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Kenya’s mortgage system is a farce

Morris Aron

The term mortgage in Kenya is like that flashy executive talk meant to impress the audience. Outside those rooms, it is a mirage at best and a farce at worst.

For a system meant to ensure home ownership—one of the basic human needs – it is sad it is this way.  Mortgage system in Kenya should have been reformed by yesterday. Statistics tell a sad story.

Mortgage loans have existed in Kenya over the last 53 years. As of December 2017, only around 26,000 mortgage accounts were housed by banks according to Central Bank of Kenya (CBK). 

A mortgage account is what you arrive at when you decide to count the number of individual files of loans that have been approved as mortgage loans in the entire Kenyan banking scene.

Compare those figures to the fact that Kenya has nine million households as per the last census and a total population of 48 million. 

The figures only say one thing—that mortgage loans have not been serving the majority and is the preserve of a few elites. At a time when housing demand is estimated at 250,000 units a year, it is easy to see why there is an urgent need to reform housing finance in Kenya. The current finance structure is not working. 

CBK statistics shows that about 76 per cent of lending to the mortgage market is by six institutions classified as one medium-sized bank controlling 21 per cent and five banks from the large banks peer group controlling the rest. A majority of mortgage loans go to bank and blue chip company employees who are at managerial level and above. 

The average mortgage loans is Sh10 million and the repayment period is anything from five years to up to 25 years. Interest rates charged by mortgage loans are only fixed if one accesses them from a company mortgage scheme, otherwise, interest rates change with any changes in the prevailing interest rates. About 78.4 per cent of mortgage loans were on variable interest rates basis as of 2017.

Mortgage calculators from financial institutions that dish out mortgage loans show that at the end of a mortgage repayment, one would have paid up to three times the value of the property. Before the advent of interest rate cap laws, average mortgage rates average 20 per cent.

So what are the issues? First, it is the use of short-term deposits to fund long-term loans. In Kenya, mortgage loans are arrived at from the deposits by customers, meaning that a financial institution can only loan what it is sure to get back if the depositors were to come for their money.

Also even with that, the interest charged has to be high enough to guarantee that in the event of a default of a few, a depositor is still able to secure their cash.

This is why any slight changes in the economic environment is felt almost immediately by the mortgage financiers.

Second is the rigorous manner with which the approval process is structured which ensures that no ordinary Kenyan passes through the sieve. Third is the need for security at almost every stage, the rigid way in which payments are structured and so on.

To rejig homeownership in Kenya, urgently set up a mortgage fund supported by the government that lends to commercial banks at special interest rates. – Aron is an economics researcher. [email protected]

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