Mortgage Finance for Increased Access to Housing Central Bank of Kenya Mortgage Finance for Increased Access to Housing A presentation at Shelter Afrique’s 2011 Annual Symposium Prof. Njuguna Ndung’u Governor Central Bank of Kenya 14th June, 2011

Presentation Outline Introduction Size of Mortgage Portfolio Mortgage Loan Characteristics Challenges to Meeting Housing Gap Ongoing Initiatives Conclusion 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Introduction CBK jointly with the World Bank conducted a survey in 2010. Survey focused on the primary residential mortgage market. Analysis presents the findings on the overall mortgage finance market, mortgage loan characteristics, and the main constraints to the primary mortgage market in Kenya. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Size of Mortgage Portfolio Mortgage values more than tripled between 2006 & 2010 but still low. Number of mortgages doubled between 2006 & 2010 but still low. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing 4

Size of Mortgage Portfolio The average mortgage loan size increased from Ksh.2.5 million in 2006 to Ksh.4.0 million in May 2010 partly attributed to increase in property (land) prices. But the number of mortgage loan accounts is still small now standing at 15,049, even though it has almost doubled since 2006, from 7,275 accounts. Top five lenders accounted for over 80% of the total mortgage portfolio. While the top two banks held over 50% of the mortgage market share. Polarized market – cannot expand and pricing an issue in such a captive market. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing 5

Mortgage Loan Characteristics Average Loan Size The average mortgage loan for new loans stood at Ksh.6.6 million in 2010 up from Ksh.4.9 million in 2007. Increased mortgage size may be attributed to: the expensive housing market - but also driven by land prices in urban areas; a predominance of high-income mortgage borrowers in Kenya; housing finance market is yet to move downstream. Interest Rates The weighted average mortgage interest rate charged ranged between 12.2% and 14.1%. These rates are high and also variable. Comparable to weighted average lending rates of 14.64% in survey period(2010). However a mortgage finance player issued a bond at a coupon rate of 8.5 % in 2010 demonstrating potential of bonds to lower costs. Mortgage periods:- Large banks-5 to 25 years Medium and Small Banks-5 to 15 years. Most of the mortgage loans are on variable interest rate (over 70%). 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Fees Charged on Mortgages Fees charged on mortgages (approximately 8%-10% of the mortgage cost), comprise: Legal Fees; 1%-2% Valuation; 0.5% Arrangement Fees; 1% Stamp Duty; 4% Mortgage Protection Policy Premium; 0.5% Desirable to minimize these fees and costs – in order to expand the mortgage market. Components of price; Land is 60%-70%. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Challenges to Meeting Housing Gap Demand for Housing Supply of Housing Availability of Developer finance (debt and equity) Planning and building regulations Cost of infrastructure Access to Land Titling/Registration system Lack of long term funds Credit Risk Informality/low incomes - lack of constant stream of income High interest rates Foreclosure system Lack of affordable housing Financial literacy Lack of Affordable Supply Lack of Effective Demand 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Challenges to Meeting Housing Gap… Banks lending to construction and real estate sector at 14.4 percent (Ksh.133.6 billion as at end of 2010) of the total credit: The bulk of long-term mortgage financing is currently funded mainly through short-term savings and demand deposits. The traditional mismatch constraint therefore comes into play. But this is because the bond market and pension funds have not been tapped. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Ongoing Initiatives Access to long-term funds: financial institutions considering issuing mortgage bonds: A 30 year Savings Development Bond issued - will create a benchmark for issuance of long-term mortgage bonds. High credit risk - information asymmetry problem; introduction of credit reference bureaus to enable banks better assess borrowers’ credit risk, also allow borrowers access credit based on information capital. Financial Education; launched financial education to enhance consumer awareness. Appropriate definition of property rights; land and search costs for authenticity is critical. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Ongoing Initiatives … Enhanced disclosures: Interest rates and other “hidden” charges – promoting disclosure of Total Cost of Credit/Repayment Schedule and subsequently Annual Percentage Rate (APR). Use of plain language – to ensure disclosed information is used appropriately. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Ongoing Initiatives… Deepen Capital Markets – to promote mobilization of long term funds: Use of pension funds for guaranteeing members’ mortgages. This is happening in Kenya, but still at a low scale. Expansion of cities + decongestion; more scope for mortgage development Regulatory reforms in 2011: Mortgage finance companies are now allowed to operate current accounts, a measure intended to enable them mobilize additional deposits; and Banks have been allowed to advance up to 40 percent of their total deposit liabilities up from 25 percent for purchase, improvement or alteration of land. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Conclusion The mortgage market is developing but has structural constraints. We have moved away from missing markets and missing institutions They relate to the legal environment as well as market development. Market is constrained by high cost of housing, cost of mortgages and low incomes. Mortgage market only available to small proportion of population but big potential exists. We have to bring in the policy spin: governing mortgage market now and where we go in the future. Expansion of housing supply to all income levels will become ever more important as urbanization continues → Expansion of cities More institutions specialized in mortgage finance required – increase vibrancy in the market → But a land policy for them. 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing

Thank You 2011 Annual Symposium - Mortgage Finance for Increased Access to Housing