Cytonn Research: Using Pension Funds for Housing Purchase in Kenya

On April 25th 2020, President Uhuru Kenyatta assented the amendments to the Tax Act 2020. One of the key amendments introduced by this law is Section 38 of the Retirement Benefits Act (1997) to allow access of retirement benefits for purposes of purchase of a residential house, with the intention of increasing home ownership in the country. In relation to this, the Retirements Benefits Authority has developed draft changes to the Retirement Benefits Authority (RBA) Regulations, what the changes mean for retirement schemes and the pensions industry going forward and our take on the adequacy and effectiveness of the proposed regulations.

Cytonn Investments have published an analytical paper on May 10, 2020 discussing the RBA’s new regulations, and the implication of these shifts in regulations on Kenya’s affordable housing sector. Some of the key changes in regulations by the RBA include:

The designation of the proportion available for the purchase of a residential house, which shall be the lower of 40% of the member’s accumulated benefit, subject to a maximum of Kshs 7.0 million or the purchase price of the house.

The expansion of the definition of institution to include: (i) a bank, mortgage or financial institution licensed under the Banking Act (Cap. 488) a building society licensed under the Building Societies Act (Cap. 489), a microfinance institution established under the Microfinance Act, 2006 (No. 19 of 2006) the National Housing Corporation; or (ii) any other institution, including an issuer of a tenant purchase arrangement that is specifically approved by the Authority for the purpose of providing a facility; or (iii) an institution or projects approved by the ministry in charge of matters relating to housing or licensed under the SACCO Societies Act, Insurance Act or a scheme with residential houses for sale.

The addition of institutions licensed under the SACCO Societies Act, Insurance Act or a scheme with residential houses for sale now means that scheme members may purchase a house from SACCOs, Insurance companies, and retirement schemes that have built or own residential houses for sale. Members can also buy a house from the Ministry of Transport, Infrastructure, Housing & Urban Development-approved institutions and projects. An example of this is the Boma Yangu Affordable Housing Programme.

Other regulations include but are not limited to:

  • Definition of the word “house” to mean residential house,
  • The clarification that members can utilize either of the option to be issued with a guarantee to secure a mortgage loan or to utilize their benefits to purchase a house but not both,
  • That members can only be allowed to utilize their funds to purchase a house once,
  • That members who have attained the normal retirement age or is already receiving a pension from the scheme are not eligible to apply for the purchase of a house from their benefits

The paper notes that that the main benefit of the amendments and regulations are that they will now enable members to purchase homes through their pension savings, therefore incentivizing workers to save in retirements benefits schemes. Additionally, the laws further the Government’s strategic goals in the Big Four Agenda, by allowing diverse sources of funds to be used for house purchase.

The paper discusses some areas of concern regarding the regulations, highlighting three key areas for review:

  • By focusing only on purchase units being sold by SACCOs, an insurance company, a pension fund, or projects approved by the ministry of housing, the proposed regulations ironically exclude purchasing units from individual, small, and large-scale real estate developers.
  • Second, the definition of institutions whose units qualify to be purchased using pension funds is confusing, since the regulations do not differentiate between financing institutions and developer institutions,
  • Finally, the percentage allowed for either mortgage access or outright purchase access need to be the same.

They argue that these three concerns need to be addressed, lest the proposed regulations become a cosmetic regulatory piece that cunningly defeats what was intended to be decisive legislation geared towards promoting affordable housing goals.

Click here for a link to the essay and to access more Topical papers. 

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