Abstract
In Ethiopia there is no mortgage valuation framework or a regulatory valuation institution. Due to this, financial institutions may value mortgage securities without any clear and consistent basis; resulting in confusion among experts and parties dependent on valuations for their business. Further, there is no previous empirical evidence on how banks or financial institutions value mortgage securities. This study is therefore intended to examine the practice of mortgage valuation adopted by Ethiopian banks by looking at valuation bases and their corresponding approaches. To meet this objective the researchers adopted a qualitative research approach where primary data were collected using key informant interviews from experienced valuers at four Ethiopian banks. The collected data were analysed and interpreted using clustering and the data were categorised into relevant themes. The study found that banks undertake mortgage valuation without any valuation basis, and they consider the cost approach as the only recognised valuation approach. Moreover, property valuers do not have sufficient professional competence in valuation and have no discretion to choose the appropriate valuation approaches. Based on the findings of this research, it is suggested that banks apply market value as a basis of valuation. The market value basis is compatible with the property market context of Ethiopia and international practices. The constitution of Ethiopia also supports it. Furthermore, banks should also adopt either the income, market or cost approaches depending on the nature and type of properties. But the cost approach can be applied as a check and balance on the reasonableness of the value determined using another approach and in cases where the two approaches are inappropriate. Valuers should also be able to use their discretion in selecting valuation approaches. These can be realised by establishing an independent national institution responsible for valuation regulation and certification.
Highlights
In many countries a significant part of investment in real estate is carried out through secured lending where real property is taken as a collateral security (Kalynichenko, 2017)
The mortgage valuation system in Ethiopia contradicts the valuation practice in many countries where reliable valuation results can be produced only by a valuation professional that adheres to international standards and professional practice (Babawal & Omirin, 2012; Parker, 2016; The European Group of Valuers’ Association (TEGoVA), 2016)
This study examined mortgage valuation bases and approaches practiced by commercial banks in Ethiopia
Summary
In many countries a significant part of investment in real estate is carried out through secured lending where real property is taken as a collateral security (Kalynichenko, 2017). The valuation of mortgaged security is an important part of the mortgage lending process both at the commencement of the loan and during the life of the loan (RICS, 2018) To this end, it is an important endeavor to determine the degree by which the value of an asset exceeds the loan in providing the margin of asset cover and to increase the certainty that the asset being taken as a guarantee will cover losses in the case of loan default (EMF, 2009; Babawale, 2012; Udoekanem, 2017). Market value is the appropriate basis there are circumstances which may require other bases (Crosby & Hughes, 2011; Bowcock, 2015; RICS, 2017a). The income, market and cost approaches of valuation may provide market value, but the selection process considers the appropriate basis of value, respective strength and weakness of each approach, the nature of the asset and the availability of reliable information needed to apply the approach (IVSC, 2017)
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