CBK warns banks on over-exposure to bad mortgage loans
The Central Bank of Kenya: The regulator has warned financiers on over-exposure to bad home loans. FILE
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CBK says that policy makers need to look into whether too much lending is going to real estate at the risk of causing instability in case of widespread default.
Latest data from the CBK indicates that as at June 30, the real estate sector accounted for 13 per cent or Sh194.9 billion of the Sh1.45 trillion in gross loans and advances made by banks.
Real estate developers and market analysts concur that innovativeness is needed in the industry to avoid over-reliance on commercial banks and the risk that this poses.
A sharp drop in real estate prices could cause instability in the financial sector due to high exposure that commercial banks have in the industry, the regulator has warned.
In the Kenya Financial Sector Stability Report 2012, the Central Bank of Kenya (CBK), says that policy makers need to look into whether too much lending is going to real estate at the risk of causing instability in case of widespread default.
The CBK suggests that real estate developers should be more entrepreneurial at finding alternative sources of funds to avoid a situation where an adverse effect in the sector would have a contagious effect on the entire banking system.
“Concentration of the banking sector credit to real estate, although positive, has potential to cause instability in the financial system if the former experience shocks, hence need for other financing models for the sector,” says the new report.
Latest data from the CBK indicates that as at June 30, the real estate sector accounted for 13 per cent or Sh194.9 billion of the Sh1.45 trillion in gross loans and advances made by banks.
This figure could be higher if it were not for CBK’s separation of lending to real estate and the building and construction sector, which had Sh71.7 billion in gross loans and advances.
If taken together the industry accounted for Sh267 billion or 18 per cent of gross loans and advances.
A significant percentage of non-secured consumer loans are also used to finance real estate projects, which again raises bankers’ exposure to the sector.
According to CBK data, lending to real estate was behind trade (Sh300 billion) and personal or household loans which stood at Sh376.9 billion, taking the lion’s share of gross loans and advances made in the first half of this year.
Manufacturing was fourth at Sh193.1 billion, trade and communication (Sh99.4 billion), agriculture (Sh67 billion), financial services (Sh53.2 billion), energy and water (Sh49.6 billion), tourism, restaurant and hotels (Sh34.4 billion), mining and quarrying (Sh14.3 billion).
Real estate developers and market analysts concur that innovativeness is needed in the industry to avoid over-reliance on commercial banks and the risk that this poses.
Joint ventures with land owners and real estate investment trusts (REITs) are some financing alternatives that local lenders have begun looking at.
“I agree and thus the need for equity partners and REITs. The former we have started and are awaiting guidelines on REITs to get started,” said the Housing Finance managing director Frank Ireri in an interview.
The Capital Markets Authority (CMA) has enacted laws on REITs, which pool funds from the public to develop or buy property and then share proceeds with investors from either selling or renting out of the developed estates.
The NIC Securities general manager Samuel Gichohi said listing real estate developers could also help real estate developers to raise funds.
Stand-alone projects can also be financed through REITs in the same way that infrastructure bonds are used to fund specific projects.
Other analysts, however, said that Kenyan banks are is still far from being over-exposed in real estate, but agreed the industry needs new ways of financing.
Francis Mwangi, head of research at Standard Investment Bank, said that the country’s 20,000 mortgage loans show that there is still room for more lending without worrying about concentration.
Mr Mwangi said the main problem in Kenya’s real estate funding is the mismatch between deposits and loans.
“The biggest challenge is that funding for the real estate sector is being done by customer deposits,” he said.
Customer deposits tend to be short-term while loans are long-term and when banks are short of cash they have to borrow to boost their liquidity.
