CHALLENGES TO DEVELOPING THE MORTGAGE MARKET Affordability The lack of affordability is a combination of factors which includes the low levels of income

CHALLENGES TO DEVELOPING THE MORTGAGE MARKET
Affordability
The lack of affordability is a combination of factors which includes the low levels of income (especially in rural areas), and the high and volatile level of inflation and relatively high margins charged by banks. Issues on the supply side also create a price barrier for many, where the cost
of even the most basic new house is out of reach for the vast majority.

Risk Management
Deficiencies in a lender’s ability to capture or understand risks mean that lenders have to charge a high ‘risk premium’. This is due to the fact that credit bureaus do not yet offer comprehensive credit histories, there is a high level of informality, and the value of collateral is tempered by deficiencies in the foreclosure process, resale market and the valuation process.

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Funding
This is ranked as the biggest obstacle but the facts suggest a relatively liquid banking sector with a low loan to deposit ratio. The issue is the availability of long term funds and the mismatch between short term deposits and the longer term mortgage loans. However, the current ratios suggest that banks could engage in further maturity transformation before hitting limits. Some of the large lenders however are constrained and certainly if current levels of growth continue, the rest of the sector will be also.

Housing/Land Market
The lack of affordable construction combined with difficulties in accessing
land make it difficult to expand access to homeownership. In particular the multiple land titling and registration mechanisms are grossly inefficient and overly complex
WAY FORWARD
1. Expand the Stock of Mortgageable Properties-
Kenya’s market is more evolved than most in
Sub-Saharan Africa but equally there is much room for improvement. The supply of land for housing and having a functioning secondary market for housing sales are essential elements of an efficient mortgage system. This requires:
A)a more streamlined and cost efficient property registry system
B)a unified and simplified mortgage law, limiting frivolous appeals
2. Provide Affordable Finance
The current cost of mortgage financing is prohibitive for the vast
majority of the population. This report calculates that just 12 percent of the urban population could consider taking out a mortgage loan which represents just 2 or 3 percent of the national population. Mortgages are completely out of reach for the entire rural population. Some steps could be taken to improve affordability including:
new products design to help affordability
over the longer term look at options for suitable subsidy programs/guarantee mechanisms
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aside from the mortgage market it is important to consider options for informal population
3. Improve Risk Management/Efficiency
—As the market grows in size, some economies of scale
will arise, but efficiency gains and a lowering of the risk premium can also help to bring down the
cost of loans.

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Expand coverage of the Credit Bureau to have fuller credit histories, as well as to non-bank finan-
cial intermediaries
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Standardization of documentation
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Underpin confidence in the sector by introducing prudential standards for loan underwriting
4. Developing a secondary mortgage market
A twin approach of firstly developing a mortgage
liquidity facility which would benefit the sector as a whole, while also pursuing the development of a
mortgage covered bond framework for the larger lenders. As this will target institutional investors, it
would be important to review investment rules of Pensions Funds and Insurance Companies.

5. Implementation
To achieve the above, a consensual approach will be needed between public and private sector. There are two key recommendations to get this dialogue underway:
HOUSING POLICY
The policy aims at:
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Enabling the poor to access housing and basic services and infrastructure necessary for a healthy
living environment especially in urban areas;
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Encouraging integrated, participatory approaches to slum upgrading, including income generat-
ing activities that effectively combat poverty;
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Promoting and funding of research on the development of low cost building materials and con

struction techniques;
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Harmonizing existing laws governing urban development and electric power to facilitate more
cost effective housing development;
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Facilitating increased investment by the formal and informal private sector, in the production of
housing for low and middle-income urban dwellers; and
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Creating a Housing Development Fund to be financed through budgetary allocations and finan-
cial support from development partners and other sources.

The objectives above are laudable but the reality has been that slums have grown and the rapid pace
of urbanization has undermined the successes that have been achieved.