Can KMRC overcome the hurdles and stimulate growth in mortgage lending?

In 2019, former President Uhuru Kenyatta launched the Kenya Mortgage Refinancing Company (KMRC) with the vision of providing a more affordable path for Kenyans to own homes.

It is expected that this will be his Affordable Housing Program (AHP), then part of the Big Four agenda, aimed to deliver 200,000 units per year.

This was the goal inherited by his predecessor, President William Ruto (who was then his deputy), and although he offended Kenyans, the roadmap was perhaps clearer. This led to the implementation of the Affordable Housing Tax.

Mr Kenyatta noted at the time that the KMRC’s aim was to ensure increased uptake of mortgage loans. He expected the number of mortgage accounts to increase from the current 26,000 to 60,000 by 2022.

“We have deliberately included Saccos, which is unique and will expand the reach of housing finance to low-income and informal income borrowers,” Kenyatta said at the time.

Yet five years later, there is little story to tell from the numbers. Juxtaposing the mortgage book in 2019 and 2022 shows it is a decline.

Since its inception, KMRC has disbursed Sh10.4 billion by the end of 2023. This has resulted in 3,252 loans, all with fixed interest rates below 10%.

KMRC chief executive Johnstone Oltetia said the agency had transformed the housing market by providing long-term funding with a repayment period of 20 to 25 years.

He said it was a game-changing move. “Before KMRC provided such funds, the average tenure of mortgage loans in our market was 10.9 years in 2022, with a minimum of five years and a maximum of 18 years,” he said.

By 2023, the average tenure for commercial banks will be 12.33 years and for Saccos it will be 13.72 years.

“The longer the loan term, Reducing the debt burden It makes home ownership more accessible by allowing borrowers to amortize their loans over a longer period of time, reducing monthly payments,” Oltetia said.

In 2019, according to the Central Bank of Kenya (CBK) annual report on banking supervision, the number of mortgage accounts was 27,993. In 2022, the number fell by 207 to 27,786.

The number of mortgage accounts had been declining since 2019, only to recover in 2022.

In 2020, a year after KMRC was established, the number of mortgage accounts fell from 27,993 to 26,971. In 2021, the number fell further to 26,723 before increasing by 1,063 in 2022 to 27,786.

“This is mainly due to new mortgage loans issued this year,” the central bank’s 2022 annual supervision report states.

When these figures are compared with the 3,252 mortgages facilitated by KMRC, one has to ask: Can KMRC facilitate mortgage uptake to the envisioned 60,000 per year?

KMRC’s business model does not allow it to deal directly with customers. It refinances mortgages provided by commercial banks and Saccos, which have direct relationships with customers. KMRC refinances these mortgages at single-digit interest rates, and commercial banks and Saccos are expected to pass on proceeds at single-digit interest rates (currently 9.5%) as well.

In April this year, at the East African Property Summit (EAPI) held in Nairobi, KMRC gave a presentation detailing the challenges facing the country’s real estate market.

Insufficient long-term funding tops the list because it indicates that financial institutions currently hold mainly short-term deposits. Few institutions have access to capital markets.

Another challenge is legislative mandates that make housing finance expensive and risky. “The legal process for property titling and registration is lengthy and cumbersome, mortgage documentation lacks standardization, and foreclosure proceedings are inefficient,” the report reads.

In addition, construction costs are also high, which will affect developers’ financing and willingness to further enter the market.

Earlier this year, KMRC revised the income threshold for applying for single-digit mortgages from Sh150,000 to Sh200,000, perhaps also to stimulate loan demand.

The institution offers loans of up to Sh10.5 million. As of 2022, the average mortgage amount is Sh9 million. In 2019, the figure was Sh8.4 million.

To boost adoption, KMRC has tweaked some of its products, including financing for developers, tenant purchase schemes, rent-to-own, green loans and sharia-compliant mortgages.

In addition to these efforts, KMRC sees the affordable housing scheme, particularly the affordable housing levy that now amounts to 1.5% of payroll, as a catalyst to drive demand for its products.

Mr. Oltetia believes that mortgage uptake will respond in the same way as the state sets up institutions across the country.

But players in the affordable housing sector, e.g. CEO, Mi Vida Housing rental expert Samuel Kariuki believes that the demand for renting is greater than the demand for buying.

Furthermore, unlike the private sector, which has institutional investment and absorption by institutional units, this is not the case with state-funded projects.

“Even if the government has the capacity, they have to build the capability to execute these projects and roll them out quickly,” he told Real Estate. “Good quality affordable leasing is necessary, but affordable ownership is not.”

The government’s main focus in housing is on low- and middle-income groups, i.e. those who fall within the KMRC income range.

Yet most middle-income people can also enjoy housing offered by developers like Kariyuki, without having to wait for a lottery or for a state-funded developer to complete an apartment building in three years or so.

Furthermore, not all people who apply for government affordable or social housing through the Boma Yangu portal are credit-worthy customers.

“Institutional investors are always concerned: are these (Kenyan accounts on Boma Yangu) quality buyers? It’s one thing to pay 10 per cent of a unit and say ‘let me go find the remaining 90 per cent’. Is there a guarantee that I will keep paying?” Mr Kariuki asked.