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Big banks cartel continue to clog Kenya’s mortgage market

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A few banks have gained a stranglehold on Kenya’s mortgage market, rendering it non-competitive with demoralizing consequences for would-be homeowners.

High-interest rates on mortgage loans, hostile requirements in dispensing such credits, and risk aversion practices by sassy lenders are some of the tribulations that continue to sink the appetite for mortgage acceptance.

And now, first-time buyers are giving up completely.

“It is a credit issue and the buck stops with the banks,” says George Mburu – a real estate practitioner and the developer of Mizizi Homes, who blames local lenders for “intentionally refusing to give loans of that nature to persons in need.”

For the sector to thrive, Mburu calls on the government to act as a ‘referee’ if the mortgage industry which typically has three primary business elements – the mortgage originator, the aggregator, and the investor, is to effectively contend with markets like South Africa.

“It should be a win-win arrangement where the government is the guarantor in the event the borrower is unable to meet his repayment obligations and at risk of losing both the asset (property) and the amount owed,” explained Mburu.

Urban homeownership in Kenya has remained comparatively low at about 21.3 percent, implying that more than 78.7 percent of the urban population are renters, compared to SA, which has more than 53 percent of its urban population owning homes.

Bank charges

The low number is now being blamed on the cartel-like behavior of local lenders who are valued to control a staggering 80 percent of the mortgage market with KCB, Stanbic, StanChart, Absa, Co-op, Equity, NCBA, and HF Bank the primary culprits charging a minimum of 13 percent.

Quick calculations show that the Kenya Commercial Bank (KCB) – the country’s second-largest bank by assets has the most mortgage accounts and charges a minimum interest of 13 percent, with the borrower paying back about Sh20.74 million, compared to Co-operative Bank of Kenya (Co-op Bank) which offers an interest of 15.6 percent, with the borrower paying back about Sh20.53 million.

On the other hand, Equity Bank – Kenya’s largest lender by both assets and customer deposits, would see such a borrower, acquiring the facility at the same rate (15.6 percent) payback of Sh19.5 million.

The bank’s website shows that the repayment period on a home is capped at a maximum of 20 years while on commercial property Purchase, it is a maximum of 10 years. Most banks give a grace repayment period of 12 years for the latter option.

In contrast, Stanbic and NCBA banks offer up to 105 percent to finance a property value or market price whichever is lower, with a maximum repayment term of up to 25 years. The amounts take care of legal and stamp duty fees and related commissions.

But some experts think the banks’ selfish actions are justified and their decisions to charge outrageous rates are determined by environmental factors in which the underlying ‘risk components’ can be objectivised, quantified, and tracked over time

“The overarching consideration is thus the following: if a bank is convinced of the economic potential inherent in a client’s business plan, it will benefit from efforts to align repayment obligations with the expected turnover and profit profiles,” offered World Bank’s Jan-Peter Olters in his previous interpretation on whether banks were being too risk averse.

Impact of Inflation

Some factors are outside the control of banks and those mostly have to do with the performance of the economy, according to Mwatha Njoroge, a real estate developer, who believes inflation is one of those factors.

“To a large degree, inflation doesn’t directly affect mortgage rates, but it can indirectly cause mortgage rates to increase,” offers Njoroge, adding that typically, inflation leads to higher mortgage interest rates because it devalues the Kenyan Shilling.

Indeed, inflationary concerns dominated the airwaves for larger parts of last year, rising to a fever pitch in October 2022 when the overall inflation rate reached 9.6 percent, before slowing to 9.5 percent in November and 9.1 percent in December 2022 – the lowest since August when the figure stood at 8.5 percent.

Ordinarily, the Central Bank of Kenya (CBK) attempts to control such concerns but has somewhat ‘been defeated’ with the MPC having to raise its policy lending rate in the previous months by a few percentage points to stem rising inflation to stabilize the shilling.

It saw several banks increase the cost of their loans in line with the policy with rises above 15 percent, ushering in the era of expensive loans for many Kenyans from July last year when such hikes commenced.

Some attempts like the creation of the Kenya Mortgage Refinance Company (KMRC) in 2018 to grow the Kenyan mortgage market by providing long-term funding to primary mortgage lenders such as commercial banks, SACCOs, microfinance banks, and development finance institutions have done little to spur the sector’s growth, hindering the affordable housing dream in the process.



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