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Kenya: Mortgage Finance for Increased Access to Housing

Prof Njuguna Ndung'u

The increasing prices of land in Kenya have partly pushed the average mortgage loan size to increase from Sh.2.5 million in 2006 to Sh.4.0 million in May 2010.

However, “the number of mortgage loan accounts is still small now standing at 15,049, even though it has almost doubled since 2006, from 7,275 accounts,” the Governor of the Central Bank of Kenya (CBK), Prof Njuguna Ndung’u has said.

The Governor, who was speaking at the Shelter Afrique’s 2011 symposium, pointed out that the top five lenders accounted for over 80 percent of the total mortgage portfolio. The top two banks held over 50 percent of the mortgage market share.

Prof Nding’u said the CBK joint survey with the World Bank (WB) conducted in 2010 which focused on the primary residential mortgage market reveals that the average mortgage loan for new loans stood at Sh.6.6 million in 2010 up from Sh.4.9 million in 2007.

The CBK and WB analysis further indicates an increased mortgage size which is attributed to the expensive housing market driven by land prices in urban areas, a predominance of high-income mortgage borrowers in Kenya and housing finance market which is yet to move downstream.

The weighted average mortgage interest rate charged ranged between 12.2 percent and 14.1 percent in 2010. These rates are high and also variable, he said. The mortgages are comparable to weighted average lending rates of 14.64 percent in the survey period (2010). However a mortgage finance player issued a bond at a coupon rate of 8.5 percent in 2010 demonstrating the potential of bonds to lower costs.

Large banks offer mortgages of a period of 5 to 25 years while medium and small banks for 5 to 15 years. Most of the mortgage loans are on a variable interest rate – over 70 percent. “There is a desire to minimize fees levied and costs – in order to expand the mortgage market,” the CBK chief said.

Nevertheless, banks lending to the construction and real estate sector are standing at 14.4 percent ( Sh.133.6 billion as at end of 2010) of the total credit. The bulk of long-term mortgage financing is currently funded through short-term savings and demand deposits.

The CBK and WB findings on the overall mortgage finance market, mortgage loan characteristics, and the main constraints to the primary mortgage market in Kenya highlighted that the bond market and pension funds have not been tapped leading to the traditional mismatch constraint that is experienced.

Access to long-term funds has been a challenge thus financial institutions are considering issuing mortgage bonds.

The financial institutions have issued a 30 year Savings Development Bond that will create a benchmark for issuance of long-term mortgage bonds.

However this posses a high credit risk – information asymmetry problem thus the need for the introduction of credit reference bureaus to enable banks to better assess borrowers’ credit risk alongside allowing borrowers to access credit based on information capital.

The Central Bank of Kenya has launched financial education programs to enhance consumer awareness. This is aimed at ensuring that there is an appropriate definition of property rights in regard to land.

The Governor encouraged the use of plain language – to ensure that disclosed information is used appropriately. The information would deepen capital markets ability to promote the mobilization of long term funds, for example by using pension funds to guarantee members’ mortgages. “This is happening in Kenya, but still at a low scale,” he said. “The expansion of cities and de-congestion offers more scope for mortgage development in Kenya.”

Mortgage finance companies are now allowed to operate current accounts, a measure intended to enable them to mobilize additional deposits; and Banks have been allowed to advance up to 40 percent of their total deposit liabilities – up from 25 percent – for the purchase, improvement or alteration of land.

“The mortgage market is developing but has structural constraints. We have moved away from missing markets and missing institutions,” the Governor told stakeholders from across Africa, adding that mortgage challenges relate to the legal environment as well as market development.

The Kenyan market is constrained by the high cost of housing, high cost of mortgages and low incomes. The mortgage market is only available to a small proportion of the population but big potential exists. “We have to bring in the policy spin to govern the mortgage market now and where we will be in the future,” he explained.

The expansion of housing supply to all income levels will become ever more important as urbanization continues to scale higher through the expansion of cities. The Governor said “more institutions specialized in mortgage finance are required to increase vibrancy in the market, but a land policy needs to be re-looked into.”

About Robert Okemwa Onsare

Robert Okemwa Onsare
Robert Onsare is pursuing Electronics Technology at the University of Eastern Africa, Baraton. He is a Cluster Strategy trained facilitator by Kenya's National Economic and Social Council (NESC). Mr Onsare has been an incubation student at the University of Nairobi, School of Engineering, FabLab, a venture project of the university and Massachusetts Institute of Technology (MIT). He is a member of the African Technology Policy Studies Network (ATPS) and a published poet. Mr Onsare is based in Kenya.

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