Kenyan banks are highly liquid and the key policy issue to consider is the ease with which banks can invest in government bonds and bills at low risk, rather than pursue investment in riskier products like housing. The figure below shows the high rate of investment from the top 8 banks into government bills and bonds. There is need to create an inducive policy environment to encourage the banking sector to lend to the housing sector – which will require collaboration amongst the banks and increased sharing of data, to reduce the risk.
The need for a stable macroeconomic environment is also illustrated by the case of Housing Finance Bank, which was able to launch a 7-year bond when the interest rate environment and exchange rate environment was stable in 2010. However, since 2010, Housing Finance Company of Kenya has struggled to replicate this access to finance due to more volatile conditions.
Construction finance is constantly raised as a gap in the housing value chain. The current metrics to obtain construction finance from banks are usually capped to approximately 60-70% of the hard construction cost, leaving the developer to fund the land cost, professional fees, and balance 30-40% of hard cost either through the developer's equity or pre-sales to buyers. The pre-sales are not protected as explained in [27. Off-plan Housing Developments under Annex F].
If one bank has provided construction finance, it is difficult for other banks to provide mortgage finance to off-takers until the land security is fully cleared. The only exception is where the individual housing units have clean title which can be charged. These fundamental collateral issues are important to enable a functioning mortgage market.
8.2.1 Banks
In addition, to reduce the potential overexposure of a bank, there is enshrined in the Act the single obligor rule under which a bank is not permitted to lend more than 25 percent of its core capital to any one borrower or any number of related borrowers.
The Act places a limitation on the increase of banking charges without the prior approval of the Minister (Cabinet Secretary for Treasury) under section 44. There is in fact a long-running legal battle between banks and customers over the alleged increase in bank charges without the approval of the Minister.
Fintech has revolutionized the delivery of financial services. Innovations such as digital payment processing solutions have improved efficiency and facilitated financial inclusion and hold great promise in enhancing affordable housing finance.
Encourage the use of fintech by banks. This can be through the adoption of innovative credit scoring systems that uses alternative data to assess creditworthiness. This will translate to persons who would have been termed as high risk under the traditional model, being able to access mortgages.
8.2.2 Mortgage Banks
8.2.3 Building Societies
Building Societies were created to support the delivery of housing
The role of building societies has diminished over time and are not currently operational. Family Building Society, Equity Building Society and Housing Finance have all evolved into banks, focusing on broader banking - not just housing.
Consider the relevance of Building Societies and these laws.
Section 3 of the Act allows government to guarantee the repayment of excess advances made or to be made by a building society to citizens of Kenya for the purpose of enabling them to purchase houses within its area of jurisdiction.
Consider repealing this Act, which is not relevant given the diminishing role of building societies.
8.2.4 SACCOs Subsector
CONTEXT
A typical SACCO loan product for housing is to provide up to 3x a member’s deposits as a loan, which is co-guaranteed by other members. The loans may also be secured by collateral or shares.
The innovation in the KMRC is certain large SACCOs are included as shareholders who will benefit from the concessional financing to on-lend to their members.
The relevant acts and regulations are:
There is a lack of specificity in the Act (and no regulations) on documents needed to lodge a compensation claim; whether inflation is factored in compensation; and management of money/funds in the Fund.
Illiquidity problems in SACCOs limiting inter-SACCO borrowing.
Operationalize the Deposit Guarantee Fund for the SACCO sub-sector in accordance with the law.
There is need for the Act or regulations to be developed to capture some gaps in the law such as: documents needed by a member to lodge a claim; whether the compensation paid from the Fund will consider inflation arising as a result of protracted disputes before settlement/compensation; a gap on how to manage the funds in the Fund; create awareness on the Fund once established.
Fast-track the setting up of the Central Liquidity Fund in the Sacco subsector to promote inter-borrowing among Saccos and deal with potential illiquidity challenges as well as become part of the national payment system.
There lacks a policy to govern the cooperative movement/societies
Fast track the finalization and adoption of the draft National Cooperative Policy
Review the powers of the Commissioner of Cooperatives with a view to upholding the principles of “autonomy and independence”.
8.2.5 Mortgage lending
8.2.6 Pension-backed lending
(Please also refer to Section 8.4.2.6 for discussion on taxation issues that arise on the transfer of pension assets into housing).
CONTEXT:
The capital under pension schemes in Kenya equaled Kshs. 1.5 trillion as at December 2021. There have been various efforts to enable pension members to utilize their pension contributions towards housing. However, the uptake of this has been slow, demonstrating the difficulties in unlocking the flow of financing into formal housing, despite strong government efforts to pursue the same.
The relevant laws and regulations are:
8.2.7 Microfinance
Microfinance institutions are licensed, regulated and supervised by the Central Bank of Kenya under the Microfinance Act 2006. Microfinance loans are mostly issued to support the incremental building and home improvement process of low-income households. For instance, Kenya Women Finance Trust (KWFT) microfinance bank has been lending to low-income women to build and improve their homes in rural areas. The bank disburses loans in tranches or phases as construction of homes continues for a total of Shs 1 million repayable in a maximum period of three years.
8.2.8 Special lending to Government Employees
A full review of the Civil Servants Housing Scheme Fund is warranted given the potential impact on housing affordability for civil servants, and the low levels of uptake. In addition, a detailed segmentation of the demand side of civil servants, highlighting housing needs, affordability, borrowing capacity, etc. should be undertaken to ensure that the Scheme is able to reach its stated target.
The composition of the Management Committee of the Civil Servant Housing Scheme Fund is currently top-heavy and not broadly represented by civil servants who are the key actors
Consider reassessing the composition of the Scheme Management Committee of the Civil Servant Housing Scheme Fund as set out in the Regulations to ensure that they represent the civil servants and is not unnecessarily top-heavy.
The Regulations sought to mandate all employers to register with the Housing Fund and contribute to the Fund; Establishes a Fund to promote an affordable housing scheme. These regulations were however quashed by the court for lack of public participation.
[1] Notably, section 38(8) of the Tax Procedures Act 2015 and section 16(4) of the Rating Act (Cap 267) already embody the in duplum rule with respect to tax liability claims and property rates claims.
[3] See e.g. Sam Kiplagat, ‘Family awarded Sh1.2bn against HF in botched home auction’
[4] The Court stated “…He is also entitled to interest on that decretal sum (judgment sum and costs) together with interest at 14% per annum up to a period of six (6) years as Section 4(4) of the Limitation of Actions Act makes it clear that no arrears of interest in respect of a judgment debt may be recovered after the expiration of six years from the date on which the interest became due. Accordingly, I direct that an order of mandamus do issue compelling the respondent to pay the decretal sum together with interest at 14% per annum from the date of the judgment up to a period of six years but no more.”
[5] Davina Wood, “The Role of Savings and Credit Cooperative Organisations in Kenya’s Housing Finance Sector” (UrbanetJune 11, 2019)
[6] SASRA, The SACCO Supervision Annual Report The annual statutory report on the operations and performance of Deposit-Taking SACCO Societies (DT-SACCOs) in Kenya
[7] Thursday, March 07 2019, “Gakuyo Faces DCI Probe over Sh1bn Ekeza Sacco Scandal” (Business Daily December 21, 2020)
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