Typical affordable home sold by SACCO, i.e. cooperatives–to owners to finish at their leisure

Typical affordable home sold by SACCO, i.e. cooperatives–to owners to finish at their leisure. Photo by Patrick Wameyo/ World Bank

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By Roger Atwood

With its gleaming skyscrapers, central Nairobi has been remade by a commercial building boom employing thousands of workers and offering the most visible sign of one of Africa’s fastest economic growth rates.

Yet Kenya faces a critical housing shortage. The country has a housing backlog estimated at 1.85 million units. Rising expectations for home ownership among its middle-and lower-income sectors–the skilled workers erecting all those skyscrapers, the thousands of office workers staffing them, among others–have unleashed demands for new and better housing and cheaper financing to purchase it.

Kenyan banks and builders have barely begun to meet the demand on their own. So, in 2017, the Kenyan government set housing as one of its four main development priorities or “pillars,” setting an ambitious goal of building 500,000 affordable units by the end of 2022, mainly through public-private partnerships.

With the goal of nudging Kenya toward meeting these goals and bringing cheaper finance to prospective homebuyers, the World Bank Group’s International Finance Corporation (IFC-WB) joined forces with private and state investors to create the Kenyan Mortgage Refinance Company (KMRC) in 2018. The IFC-WB’s Joint Capital Markets Program, or J-CAP, has provided essential know-how and technical assistance to the new company, while loans worth $250 million from the World Bank and $100 million from the African Development Bank, or AfDB gave it initial working capital.

KMRC’s sustaining source of cash, however, will come from the sale of bonds on local capital markets. Acting as a mortgage refinancer, KMRC will then lend the proceeds of the bond to primary mortgage lenders in the form of long-term loans secured against mortgages. The first bonds are due to be issued before the end of 2021.

Through this mechanism, which takes advantages of Kenyan capital markets while helping solidify them, KMRC will extend financing to a wide array of credit institutions including banks, traditional mortgages lenders, and rural credit unions. Those institutions have already approved hundreds of loans that meet KMRC’s eligibility criteria and are expected to begin disbursing money to home-buyers in 2021.

Most importantly, KMRC’s retail mortgage partners offer terms that the Kenyan mortgage market has almost never seen before: fixed-rate mortgages with long-term maturities for people with modest incomes.

“KMRC is a big innovation, because it gives banks the resources to reach down-market sectors that banks have had no interest in reaching in the past. For the Kenyan housing sector, that is really pushing the envelope,” said Caroline Cerruti, senior financial specialist at the World Bank. KMRC is carving out an affordable mortgage market in Kenya almost from scratch, while stimulating competition between lenders to reach underserved sectors and adding a new dimension to Kenya’s own capital markets, she explained.

The company sprung from a unique collaboration between Kenyan financial institutions and J-CAP, an initiative of the IFC-WB aimed at kick-starting dynamic, well-regulated financial markets in developing economies and harnessing those markets for local wealth creation. Strong capital markets allow developing countries to mobilize money for climate, social and infrastructure projects while lowering their dependence on foreign debt and protecting them from volatile capital flows.

J-CAP lent advice and support at every stage of KMRC’s creation, said Johnstone Oltetia, Chief Executive Officer of KMRC. “J-CAP is significantly assisting on the bond issue right now and was also helpful at the conceptualization of KMRC,” added Oltetia, a 20-year veteran of securities markets regulation and financial sector policy.

“Our focus is on affordable housing, which has been defined as housing for people whose income is less 150,000 shillings per month (about US$ 1,400). People in that income range have never been able to afford a mortgage in Kenya,” said Oltetia. The retail lenders that work with KMRC will be required to offer long-term mortgages of up to 20 years, compared to the Kenyan market’s current average of 8.6 years, and at fixed rates generally below 10 percent, compared to as high as 15 percent at present, he said. That last innovation alone will have a potentially transformative effect on the market, said Oltetia.

“Fixed-rate mortgages have never been offered in Kenya,” he said. “This is the number-one way to help affordability and reduce defaults, because the borrower will be able to say: ‘If I can afford this now, and I keep the same income, I should be able to finish payment of the loan, and I will own my own home.’”

KMRC may represent a new approach to easing Kenya’s housing deficit, but the factors behind the shortage are common to most countries in Sub-Saharan Africa. Land tends to be expensive, in part because speculators hold large tracts in expectation of rising prices, and lack of local manufacturing bases means construction materials often must be imported, said Olivier Hassler, a Paris-based expert on housing finance. Banks finance only the safest projects with the easiest returns, and that almost always means housing for the wealthy.

“Financing matters, but it’s important not to overlook the supply side – construction materials, the price of land–which, in Africa, are especially big contributors to the high cost of housing,” said Hassler. Much to the Kenyan government’s credit, they are committed to tackling the issue of land titling and affordable housing supply. This commitment provided the comfort the World Bank Group needed to support the operationalization of KMRC.

Those factors plus the dearth of access to housing finance have given Kenyan cities, like others in Africa, extremely high ratios of rentals to home ownership. Nearly 80 percent of Kenyan urban dwellers live in rented homes. Of those relatively few who own their homes, more than 80 percent built it themselves, without bank loans of any kind, and most of the rest received their home through inheritance. Kenyan banks will lend for construction of homes built only with bricks and mortar, not wood, a policy that rules out most traditional housing, said Oltetia. Moreover, bureaucratic hurdles to gaining title make it difficult to offer real estate as collateral.

A mortgage remains a rare and frightening prospect for most Kenyan families, even many wealthier ones, due to the long-term financial implications it poses, he said. To succeed, KMRC and its retail lenders will have to overcome deeply ingrained fears among both lenders and borrowers that wider access to mortgages will mean more defaults, he said.

Critical to KMRC’s business model is the mobilization of capital derived from Kenya’s own bond market, which is among only a few in Sub-Saharan Africa large and well-regulated enough to allow for operations of this kind, said Hassler. KMRC is in effect leveraging the strength of Kenya’s capital markets – long the preserve of the banking elite – to offer products that cater to households with low or irregular incomes.

“Mortgages from banks are funded mostly by deposits, but deposits aren’t going to be enough to fund long-term mortgages,” said Hassler. Using short-term deposits to fund long-term products creates an asset mismatch that undermines the banks’ financial position. Some other African countries use government banks to supply mortgage financing, but that solution relies on annual budget allocations and offers opportunities for corruption. “To gain long-term resources, even if it’s only, say, 20 percent of portfolios, you have to go to the bond market,” he explained.

KMRC has an unusually diversified shareholder portfolio that reflects its hybrid mix of grassroots and public-policy goals. The Kenyan government holds a 25 percent stake, and most of the rest is divided between 20 Kenyan financial institutions–eight commercial banks, one micro-finance bank, and 11 credit union-like institutions known as Savings and Credit Cooperatives, or SACCOs, which have a strong presence in towns and rural areas. The IFC-WB and Shelter Afrique, a Nairobi-based lending agency affiliated with the AfDB, also hold shares in the new company.

Like the bigger shareholding banks, the SACCOs will also act as primary lenders with funds derived from KMRC, a pioneering innovation that “has required some capacity-building for the SACCOs as they have no experience at all with mortgages,” said Oltetia.

The inclusion of SACCOs gives a broad reach to Kenya’s new mortgage refinance infrastructure while sending a powerful signal of social inclusion, said Hassler. “They have a cultural aspect, as many people would rather go to a structure like a SACCO than to a bank,” he said. “Many are not comfortable with banks in emerging economies, and credit unions have wide networks. They’re like the post, with branches in every little village.”

Some SACCOs have had problems with liquidity in the past, said KMRC’s Oltetia. But they are well-regulated by the Kenyan state authority known as SASRA, he said, and some have already started offering mortgages that will range between three million and four million shillings (US$ 28,000-37,000). “We are, as far as we know, the first mortgage refinance company in the world to bring in credit unions, what in Kenya are called SACCOs,” said Oltetia.

Although the global pandemic has slowed KMRC’s bond sale and the rollout of mortgages, Oltetia expects the company to start gradually changing the atmosphere in which houses are bought and sold in urban Kenya. The total number of mortgages on the books in the country of 52 million people stood at only 26,971 in 2020, most of them held by bank employees receiving concessionary rates. The total figure has been expected to climb to 60,000 by 2022. Over that period, KMRC plans to make US$ 350 million available for mortgages, enough to accommodate about 10,000 housing units at a price of US$ 50,000 or less.

Major new projects are already starting to change the face of Nairobi’s inner city. Some are being erected on vacant land, others replacing dilapidated social housing dating mainly from the 1960s. Construction costs are footed partly or entirely by Kenyan state entities in line with the pillar priorities announced in 2017, and government funds pay for utilities hookups.

The Pangani Affordable Housing Project, for example, rises a few miles from Nairobi’s bustling center, with multi-story apartment blocks, modest houses, and tidy lawns. The project is nearing completion, with 280 houses to be finished this year out of a total of 1,380 planned units with construction subsidized by the Nairobi county government in a public-private partnership. All units have been sold or are under contract. So far about 300 have been snapped up with financing from funds derived from KMRC, and 500 more applications are pending, said Peter Mugeni, director of credit at the banking division of HF Group, a primary lender and KMRC shareholder.

“This initiative is still in its infancy but it’s quite transformative,” said Mugeni. “For a house that costs US$ 50,000 and a loan of US$ 40,000, the installment is about US$ 350 a month. That is what you would pay to rent. At that point it makes sense to own.” About 10,000 more units have had construction contracts awarded in neighborhoods on the edges of Nairobi’s central business district, said Mugeni.

KMRC’s role has been to provide the capital and, equally importantly, reduce risk by making mortgages more manageable, said Mugeni. “If you just leave it all to market forces to price loans and interest rates, that is quite risky. Something like this, where we’ve got access to a pool of funds at fixed rates, that means we can plan. We can price those loans also at fixed interest rates and take a small margin,” he said.

New projects have sparked a level of excitement that the Kenyan housing market had not seen in a long time, he added. Kenyan media described feverish demand for 1,370 housing units at the brand-new Park Road complex, which was built in Nairobi’s Ngara district entirely with public funds as part of the government’s affordable-housing drive. KMRC’s primary lenders have received about 1,500 applications for units at Park Road, said Oltetia.

Ultimately the goal of an initiative like KMRC will be to tilt a share of investment capital away from the most profitable and least risky building projects and toward those with a more social character. In Kenya and countries that follow its lead, mortgage refinancing will play a key, early role in emboldening capital markets to shift into investing in affordable housing, said David Gardner, a Johannesburg-based consultant on African housing issues.

“In most African countries, the process of opening up capital markets to provide housing lending is slow, and it’s based on a significant change in how financial institutions make their money. In Africa that has been to buy government bonds. The government uses that money to make infrastructure investments” and banks get an almost risk-free return, said Gardner. “You have to wean the banks off those very safe, very easy returns and move them into housing lending, which is inherently more risky.” Mortgage lending becomes a catalyst, he said, for developing a wider variety of financial instruments that can be directed toward national development goals. “Over time that starts extending into different types of housing lending, unsecured lending, and pension-backed lending, but all those depend on the ability of those institutions to mobilize capital,” said Gardner.

Mortgage refinancing companies like KMRC can also be effective in providing credit at times of economic downturns, playing a stabilizing, counter-cyclical role in markets as they did in a few countries in Europe and Asia during the 2008-09 financial crisis, said Hassler.

While tapping into dormant demand in Kenya, mortgage refinancing has the potential to change the texture of life in Nairobi and some other African cities suffering comparable housing shortages, said Mugeni.

“Private developers have always chased certain ends of the market, and that is why we’ve seen the Nairobi skyline shift in a big way, into higher-end residential projects. Those are looking good,” said Mugeni. “But the inner city of Nairobi is soon going to get 10,000 new affordable housing units. That is going to have an impact.”

J-CAP’s work in Kenya is supported by the governments of Japan, Norway and Germany. J-CAP’s wider work is made possible because of the support of the governments of Australia, Germany, Japan, Luxembourg, the Netherlands, Norway, and Switzerland.

Published in July 2021