A long-awaited covered bond framework could be introduced in Morocco in the first half of next year, when banks also plan to launch debut issues, according to Fitch, with the rating agency suggesting that a diversification of long term funding would be positive for Morocco’s housing finance market.

A covered bond framework has been in the works in Morocco since at least 2010, but progress has been slow and previously anticipated implementation dates have been and gone without the law being passed.

In a report on Morocco’s retail housing finance market published yesterday (Tuesday), Fitch said that according to Moroccan banks there are signs of “renewed dynamism” in the process and some banks now plan to issue their first covered bonds in the first half of 2018, when they expect the law to be introduced.

The rating agency described Morocco’s housing finance market as being one of the most developed in Africa, and highlighted that Moroccan banks’ needs for long term funding could increase in the coming years.

As of end-2016, residential mortgage lending by Moroccan banks amounted to MAD188bn (Eu17bn), equivalent to 23% of the banking sector’s total domestic loans, according to Fitch.

Mortgage lending has grown by around 5% in recent years, it said, with demand for mortgages having remained strong despite unsteady economic growth. Fitch said banks could be encouraged to fund lending through capital markets should deposit growth, at 6% in 2016, fall below loan growth.

“Diversification and access to longer term funding would be positive developments for the housing finance market, in our view,” said Fitch.

The draft Moroccan framework is not publicly available, but Fitch said that based on its discussions with banks, the law would allow covered bonds to be backed by mortgage and public sector collateral. It said eligible assets for mortgage covered bonds will primarily be primary mortgage loans with a maximum LTV ratio of 80%. It noted this requirement is “not out of line” with LTVs applied by banks rated by Fitch for non-government guaranteed loans, implying that a high proportion of available housing loans could be used as collateral.

“We understand the draft law includes provisions for customer deposit protection – covered bonds issuance will be limited to a maximum of 20% of a bank’s total assets – bankruptcy remoteness, and collateralisation requirements – 105% of the net present value of the covered bonds,” added Fitch.

“This type of funding could represent a good source of funding for the real estate loans portfolios should appropriate legislation be introduced and the covered bonds market develop in line with rated banks’ expectations.”

According to Fitch’s sources, a failure to reach an agreement on asset valuations, due mainly to data insufficiencies, has been one key point holding up the law’s progress.

Photo: Morocco’s Parliament, Rabat