION FOR A RESOLUTION

OF PARLIAMENT TO INCREASE SHARE CAPITAL OF HOUSING

FINANCE BANK (Ul LTMTTED (CAPTTALTZATTON)

OFFICE OF THE CLERK TO PARLIAMEN'I fanuary 2018 REPORT OF COMMITTEE ON FINANCE, PLANNING AND ECONOMIC DEVELOPMENT ON THE MOTION FOR A RESOLUTION OF PARLIAMENT TO TNCREASE SHARE CAPITAL OF HOUSTNG FINANCE BANK (Ul LIMITED (cAPTTALTZATTONI

1.O Introduction

The motion for a resolution of Parliament to authorize government to increase the share capital of Housing Finance Bank (U) Limited (capitalization) was presented in the House on 24th May 2017 and referred to the Committee on Finance, Planning and Economic Development on 26ft July 2OL7 in accordance with Rule 177 of the Rules of Procedure of Parliament.

2.O Background

Housing Finance Bank Limited was incorporated in December 1967 as Housing Finance Company of Uganda limited. It started out as a building society through which its members obtained credit finance for acquisition of housing. HFCU late transformed to a credit institution and extended its services to cover mobilization of deposits for on-ward lending to the public. This was largely to augment its core function of provision of credit for acquisition and construction of residential properties.

In 2008, Housing Finance transformed into a fully-fledged commercial Bank (class 1 License) regulated and supervised by after capitalization. As at 31st December 2015, the Bank operated a network of 19 branches spread across the country, with a total asset of Ushs 619 billion, of which UGX 383 billion is in loans and advances, making HFB the 9ft biggest lender in the country.

3.O Methodology

The Committee held a meeting with Ministry of Finance, Planning and Economic Development and Housing Finance HFB).

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ex{l The Committee also reviewed the following documents:

(i) Business plan (2018-2022)' showing the impact of previous and proposed capitalization (ii) Proposed mortgage scheme for Public Servants (iii) Board resolution approving capital injection of UGX 61 billion (i") Audited accounts for the last five years (2012-2016l

4.O Shareholding of the bank

The shareholders of the Bank are Government of Uganda represented by the Minister of Finance, Planning and Economic Development with 49.18o/o, National Social Security Fund with 5oo/o and National Housing and Construction Company Limited with O.82o/o.

The Bank's share capital is currently constituted of 6,100,000 fully paid up shares of UGX 10,000 each. The bank's asset base needs to be increased by UGX 60bn to about UGX 680 billion, to enable the bank to continue to expand mortgages in line with Government policy, and to deal with other capital requirements of the bank. The NSSF has already paid up 50% (UGX 30 billion) of the total required capitalization, and government is required to pay the balance of UGX 30 bi11ion, making a total capitalization of UGX 60bn.

5.O Strategic objectives of the proposed capitalization for HFB

The strategic objectives of the proposed capitalization of the bank are the following:

(i) Extending mortgages to the general public at lower interest rates compared to other commercial banks, and extending outreach (ii) Increasing the capital base of the Bank to extend mortgages at affordable interest rates. Given their nature, mortgages require significant capital base for interest rates to be competitive

@ e,,o.,o (iii) Providing long term capital to the bank which is more suitable at affordable for mortgage lending. A large portion of the bank's mortgages are financed by Bank deposits which are short term and therefore not appropriate for this kind of investment. (i") Expanding mortgage and increasing resilience of the Bank. The real estate sector has suffered an economic downturn which has impaired the balance sheet of the Bank. This has reduced the bank's profitability in the real estate sector. Capitalization is therefore required for the bank to continue expanding mortgages and remaining resilient to economic and financial downturns (v) Increasing the capital/liquidity buffers of the bank. In view of the current performance of the financial sector, the Bank of Uganda which is the regulator for the banking sub-sector now requires Banks to have significant buffers beyond the statutory capital and liquidity requirements.

6.0 Justification for increasing the bank's share capital (Capital basef

Uganda has been rapidly urbanizing, at 5.lo/o per annum, and is expected to be amongst the most urbanized countries in Africa by 2050. Even with the potential to be become one of the most urbanized countries in Africa, Uganda still faces great challenges in housing particularly with formal supply of housing not keeping up with the growth in population. Moreover, affordability is out of reach for most Ugandans, which increases vulnerability for most households.

It's a government policy objective to improve housing conditions in Uganda. According to the 2Ol4 National Housing and Population Census Report, the number of people sleeping in a room is a major determinant of crowding and hence affects the health of household members. About 47yo of households resided in dwellings with one room for sleeping while 29%o resided in dwellings with two rooms. Urban areas had er percentage of households bo

or^L rooms for sleeping of about 57%o cornpared to rural areas of 44o/o. It is a national goal to improve the socio-economic welfare of all Ugandans, including by providing adequate and decent shelter for all. This goal is also included in the UN sustainable development goals to which Uganda subscribes.

To make financing of housing accessible and affordable, it is imperative that government continues to influence the cost of financing for mortgages by providing an alternative financing window through the government owned Housing Finance Bank. The poor housing conditions currently prevailing will be improved through sustained government interventions by availing relative cheap capital to individual Ugandans. The Government also plays a demonstration role in the market to give a signal that lending for housing is feasible, and helps to reduce the perception of risk by other financial institutions.

The current capital base of Housing finance bank is inadequate to make a significant impact in housing and to offer diversified products to meet the needs of the population in their various income brackets. In view of this, it is necessary to increase its product offering to a wide spectrum of the population, by increasing the Bank's paid up share capital through injection of additional UGX 60 billion by the shareholders.

Besides the need to improve the housing conditions in the country, there is a prudential requirement by the regulator of the banking sector, the bank of Uganda, to increase the minimum core capital ratio for commercial banks to I2.5% of risk-weighted assets (RWA) compared to the current minimum of 8%o. The proposed new capital injection will enable the Bank to be well prepared when the implementation commences by end of 2017. This will necessitate increasing the capital of the bank to meet this requirement while at the same time expanding its clientele in housing mortgages.

7.O Benefits of the proposed increase in the capital base of

wL The proposed capitalization of the bank will have the following benefits:

(i) Leverage the enhanced capacity of its balance sheet to increase affordable capital for housing finance. The bank shall leverage this new share capital from the shareholders to grow the loans and advances from shs 383 billion as at December 2016 to the projected shs 800 billion over the next 5 years, benefiting at least 60,000 home owners. (ii) Enable the bank to continue meeting capital requirement and consolidate and improve its position in the lending sector, where HFB is currently ranked number 8 in the market. This capital injection shall enable the Bank to continue meeting the capital adequacy requirements of the regulator while expanding the balance sheet from UGX 680 billion as at December 2OL6 to the projected UGX 1.2 trillion and increase returns to the shareholders to 2l%o per annum over the next 5 years, in line with the Bank's strategic plan (iii) Alternative funding options for mortgages and housing lending. In order to manage the high cost of funding that has posed a challenge to the growth, development and sustainability of the mortgage sector, the bank shall in conjunction with other key stakeholders explore the possibility of the creation of a mortgage liquidity company. The mortgage liquidity facility company will be used to generate more funding to finance the mortgage in the country. (iv) Introduce innovative solutions. The bank will introduce innovative savings solutions that are interlinked with the mortgage and housing finance propositions as part of the value chain approach. (v) Deepening financial inclusion for housing finance. To achieve this, the bank will develop housing finance solutions targeting low to medium income earners, develop and implement affordable and technologically-driven solutions and ro11 out innovative channels into under-served areas

N (vi) Increasing outreach and beneficiaries in housing sector. The increased share capital shall also enable the bank to make necessary infrastructure and technologr investments in order to increase the number of customers from the current 155,0O0 to 364,000 over the next 5 years, of whom about 60,000 shall access a wide range of credit facilities from the Bank, mainly in the housing sector. (vii) Expand the network for easy access to banking services. The bank will create an agency banking network across the country in order to make banking services more accessible to customers especially the currently under-banked Ugandans, in line with the new banking regulations. The bank will also make more investments in technologr - especially internet and mobile banking services which will also ease access to the bank's services and products.

8.O Source of financing for the capitalization

The financing for the capitalization of HFB will be a transfer within the bank of UGX 30 billion from the sale of pool houses collection account to the paid up share capital account of the Bank. Therefore there will be no additional resources required from the government consolidated fund and there will be no new debt obligations created as a result of this transaction.

9.O Impact of previous capitalization to Housing Finance Bank

In 2006107, Housing Finance transformed from a mortgage company to a Commercial Bank and its total share capital was increased from 1O billion shillings to 61 billion shillings. The Capitalization;

(i) Enabled the company to transform from a credit institution to a Tier 1 Commercial Bank; (i0 Grew the Bank's branch network from 2 in 2006 to 19 ATM across the country in 2016;

0.4! (iii) Increased customer deposits by 5 times from 55bi11ion in 2006 to 353 billion shillings in 2016 (iv) Increased total assets by 4 times from 132 billion in 2006 to 680 billion in 2016 (") Increased net profitability from shs 3.9bn in 2006 to 18.1 billion in 20t6 (vi) Increased the number of staff from 67 employees in 2006 to 436 employees in 2O16

1O.O Observations by the committee

The Committee observed that:

(i) The capitalization of Housing Finance Bank will enable civil servants to access mortgages from the bank. The money to be used for capitalization was raised from the sale of government pool houses. The mortgage rate will be L7.SVo (ii) The increase in share capital of the bank will increase the return on equity by 2lo/o by 2021. This will in turn increase corporation tax of the bank to about UGX 100bn every financial year thus increasing government revenue and pay her shareholders approximately UGX 60 billion by 2021. The capitalization will also expand the branch network brining on board an extra 50 employees thus creating employment for Ugandans. (ii| Housing Finance Bank is one of the few locally owned banks and can be used as an instrument through which government can influence its policy on improving housing in the country. (iv) Interest rates have continued to be high on loans. This affects long term borrowing where mortgages fa1l making it difficult for many Ugandans to afford decent t should look for

,@ 7 of providing funding specifically to enable citizens acquire decent housing at affordable interest rates.

11.O Conclusion

The Committee recommends that the motion for a resolution of Parliament to increase the share capital of Housing Finance Bank (u) Limited be approved by the House

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8 REPORT OF COMMTTTEE ON FINANCE, PLANNING AND ECONOMIC DEVELOPMENT ON THE MOTION FOR A RESOLUTION OF PARLIAMENT TO INCREASE SHARE CAPITAL OF HOUSTNG FTNANCE BANK (Ul LTMTTED (cAPITALTZATTONI

No NAME CONSTITUENCY SIGNATURE 1 Hon. Musasizi Henry, CP Rubanda East 2 Hon. Katali Loy, V I CP DWR Jinja 3 Hon. Acidri James Maracha East 4 Hon. Lugoloobi Amos Ntenjeru North 5 Hon. Asiku Elly Elias Koboko North 6 Hon. Bategeka Lawrence N Hoima Municipality 7 Hon. Kalule Sengo Emmanuel Gomba East I 8 Hon. Kamateeka Jovah DWR Mitooma 9R*-Iaala 9 Hon. Katoto Hatwib Katerera County 10 Hon. Lokii John Baptist Matheniko County 11 Hon. Nagwomu Moses M Bunyole East ,12 Hon. Niringiyimana James .K. Kinkizi West 13 Hon. Opolot Isiagi Patrick Kachumbala County 14 Hon. Tumuramye Genensio Kashongi County -tl 15 Hon. Naigaga Mariam DWR Namutumba t6 Hon. Ilukor Charles Kumi county -4 t7 Hon. Okello Anthony Kioga County 18 Hon. Ayepa Michael Labwor County/ t t9 Hon. Mulindwa Isaac Ssozi Lugazi MuniciRa\ \ Nrq! 20 Hon. Adong Lilly Nwoya District 2t Hon. Walyomu Moses M Kagoma County 22 Hon. Mukula Francis Agule Pallisa 23 Hon. Kakooza James Kabula County 24 Hon. Bagoole John Ngobi Luuka County /) 25 Hon. Nathan Nandala-Mafabi Budadiri West 26 Hon. Akol Anthony Kilak North 27 Hon. Odonga Otto Aruu County 28 Hon. Luttamaguzi Semakula Nakaseke South 29 Hon. Akello Judith Franca Agago District I