Feasibility Study on a Proposed Credit Guarantee Model for Affordable Housing in Kenya

Lion’s Head Global Partners (LHGP) undertook a feasibility study on the establishment of a partial credit guarantee model for the affordable housing market segment, through interrogating the viability of various models and informing the design of the appropriate scheme for implementation, for FSD Kenya.  This included an analysis of Kenya’s mortgage market by reviewing the current lenders, home loan products, outlining constraints to expansion of affordable housing finance & potential solutions, analyzing the mortgage gap and potential impact of the PCG[1]. Lessons are drawn from case studies which include; Cagamas National Mortgage Corporation Malaysia, Pakistan Mortgage Refinance Company Ltd (PMRC), and, Philippine Guarantee Corporation.

According to the report, Kenya housing finance has remained a challenge due to; limited access to housing finance, high cost of finance and the lack of long-term housing finance products. Key barriers to increased housing finance uptake include the access and affordability of funding, a complex legal and regulatory framework, collateral requirements and an arduous property registration process. This led to the proposal of the establishment of the Partial Credit Guarantee (PCG), which would concentrate on de-risking end-user borrowers and making mortgages more accessible. The PCG presents an opportunity to mobilize end-user finance and, by extension, the delivery of affordable housing units, at a larger scale.

The PCG would have been primarily funded by the National Housing Development Fund (NHDF). It would have attracted supplemental funding from insurers and DFIs. The NHDF will implement the PCG by transferring a 10% deposit (cash) and issuing a 20% partial credit guarantee (unfunded) to banks for qualifying mortgages primarily from informal sector borrowers. The lending institutions, if eligible, would be refinanced through the KMRC. Notably, the guarantee will cover up to 20% of the approved loans and allow the banks to provide mortgages at lower borrowing rates. In case of default, lenders are expected to follow standard mortgage recovery procedure; and lodge a claim from the NHDF for loss incurred (if any) up to 20% of the outstanding principal.

The Affordable Housing PCG Pilot Program plans to implement the PCG Scheme at a scale that requires little capital investment, thus enabling an iterative cycle of product development in partnership with financial institutions and other important stakeholders. The pilot program would need to be housed with an existing institution and target the mortgage gap. It should also focus on how well to distribute the PCG product and funding options to cover its initial roll-out and product portfolio.

In terms of PCG structuring, the pilot programme can either be housed by the Kenya Mortgage Refinance Company (KMRC), an industry association or an existing guarantee provider. Mortgage refinance companies around the world have been successful in operating PCGs, for example, the Pakistan Mortgage Refinance Company (PMRC) and Cagamas National Mortgage Corporation Malaysia. On the other hand, industry associations such as the Kenya Bankers Association can leverage its convening powers within the financial sector and its track record in leading industry-wide initiatives such as Pesalink and the Kenya Green Bond Programme to develop the pilot programme. The Pilot Program may endeavor to form alliances with guarantee providers operating in the Kenya market, such as the African Guarantee Fund (AGF), GuarantCo, multilaterals and DFIs. This has been successful in other countries such as the Philippines where PhilGuarantee provides guarantees for affordable housing.

According to LHGP’s analysis of the Mortgage Gap, 1.27 million households have an income between Kshs 50,000 and Kshs 150,000, with at least 0.89 million coming from the formal sector and 0.38 million from the informal sector. These 1.27 million households might make up the entire addressable market for PCG. A successful PCG should provide actual benefits to participating financial institutions and prospective homeowners without undermining the incentive for banks to sustain appropriate underwriting standards. A favorable regulatory environment is paramount in encouraging banks to effectively utilize the guarantee for risk management. For instance, the government may take into consideration offering tax incentives to attract lending institutions to take part in the programme. If the PCG program is successful in addressing the major market restrictions, particularly those that exist in the informal sector, it may have a transformative effect. In summation, the program has a huge potential given the nation’s rising credit demand and commercial banks’ unwillingness to venture into the lower end of the housing finance market.

[1] A PCG programme has been proposed by the SDHUD and is currently being reviewed by the National Treasury.