Non-salaried workers are set to access subsidised mortgages of up to Sh6 million under a State-backed scheme that covers nearly half of the credit in the event of default.
A newly formed firm, Kenya Mortgage Guarantee Trust (KMGT), will repay up to 40 percent of defaulted mortgages, with lenders shouldering the remainder of the risk.
This is meant to comfort banks and savings and credit cooperative societies (saccos) that receive billions of shillings from the Kenya Mortgage Refinance Company (KMRC) for onward lending of cheap mortgages to workers.
The structure of Kenya’s labour market, where the majority of workers lack a fixed regular monthly pay, has slowed down the supply of subsidised mortgages to increase affordable home ownership.
“The whole mechanism is expected to encourage financial institutions [banks and saccos] to go far down the market. The cover provides a default loss protection to the financial institutions,” KMRC chief executive Johnstone Oltetia told the Business Daily in an interview.
“To ensure that it goes way down, and, therefore, we don’t cover people with high income, we have put a loan limit of Sh6 million. The idea here is that you don’t want to cover people who already can afford a mortgage under the current arrangements.”
The risk-sharing arrangement is expected to encourage banks and saccos to start offering home loans to persons in largely informal settings who earn irregular income from small businesses such as salons, restaurants, bars and corner shops.
The non-deposit-taking KMRC, which is jointly owned by commercial banks, savings cooperatives and the State, offers long-term financing to financial institutions with the promise of lending to homes at a single-digit interest rate, lower than the average market rate of 14.3 percent in 2023.
KMRC formed the guarantee trust, which operates as an independent firm.
Under the current arrangement, KMRC offers long-term funds to participating banks and saccos at a fixed interest rate of five percent for onward lending to workers
The model, however, requires proof of regular monthly income, locking out non-salaried workers largely in the informal sector who are estimated at 15 million, or 83.33 percent, of Kenya’s 18 million labour force.
Banks have also not been able to advance mortgages to the majority of the about three million formally employed workers due to the perception of high risk of default, given that more than 88 percent of them earn less than Sh100,000 monthly average income, raising questions over their ability to afford repayments.
“The arrangement we have is on a first-loss basis. We are protecting 40 percent, which I think is high enough. That means if you have a loan of Sh1 million, KMGT covers Sh400,000 of that loan,” Mr Oltetia said. “We settled on 40 percent after engaging financial institutions, having started at 25 percent, while they [financial institutions] were pushing for 45-50 percent.”
KMRC says the KMGT framework has been benchmarked against successful arrangements in other countries, including Malaysia, where the guarantee is at 25 percent.
Kenya has a thin retail mortgage market, last estimated at 30,015 home loans worth Sh281.5 billion in December 2023, according to the latest data from the Central Bank of Kenya.
The average home loan size advanced by commercial banks was in 2023 estimated at Sh9.4 million, unchanged from the value in 2022.
That has locked out low- and mid-income workers because of the high repayment costs, which cannot be supported by their payslips.
The high cost of home loans for workers is what prompted the previous administration of President Uhuru Kenyatta to partner with commercial banks, saccos and development finance institutions (DFIs) to form KMRC to derisk the mortgage market.
The mortgage refinancier, 25.3 percent owned by the Treasury, is developing a digital credit assessment tool. The tool will help determine the eligibility of workers in an informal setting following a recommendation of an undisclosed consultant from India, famed to have the majority of micro-sized businesses driving growth and innovations.
Applicants to be covered by KMGT will be assessed based on mobile money transactions such as M-Pesa statements as well as bank statements (for those with accounts), amongst others.
“The tool will also look at people’s personalities by checking on things such as social media accounts to determine your credit history,” Mr Oltetia said.
KMGT is exploring the possibilities of allowing potential homeowners in informal settings to repay loans in a lump sum on quarterly basis to cover a few months, weekly or daily basis, depending on the regularity of their income and informed by the outcome of the digital credit assessment tool.
This has come at a time Affordable Housing Board has disclosed that 124,000 houses are at different stages of construction in various parts of the country, with 4,888 units expected to be ready for occupation by June.
The units comprise social housing units [bed-sitters] earmarked for persons earning less than Sh20,000 per month, affordable housing for workers with income of between Sh20,000 and Sh149,000 and affordable middle-class housing for those earning more than Sh149,000.
KMRC has advanced Sh11.89 billion to banks and saccos for onward lending to home buyers since it started operations.
