This law provides for the functioning and operation of the Central Bank of Kenya, part of which includes regulation of commercial banks and mortgage refinance companies that fund housing development.
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The law provides for the operation and functions of the Central Bank of Kenya and establishes the currency of Kenya.
· Under section 4 of the Act, the principal objective of the Central Bank is to formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices, or put differently, to ensure price stability/deal with inflation. In this regard, the Monetary Policy Committee of the Central Bank meets at least once every two months to set the benchmark rate, which signals to commercial banks whether to increase or decrease the interest rates on loans. During periods of inflation, the Central Bank usually raises the rates to avoid overheating the market and stabilize general prices, this leads to more expensive credit as commercial banks also increase the interest rates they levy on credit/loans.
· Section 4(2) requires the Central Bank to foster the liquidity, solvency and proper functioning of a stable market-based financial system. Ensuring the liquidity and stability of financial institutions is a critical function as it ensures that financial institutions are healthy and able to provide financing to housing on both the supply side as well as the demand side.
· Under section 4(3), the Central Bank is required to, subject to ensuring price stability and financial stability, support the economic policy of the Government including its objectives for growth and employment. The Cabinet Secretary for Finance may specify the economic policy to be taken by the Government through a notice in writing directed to the Central Bank. Given that the current government seeks to promote affordable housing as an economic policy to create jobs and also provide shelter for her citizens, it would follow that the Central Bank of Kenya is under a legal obligation to support the government through its monetary policy measures, so long as doing so does not interfere with its key objectives of price and financial stability. It is not entirely clear how much the Central Bank of Kenya has been supporting the economic policy of government (of affordable housing) in this regard. This needs to be explored further.
· Other functions of the Central Bank that are relevant for affordable housing are set out at section 4A of the Act and include the power to license and supervise mortgage refinance companies. This is further provided under section 33P of the Act which prohibits any person or entity from engaging in the mortgage refinance business without a licence. Mortgage refinance companies are defined under section 2 of the Act as non-deposit taking companies licensed to undertake the business of providing long term financing to primary mortgage lenders for housing finance and any other activity that the Bank may from time to time prescribe. An example of a mortgage refinance company (which is the only one currently) is the Kenya Mortgage Refinance Company, which was licensed to provide long term funding to banks and SACCOs which then on lend to customers to enable them acquire housing.
· The specific powers of the central bank in regulating mortgage refinance companies are set out under section 33Q of the Act and include: licensing such companies; determining minimum liquidity requirements and permissible investments; determining capital adequacy standards and requirements; supervision of such mortgage refinance companies; revoking or suspending the licence; among other powers. Section 38 of the Act provides that the Central Bank may set minimum reserve requirements (requiring institutions such as commercial banks to keep minimum cash balances on deposit with the Central Bank as reserves against their deposit and other liabilities). By setting minimum capital and liquidity requirements, the central bank effectively determines how much funds are available to mortgage refinance companies and financial institutions (banks and microfinance institutions) to extend as loans/credit in support of affordable housing.
· Under section 36A (2), commercial banks are obliged to disclose any positive or negative information about their customers to licensed credit reference bureaus, where such information is reasonably required for the discharge of the functions of the banks and the licensed credit reference bureaus. This regime of credit information sharing has been further augmented by the Credit Reference Bureau Regulations 2020 and serves to provide credit scores of customers thus dealing with information asymmetries and promoting responsible lending. However, in practice, there has been a preoccupation with sharing half-file credit information (largely negative credit information of a customer) with credit reference bureaus leading to blacklisting of borrowers as opposed to full file information (including positive credit information) which would provide a better assessment of a customer.
· Section 57 of the Act empowers the Central Bank to develop and publish regulations, guidelines, circulars and directives to give effect to the provisions of the Act. In particular, the Central Bank may publish regulations on anti-money laundering and measures for countering financing terrorism; credit information sharing; consumer protection; and permissible and prohibited activities.
1. Central Bank of Kenya (Mortgage Refinance Companies) Regulations, 2019
· The Regulations provide for the establishment, licensing and operation of mortgage refinance companies. A mortgage refinance company shall engage in the authorized following activities— (a) refinancing or purchasing of eligible mortgage loans; (b) investment in debt securities issued by the Government of Kenya or any guaranteed debt; (c) providing fully secured long term financing to primary mortgage lenders for financing of eligible mortgages; (d) issuing bonds, notes and other financial instruments for purposes of meeting its objectives; and other activities as may be determined by the Bank from time to time.
· The promulgation of these Regulations allowed for the establishment of the Kenya Mortgage Refinance Company to provide affordable financing to financial institutions (including microfinance institutions and SACCOs) at five percent interest rate for onward lending to prospective homeowners at 7 percent interest rate for a principal maximum mortgage amount of Ksh. 4 million in Nairobi metropolitan area and Ksh 3 million in other areas.
· The purpose of the facility is to provide liquidity to financial institutions by allowing them to refinance illiquid mortgage assets thus enabling mortgages to be issued at longer tenors and with lower rates given the reduced liquidity risks. It is hoped that this will mitigate against the high interest rate of mortgages in Kenya which has resulted into a very low uptake.
· However, for the KMRC to be effective, there is need to put more effort toward the attainment of stable and lower interest rates. There is also need for reduced government domestic borrowing which may crowd out KMRC from accessing the needed funding. In addition, there is need to apply other standards for credit assessments to on board other informal low-income workers who are not salaried.
· Relatedly, the Central Bank of Kenya issued Banking Circular No. 2 of 2021 on 8 June 2021 (effective 1 July 2021) to all commercial banks and mortgage institutions. The Circular amended the risk weighting (capital requirements) for mortgage loans by reviewing the treatment of residential mortgages under the Basel III framework/Accords. Mortgage lending fully secured by residential property located in cities and municipalities (occupied by borrowers or rented) is assigned a risk weight of 35% from the earlier 50%. This relaxation in capital requirements is expected to free more capital/credit to flow in favour of residential mortgages.
