Affordable mortgage
Affordable mortgage
Business Model Description
Provide affordable mortgages for low and middle income households to strengthen their access to finance.
Expected Impact
Contribute to financial inclusivity and the quality of life of Kenya's population by paving the way for home ownership.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Kenya: Nairobi (Province)
- Kenya: Coast
- Kenya: Nyanza
Sector Classification
Financials
Development need
The total financing gap for small and medium enterprises (SMEs) equalled USD 19 billion in 2017.(1) SMEs in Kenya have a limited cash buffer, which can endanger their liquidity. 75% of them were expected to face serious payment problems by the end of June due to the pandemic.(2) The general constraints of the financial sector are access to affordable capital and long term credit.(3)
Policy priority
Finance is a key sector for Kenya's development. Financial inclusion is highlighted as a priority in the Kenya Vision 2030, the 'Big Four' Agenda and the country's development and transformation plans.
Gender inequalities and marginalization issues
This sector is characterized by a substantial discrepancy in the access to credit between males and females.(4)
Investment opportunities introduction
Kenya is a financial hub and aims to create a regional finance center in Nairobi. With increasing financial inclusion and the surge in mobile payment services (10% between 2018 and 2019), the appetite for this sector is rising.(5)
Key bottlenecks introduction
Bottlenecks include a lack of specialists, discrepancy between ticket sizes (investors satisfy only considerable tickets while small and medium enterprises (SMEs) needs are usually small), the high default rate of borrowers, lack of collaterals, and lack of customer adjusted financial instruments (e.g. weather based insurance).
Corporate and Retail Banking
Development need
The total financing gap for small and medium enterprises (SMEs) equalled USD 19 billion in 2017.(1) SMEs in Kenya have a limited cash buffer, which can endanger their liquidity. 70% of micro, small and medium enterprises (MSMEs) in Kenya do not have access to medium and long term loans.(6) Inadequate access to affordable capital and long term credit stymies economic growth in Kenya.
Policy priority
According to Medium Term Plan III, the financial sector will be strengthened to ensure entrepreneurs and investors are supported with affordable credit and other financial services.(7)
Gender inequalities and marginalization issues
The total estimated market for women housing loans equals around USD 15 billion. According to the International Finance Corporation, one-third of female headed households plan to take a housing loan in the next 5 years. (4) The sector is characterized by the substantial discrepancy in the access to credit between males and females.(4)
Investment opportunities introduction
Kenya is a financial hub and aims to create a regional finance center in Nairobi. With increasing financial inclusion and the surge in mobile payment services (10% between 2018 and 2019), the appetite for this sector is rising.(5)
Key bottlenecks introduction
The government identifies the lack of collateral as a bottleneck for accessing credit, especially for women.(8)
Mortgage Finance
Pipeline Opportunity
Affordable mortgage
Provide affordable mortgages for low and middle income households to strengthen their access to finance.
Business Case
Market Size and Environment
> USD 1 billion
Although Kenya is perceived as a regional financial hub, there were only 24,000 mortgages valued at around USD 2 billion in 2018. It represented around 2.5% of gross domestic product (GDP), compared with 30% in South Africa. The majority of the loans (around 90%) are provided by Savings and Credit Cooperative Organizations (SACCOs).(10) The number is expected to increase to over 60,000 mortgages by 2022.(11)
The government estimated an annual need of 240,000 new houses each year. The low production creates a shortfall of 132,000 houses every year.(12)
The real estate subsector constituted 6.9% of gross domestic product (GDP) in 2019 and recorded 5.3% growth (one of the fastest in the services sector) in the same year.(13)
Indicative Return
10% - 15%
Currently, mortgage rates in Kenya equal around 12% -15%.(14)
Kenya's market interest rate is around 13.5%. This may be lower for affordable and social housing.(15)
Investment Timeframe
Long Term (10+ years)
Average loan maturity equals 15 years with an average 14% interest rate.(16)
The National Development Housing Fund provides mortgages for 20 - 25 years.(11)
Affordable financing should be perceived as a medium to long term investment most likely for patient capital.
Ticket Size
USD 1 million - USD 10 million
Market Risks & Scale Obstacles
Market - Volatile
Business - Supply Chain Constraints
Capital - Limited Investor Interest
Impact Case
Sustainable Development Need
In 2019, Kenya's population grew by 2.3%, with more rapid growth of 4% in urban areas.(20) Providing affordable mortgages is one solution to support Kenyans to buy a house.
Around 95% of the formally employed population belongs to the 'mortgage gap', meaning they are creditworthy but cannot access mortgages.(21)
Despite having a strong financial sector, Kenya has a significant gap in terms of long term financing. It can be partially attributed to the high indebtedness of households related with increasing non-performing loans (9.5% in 2018) and lack of long term liquidity.(21)
Gender & Marginalisation
Only 4% of women in Kenya used formal loans to purchase a house, and of those 57% came from Savings and Credit Cooperative Organizations (SACCOs). Despite a high demand, the informal nature of female employment deprives them of bank credits.(22)
Reduced number of overcrowded houses, improved quality of life
Appearance of long term investment opportunities for investors and the capital market
Expected Development Outcome
Increased access to affordable mortgages and financial inclusivity
Reduced slums and informal settlements
Gender & Marginalisation
Increased financial inclusion for women
Primary SDGs addressed
1.1.1 Proportion of the population living below the international poverty line by sex, age, employment status and geographic location (urban/rural)
1.2.1 Proportion of population living below the national poverty line, by sex and age
1.4.1 Proportion of population living in households with access to basic services
36.80% (Share of the population living in extreme poverty-international poverty line) (33)
36.1% (Share of the population living in extreme poverty-national poverty line) (33)
Based on 2015 data: 63.20% - improved water source 41.60% - electricity 30.10% - improved sanitation services 12.76%- clean cooking fuels and technologies (33)
0%
0%
100%
10.1.1 Growth rates of household expenditure or income per capita among the bottom 40 per cent of the population and the total population
N/A
N/A
11.1.1 Proportion of urban population living in informal, informal settlements or inadequate housing
56% (33)
By 2030, ensure access for all to adequate, safe and affordable housing and basic services and upgrade slums
Secondary SDGs addressed
Directly impacted stakeholders
People
Indirectly impacted stakeholders
People
Corporates
Outcome Risks
High rates of indebtedness and high interest rates (23)
Gender inequality and/or marginalization risk: Better financial arrangements may turn the attention of the industry and policy makers away from the need for lower income groups and costs.(24)
Impact Risks
Gender inequality and/or marginalization risk: Stakeholder participation risk - High rates of indebtedness may negatively affect stakeholders and vulnerable communities.
Impact Classification
What
Providing affordable mortgages is likely to have a positive impact because it contributes to solving the bottleneck in purchasing affordable housing.
Who
People who belong to the 'mortgage gap' or can't afford normal mortgages who are deprived of access to mortgage and cannot affordable housing.
Risk
Increased construction sector activity may negatively impact the environment. Moreover, yet another financial burden for the Kenyan households may result in citizens' over-indebtedness.
Impact Thesis
Contribute to financial inclusivity and the quality of life of Kenya's population by paving the way for home ownership.
Enabling Environment
Policy Environment
Third Medium Term Strategic Plan: Providing affordable housing is one of the four priorities of the 'Big Four' Agenda.
National Housing Development Fund: To facilitate the plan, the government will establish a National Housing Development Fund and prepare other specific financing strategies. Also sufficient serviced land will be available.(7)
Kenya Mortgage Refinance Company: The government has also set up the Kenya Mortgage Refinance Company, which will provide long term funding or extend home loans.(21)
Financial Environment
Fiscal incentives: Newly listed companies receive preferential corporate tax rates depending on the percentage of listed shares. (The normal rate is 30% for resident corporations and 37.5% for non-residents.) Commercial buildings receive a 25% capital deduction in developed areas.(28)
Other incentives: First time home buyers do not have to pay a stamp duty equal to approximately 2% - 4% of the total house cost.(29)
Other incentives: Citizens seeking credit to purchase or improve houses can deduct up to USD 2,800 per year from tax interests. Also people depositing money on the Home Ownership Savings Plan can deduct USD 900 annually for 10 years.(30)
Regulatory Environment
Finance Act 2018: Introducing the Finance Act and the National Housing Development Fund created an obligation for employees and employers to contribute 1.5% (3% in total) of their salary to an individual account called the Housing Credit Fund.(25)
In 2019, the Kenyan High Court removed an interest rate cap established in 2016, boosting the number of credit offers and mortgages.(3)
Moreover, in 2019, the Bank of Kenya issued the Regulations on the Mortgage Refinance Sector. It directs the sector and highlights licensing issues. The regulations mean the subsector will be able to develop and support the mortgage subsector.(26)
Finance Bill 2020: This Bill introduced a new Digital Service Tax on income from services provided through the digital marketplace. The tax is 1.5% on the gross transaction value, which will be implemented in 2021.(27)
The Ministry of Housing is responsible for developing housing policies, providing incentives and coordinating stakeholders.(8)
Marketplace Participants
Private Sector
KWFT (Kenya Women Microfinance Bank), National Housing Corporation, Savings and Credit Cooperative Organizations (SACCOs), Acumen, Commercial banks in Kenya offering mortgage (i.e. Standard Chartered Bank Kenya, Citibank, Commercial Bank of Africa) (31)
Government
Ministry of Housing
Multilaterals
Kenya Mortgage Refinance Company, World Bank
Non-Profit
Habitat for Humanity, Kenya Union of Savings and Credit Cooperatives, Centre for Affordable Housing in Africa, National Housing Portal
Target Locations
Kenya: Nairobi (Province)
Kenya: Coast
Kenya: Nyanza
References
- (1) Khanna, M., Wimpey, J.S., Bruhn, M., Singh, S,, Hommes, M. and Sorokina, A. (2017). MSMEs Finance Gap: Assessment Of The Shortfalls And Opportunities In Financing Micro, Small And Medium Enterprises In Emerging Markets. World Bank.
- (2) UNKenya (2020). The Socio-Economic Impact of COVID-19 in Kenya.
- (3) World Bank (2019). Country Private Sector Diagnostic - Creating Markets In Kenya: Unleashing Private Sector Dynamism to Achieve Full Potential.
- (4) International Finance Corporation (2019). Her Home - Housing Finance for Women, https://housingfinanceafrica.org/app/uploads/HousingFinanceWomen1-29-20.pdf
- (5) Communication Authority of Kenya (2019). Annual Report 2019
- (6) Sachs, J., Schmidt-Traub, G., Kroll, C., Lafortune, G., Fuller, G., Woelm, F. (2020). The Sustainable Development Goals and COVID-19. Sustainable Development Report 2020. Cambridge: Cambridge University Press.
- (7) Republic of Kenya (2018). Third Medium Term Plan 2018 – 2022 Transforming Lives: Advancing Socio-economic Development Through The 'Big Four'.
- (8) Gardner, D., Lockwood, K., Pienaar, J. and M. Maina (2019). Assessing Kenya's Affordable Housing Market, Centre for Affordable Housing Finance in Africa.
- (9) Mbabazi, E. (2020). 'Low-Income Kenyans to Get Mortgages at 7% from September', The Kenyan Wallstreet. https://kenyanwallstreet.com/kenyans-to-get-mortgages-at-7-in-september/
- (10) World Bank (2019). Country Private Sector Diagnostic - Creating Markets In Kenya: Unleashing Private Sector Dynamism to Achieve Full Potential.
- (11) Shah, S. (2019). Construction financing in Africa’s affordable housing sectors: a critical gap: Testing the assumptions in Kenya’s Affordable Housing Program. Centre for Affordable Housing Finance in Africa. http://housingfinanceafrica.org/app/uploads/Shah_Case-Study-16_Construction-Financing-FINAL.pdf
- (12) Republic of Kenya (2018). Third Medium Term Plan 2018 – 2022 Transforming Lives: Advancing Socio-economic Development Through The 'Big Four'.
- (13) Kenya National Bureau of Statistics (2020). Kenya Economic Survey 2020. https://www.knbs.or.ke/?wpdmpro=economic-survey-2020
- (14) Delmendo, L.C. (2019). 'Kenya’s housing market is now struggling', Global Property Guide. https://www.globalpropertyguide.com/Africa/Kenya/Price-History
- (15) VAAL Real Estate (2021). Cheapest Mortgage Rates in Kenya. https://vaal.co.ke/cheapest-mortgage-rates-in-kenya/
- (16) World Bank (2011). Developing Kenya's Mortgage Market. https://housingfinanceafrica.org/app/uploads/Kenya_Expanding_Mortgage_FinanceSM.pdf
- (17) World Bank (2011). Developing Kenya's Mortgage Market. https://housingfinanceafrica.org/app/uploads/Kenya_Expanding_Mortgage_FinanceSM.pdf
- (18) Delmendo, L.C. (2019). 'Kenya’s housing market is now struggling', Global Property Guide. https://www.globalpropertyguide.com/Africa/Kenya/Price-History
- (19) Federal Reserve Bank Boston. Household debt repayment behaviour: what role do institutions play? https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/qau0803.pdf
- (20) World Bank database. https://data.worldbank.org/
- (21) World Bank (2019). Country Private Sector Diagnostic - Creating Markets In Kenya: Unleashing Private Sector Dynamism to Achieve Full Potential.
- (22) International Finance Corporation (2019). Her Home - Housing Finance for Women, https://housingfinanceafrica.org/app/uploads/HousingFinanceWomen1-29-20.pdf
- (23) Weber, O. (2013). 'Impact measurement in microfinance: Is the measurement of the social return on investment an innovation in microfinance?' Journal of Innovation Economics and Management, 11(1).
- (24) Elumah, L., Bamidele, I. and Yinusa, O. (2017). Mortgage Financing And Housing Development In Nigeria. Osogbo: Department of Accounting and Finance and Business Administration. Fountain University.
- (25) Wills Towers Watson (2018). Kenya: Mandatory housing fund contributions announced for 2019. https://www.willistowerswatson.com/en-CH/Insights/2018/11/kenya-mandatory-housing-fund-contributions-announced
- (26) MMAN Advocates (2019). Regulating the Mortgage Refinance Sector in Kenya. https://www.mman.co.ke/content/regulating-mortgage-refinance-sector-kenya
- (27) Finance Bill 2020. National Assembly Bills. Republic of Kenya. http://www.parliament.go.ke/sites/default/files/2020-05/Finance%20Bill%2C%202020_compressed.pdf
- (28) KENIvest. Investment Incentives. http://www.invest.go.ke/starting-a-business-in-kenya/investment-incentives
- (29) International Trade Administration (2020). Kenya Affordable Housing. https://www.trade.gov/market-intelligence/kenya-affordable-housing
- (30) Kenya Revenue Authority. https://www.kra.go.ke/en/ngos/incentives-investors-certificate/investing-in-kenya/incentives-investors
- (31) VAAL Real Estate (2021). Cheapest Mortgage Rates in Kenya. https://vaal.co.ke/cheapest-mortgage-rates-in-kenya/
- (32) International Trade Administration (2020). Kenya Affordable Housing. https://www.trade.gov/market-intelligence/kenya-affordable-housing
- (33) SDG Tracker (2021). End poverty in all its forms everywhere. https://sdg-tracker.org/no-poverty