# **1. Introduction**

Countries in Sub-Saharan Africa (SSA) have experienced stable economic growth averaging 5 percent over the past decade. However, growth has not been inclusive, and poverty as well as unemployment have remained very high. The challenge of inclusive growth is made even more daunting by unmanaged urbanization that has led to millions living in substandard housing.

Africa has the highest rate of urbanization growth, but the least developed housing finance in the world (World Bank 2014). UN Habitat reports that 46 African cities now hold more than one million people and that every day for the next fifteen years, Africa’s cities will have to accommodate an extra 40,000 people. Over the next 25 years, more and more people will be added to the number of urban dwellers in Africa. This new challenge is emerging in a context of already widespread poverty and inequality in cities, where many people are living in slums without adequate basic services. Better housing finance systems are needed to meet the growing demand for housing that African countries face.

However, the low capacity of the construction industry and the absence of a strong housing finance sector are likely to exacerbate stresses on the housing market, raising rents and further widening income inequality. Despite a positive trend, the ratio of mortgage debt to GDP remains extremely low in Africa at 3 percent, compared to 70 percent in developed countries. Africa’s mortgage markets are nascent and small by international comparisons. However, according to data from Badev et al. (2013), the average proportion of the population with the minimum income required for a prudent mortgage is 16 percent in Africa.

So far, efforts of African governments, international partners, and financial institutions have barely reduced the gap between high housing demand and insufficient housing supply in Africa’s urban areas. As in other parts of the world, this gap is even more important for low- and middle-income households. In fact, currently most low- and middle-income households in Africa only have access to the unregulated, informal housing sector. With the exception of South Africa, formal sector housing programs (public or private) have mostly targeted middle- and high-income households in Africa.

Housing finance has generated at least three main strands in economic literature. The first strand focuses on housing finance determinants (see Badev et al. 2014; Egert and Mihaljek 2007; Haibin Zhu 2006; and Buckley and Madhusudhan 1984); the second on the channels with which it affects inclusive growth (see Buckley 1996 and Dubel 2007); and the third on its impact on growth and shared prosperity (see Hongyu et al. 2002 and Gutierrez et al. 2007). This literature has answered numerous questions of interest on housing finance determinants, but so far it has not focused on specific characteristics of SSA housing finance, due to housing finance’s very low level of development among other things. The literature has yet to provide a comprehensive analysis of the linkage between housing finance and shared prosperity, especially in Africa.

Building on existing literature and to fill the gap, this paper offers answers to the following questions: What is the structure and typology of housing finance in Africa? What are the determinants of housing finance development in Africa? What is the relationship between housing finance, economic growth, and inequality in Africa?

Our investigation suggests that the housing finance sector in Africa is very weak. The ratio of mortgage debt to GDP is less than 10 percent for almost all countries other than South Africa and Namibia. Housing penetration (the percentage of the adult population with an outstanding loan to purchase a home) is also very low, with no country posting more than a 9 percent penetration rate and three out of four countries having a rate of lower than 5 percent. In addition, in African countries, the mortgage rate, the legal system, 2