Households in the informal sector could soon access home loans from banks and saccos under a plan aimed at derisking lending to workers with irregular income.
Kenya Mortgage Refinance Company (KMRC), a joint venture of the Treasury and private lenders, is working on a framework to guarantee part of the loans advanced to homeowners in the informal sector.
KMRC says the Risk Sharing Facility (RSF), which is in the final stages of development, will help increase homeownership by workers in the informal sector who make up more than 80 percent of Kenya’s total labour force.
Workers in the informal sector were estimated at 15.96 million in 2022, accounting for 83.39 percent of 19.14 million total workforce, according to the Kenya National Bureau of Statistics.
Under the plan, the mortgage refinancier will undertake to shoulder some of the risk on “mortgage portfolios generated by lenders mainly from borrowers with non-formal income”.
“The establishment of the Risk Sharing Facility or partial mortgage guarantee product would help improve the housing finance affordability, as the product would bear some of the credit risk for lower-income borrowers,” KMRC chief executive Johnstone Oltetia said via email.
“The product will expand the KMRC offering to lower-income customers who currently are excluded from accessing home loans.”
The arrangement, Mr Oltetia says, will encourage banks and saccos to shift financing down market, widen the scope of housing finance and narrow the housing financing gap for non-formal income borrowers who are perceived to be risky.
Asked what share of risk KMRC is likely to shoulder, Mr Oltetia said: “This will be determined once we conclude on pricing, market analysis testing and financial modeling.”
President William Ruto has made construction of affordable houses a priority, pledging to put up 250,000 units every year largely funded by the 1.5 percent levy that the courts last Tuesday ruled is unconstitutional.
The lowest priced unit (a single-room on a 20 square metre space) will cost Sh840,000, which will require prospective homebuyers to deposit Sh84,000 and clear the remainder through monthly payments of Sh3,200 over 30 years.
A two-roomed house of 30sqm will cost Sh1.26 million with prospective owners required to deposit Sh126,000 and thereafter pay Sh4,800 monthly for 30 years, while the price for a 40sqm three-roomed unit is Sh1.68 million paid through Sh168,000 deposit and Sh6,400 monthly payments.
A bedsitter, or studio, on 20sqm space will cost Sh960,000 with occupiers charged Sh5,200 monthly for 30 years on top of Sh96,000 deposit.
The KMRC offers funds to participating banks and saccos for onward lending to homebuyers at an annual fixed interest of five percent.
The recipient lenders are, in turn, required to advance the cash to qualifying homebuyers at single-digit interest rate. Prospective homeowners whose income should not be more than Sh150,000 per month, access up to Sh8 million for property in Nairobi metropolitan area and Sh6 million elsewhere in the country.
Kenya has a thin retail mortgage market, estimated at 27,786 home loans worth Sh261.8 billion by December 2022, according to latest data from the Central Bank of Kenya.
The average loan size for banks last year increased to Sh9.4 million from Sh9.2 million in 2021, locking out low- to mid-income workers.
The high cost of home loans workers prompted the previous administration of President Uhuru Kenyatta to partner with private lenders to form KMRC, which was feted as the most innovative housing public-private partnership firm in Africa at the inaugural African Union for Housing Finance (AUHF) on October 31.
The firm was incorporated to derisk mortgages market by offering long-term funds, backed by a credit line from the World Bank Group and the African Development Bank, to banks and saccos for onward lending.
“KMRC is getting funds on fixed interest rates and that’s why the variations [such as inflation] have got no impact on KMRC loans. The fixed-rate financing means that even if there are variabilities or changes in the economic environment, thee status remains the same for the financing we are providing,” Mr Oltetia said in an interview earlier in the year.
“This cushions borrowers because the changing environment has got no effect on the customer, and that is a fundamental thing that potentially will drive KMRC funding even more.”
Uptake of KMRC loans was expected to increase in a high inflation environment, which has seen interest rates bump this year. However, the elevated interest rates have also offered commercial banks and saccos more attractive returns with government, for example, paying more than 15 percent on three-month securities.
The data shows KMRC disbursed nearly Sh2.40 billion to refinance the 606 home loans between January and September, a 58.92 percent fall compared with Sh5.84 billion wired to lenders last year to fund 1,957 mortgages.
This means the average size of mortgages under KMRC has increased by more than half.
The average home loan in the year through September climbed to Sh3.96 million from Sh2.98 million a year earlier, reflecting the increased cost of construction on back of inflation and weakening shilling.
The cost of key construction materials such as steel, paint and cement has gone up, partly due to increased cost of operation, including a depreciating shilling against major international currencies.