Kenya needs other mortgage options




President Kibaki, while opening the civil servants housing scheme at Ngara, Nairobi, said there is a need to develop more affordable houses so that Kenyans take up mortgage finance.



What he was implying is that current interest rates are unaffordable to most Kenyans. Civil servants in Ngara will pay at five per cent interest, which is far below the 13-20 per cent offered by mortgage companies.



There are two ways to make housing easily accessible; reduction in interest rates and increase in repayment period. For example, a mortgage of Sh1 million taken at 13 per cent interest payable in five years will attract a repayment rate of Sh22,760 a month. If you increase the repayment period to 10 years, the amount falls to Sh14,940. If you raise it to 15 years, one pays Sh12,660 a month, a decline of 49.6 per cent.



Clearly, if ordinary Kenyans are to afford mortgage, authorities must work in tandem with financial institutions and other stakeholders to reduce interest rates significantly with a view to, among others, increase repayment period.



In Malaysia, university graduates are allocated houses for which they pay rent. They are also allowed to buy them on mortgage payable over a period of up to 30 years, which can also be extended to 50 years.



Interest rate on house mortgage ranges between 3.8 per cent and 4.3 per cent. With these low rates, most working Malaysians can afford a decent house.



There is no reason Kenya cannot borrow this model. After all, Malaysia also borrowed its economic model from Kenya.



One of the cardinal points of bringing down the cost of money in any economy is to mobilise huge financial resources globally and domestically using appropriate financial instruments and financial infrastructures, provided the macroeconomic balances are right.



One such infrastructure is the establishment of a secondary mortgage corporation for Kenya, which is also clearly recognised in Vision 2030, which says inter-alia that: In order to increase access to finance among the low income households, and among developers, a “Secondary Mortgage Finance Corporation”, a “National Housing Fund”, and “Housing and Infrastructure Bonds” will be established. Indeed, in the Medium-Term Expenditure Framework (MTEF) report of 2008-2012, the government allocated Sh80 million for its establishment.



Mobilisation of savings and deposits for housing financial institutions is a slow process. Measures being instituted by the Central Bank of Kenya (CBK) to have these institutions operate checking accounts may not achieve much in the resource mobilisation required to address the country’s housing shortage.



Urgent solution

The country must develop an institutional framework that can mobilise substantial resources at any one given moment in time if leading international and regional best practice is anything to go by.



With demand for new housing units in urban areas currently estimated at 200,000 units annually, and only 23 per cent of it being met, the gap is big and requires an urgent solution. To seal it, the economy must be in a position to mobilise on average Sh310 billion yearly.



What has been provided by the government and private sector banking and housing financial sector is inadequate to bridge this gap. For example, in the MTEF report of 2008-2012, the government provided Sh17 billion a year for the next five years for housing.



This can only cater for approximately 8,500 housing units annually, which falls far short of the national deficit. Housing Finance recently floated a bond of Sh7 billion to finance the setting up of 3,500 housing units against a shortfall of 155,000 a year.



In the 2010 budget, the government amended the banking law to allow commercial entities to commit up to 40 per cent of their deposit liability to the housing sector from the current 25 per cent.



While this is against the Basel Accords, its impact has not been felt so far for the simple reason that banks in Kenya are known to hold too much liquidity and would only invest this in guaranteed income investment grade products, which carry the implied government guarantee.



For example, in 2010, the amount set aside for real estate by banks increased to Sh98 billion, accounting for only 7.75 per cent of total deposit liabilities against a benchmark of 40 per cent. It also fell far short of the housing financing gap of Sh310 billion a year.



Establishment of a secondary mortgage corporation would be one of the major reforms that would enhance long-term mortgage finance to provide a plausible investment opportunity for commercial banks to invest excess liquidity.



Beneficiaries of the funds so mobilised would be the existing housing financial institutions, commercial banks, the National Housing Corporation (NHC), and developers.



The author is an independent financial consultant. He is one of the two consultants preparing the National Investment Master for Kenya under the auspices of the Kenya Private Sector Alliance. He went on a benchmarking mission to Malaysia in June, 2012.



Posted  Tuesday, December 4  2012 at  02:00

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