Kenya doing badly in the mortgage uptake front...

Developers have lauded the government’s and bankers’ attempts to reduce the cost of borrowing in the country through reference and annual percentage rates, saying these will not only enhance transparency, but also help grow mortgage assets, which are only equivalent to 2.5 per cent of Kenya’s Gross Domestic Product.

In July two things that could prove game-changers in the property sector happened; first, the government launched the Kenya Banks’ Reference Rate (KBRR), which is expected to guide all mortgaging and lending in the country; and, second, bankers introduced the Kenya Bankers Association’s Annual Percentage Rate (APR), which calculates the true annual cost of borrowing, including all extra costs and charges.

“The introduction of the KBRR is the first step towards developing a more vibrant mortgage market in Kenya,” said Ms Caroline Kariuki, the Managing Director of The Mortgage Company, in a speech during the unveiling of the industry’s second quarter report in July.

“This rate would be the equivalent of the London Interbank Offer Rate (LIBOR), against which all international currencies are priced. The standardisation of the offer rate means that the Central Bank rate that was previously ignored by banks in setting up their base rate will now be a serious reference rate for all financiers.”

Although Kenya’s mortgage market is the third most developed in Sub-Saharan Africa, it falls short of Namibia’s and South Africa’s, where outstanding mortgages to GDP stand at 20 and 26 per cent, respectively, according to Mr Daniel Ojijo, the Homes Universal Chairman and co-founder of the Kenya Homes Expo.

Ms Kariuki’s and Mr Ojijo’s high expectations are shared by Mr Munir Sheikh Ahmed, the National Bank managing director, who says easy access to finance for potential homeowners and equipping them with knowledge and expertise in financial management will help them plan for the future and eventually own homes.

These efforts to reduce lending rates come at a time when most construction projects are taking longer than projected due to difficulties in raising adequate financing, often caused by expensive mortgages and construction loans, according to Mr Gideon Ngure, Head of Marketing at Sigimo Enterprises.

“The high cost of credit, coupled with high and fluctuating interest rates, weighs negatively on the total financing structure of developments, hence can be a potential cause of delays. In addition, access to equity is in short supply in Kenya, making financing thornier as it becomes difficult for developers to become eligible for loans.”

In more developed markets, mortgage documentation is standardised so that the loans are similar despite the originating bank. This means that the application forms and the security documentation are all uniform, and the legal documentation and valuation parameters make mortgages comparable despite the different service providers, Ms Kariuki says.

“This will be a pre-requisite to having mortgages sold to the secondary market, and given the youthful nature of our market, this is an opportune time to undertake this process,” she adds.

Kenya is, however, a unique market with different characteristics from the rest of the developed market. Below are some of the unique features that define the Kenyan market, and which will need to be taken into account to facilitate growth and uptake in mortgages, according to Ms Kariuki.

1 Kenya is defined by the predominantly self-employed sector, which, to date, has little or no access to mortgages. The ability to adequately analyse and price risk for this sector, therefore, will be very important in growing the housing market in future.

“It is very interesting how the microfinance sector, led by Equity Bank, has found ways in analysing business-related risk, yet have not been able to finance the home market using a similar model,” says Ms Kariuki.

The unique features of the sector do not lend themselves to the traditional mortgages designed for long-term regular income, and yet, if micro-lenders can meet business obligations, we surely can overcome the barrier of designing products that will facilitate home ownership in this segment, she says.

“Perhaps Government intervention through the introduction of a guarantee scheme will reduce the perceived risk of lenders, or the combination of a savings and loan product, where the borrowers save up for some time to create a buffer for any defaults.”

2 Funding the mortgage sector will need to be done differently as bank deposits are neither sufficient nor well matched in risk and tenure. The introduction of the higher premiums for pension funds may be the opening that the market requires to find well-matched liquidity for the mortgage sector.

“If this is well structured, we need not put our pensions at risk, but facilitate the much needed funding to sustain and grow our home ownership levels,” Ms Kariuki says.

3 Our economy is also agriculture-based and while in most rural settings the population owns their homes, the issue here is the quality of housing found there. As such, “incremental housing models that tie in income from agricultural cycles and home improvement finance would be a definite opening for the sector, where a self-build model would be better suited,” says Ms Kariuki.

With Kenya being the continent’s second most developed financial market, after South Africa, in terms of financial access, “it would be easy to translate the regular inflows from milk, tomatoes, sugarcane, tea and coffee into regular flows for housing finance”, she adds.

Kenya is moving towards a great space with mortgage lenders having more information to make better credit decisions, and buyers having better protection from lenders with a full view of the cost of credit, Ms Kariuki says.

“Exciting times are coming with the banks taking a more competitive stance and the margins beginning to narrow. Once the Central Bank of Kenya takes on a more aggressive KBRR, we should see the mortgage sector heading in the right direction of lower cost of debt and the mortgage uptake becoming a norm rather than an exception,” Ms Kariuki adds.

At the same time, developers have proposed collaboration between the government and international organisations like Habitat for Humanity, reduction of taxation to the construction industry, infrastructure development and provision of services to land that falls outside Nairobi as some of the factors that will make homes more affordable to the majority.

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