Fear that the new land laws would change rights of ownership kept off commercial banks from lending to property developers and land buyers.
A credit survey conducted by the Central Bank shows that while lending standards in most economic sectors remained unchanged over the last three months, banks kept off lending to building and construction and the real estate.
CBK says that the reduction in borrowing in the two sectors was attributable to expectations of high non-performing loans (NPLs) due to the implementation of new land laws.
“The forecast of NPLs increase in building and construction sector was based on assumption that new land laws would negatively impact the loans in the building sector,” the CBK report released on Wednesday read in part.
The survey trace the banks’ lending behaviours and expectations over the first and second quarters of the year, done to gauge the impact of the CBK act to raise its benchmark lending rate.
The CBR was raised to 18 per cent in December last year to reduce the amount of credit going to the economy to help contain inflation and stabilise the local currency by reducing imports.
In the survey, 39 per cent of banks indicated that they had tightened borrowing standards for consumers in the real estate, construction and building sectors in the three months to June.
Though this was a significant drop from the 66 per cent of banks that tightened standards for building and construction and 73 per cent of banks that tightened standards for real estate in period to March, the rates were comparatively higher to other sectors.
In May this year, President Kibaki signed into law three Bills that are expected to overhaul land administration in Kenya.
In addition to making provisions for the establishment of a Lands Commission to manage land issues in Kenya, the new laws also make provisions for spousal approval before using land as security in acquiring loans.
Further, the new laws call for the review of some categories of title deeds and the reversion of leasehold land to the government ownership. Real estate and construction also had the lowest demands for credit.
Although other sectors reported increasing or unchanged demand, 45 per cent of credit officers surveyed reported decreasing credit demand in real estate while 37 per cent reported decreasing demand in building and construction.
CBK further points out that credit application for building and construction dropped from 800 in March to 428 in June 2012.
Credit applications in real estate dropped from 611 to 402 in the same period.
“The survey indicated that cost of borrowing was the greatest factor that led to a decrease of demand for credit,” reads the CBK report.
This is reflected in data released by the Kenya National Bureau of Statistics (KNBS) indicating that residential construction in Nairobi has fallen by about 67 per cent in the first six months of 2012.
However, the outlook is positive for borrowers. CBK last month lowered its base lending rate to 16.5 per cent and it is expected that this will stimulate higher credit demand.