The government has embarked on a plan to provide affordable houses. FILE PHOTO |
Urban housing shortage is swelling by the day. There is no
doubt. The shortage itself is a function of both supply and demand.
Demand-side constraints are driven by the question(s) of affordability
while the supply-side constraints are driven by funding challenges.
There
has been a number of efforts, both by the government as well as the
private sector, to address both sets of constraints. Anecdotally, it is
increasingly evident that due to the heavy initial capital outlayus recommendations was the introduction, in
July 2014, of the “KBRR+K” pricing formula for commercial banks to apply
on variable-rate loans, and which was later overrode by the Banking
(Amendment) Act, 2016.
Specifically, in regard to
mortgage finance, the committee recommended the government facilitate
lines of credit for large housing development projects targeted at lower
income buyers for owner occupation. The premise here is that commercial
banks cannot be able to efficiently provide the requisite capital for
such purposes.
There is some background to this. Modern
day banking is founded on Fractional Reserve Banking (FRB), where
commercial banks take deposits, usually short-term and non-sticky in
nature, from the public, keep a fraction with the central banks (in the
form of mandatory reserve requirements) and lend the rest, usually at
elongated tenures and at premiumised rates over the cost of deposit.
Conceptually,
because commercial banks, in their intermediation role, have to borrow
(for instance) a 90-day money and lend out for much longer periods
(usually in excess of 12 months), they have to deal with significant
amount of maturity risks.
The premiumisation is
designed to compensate for maturity risks as well as other risks often
associated with lending-credit, liquidity, repricing.
To
successfully offer home ownership products, usually via mortgages,
whether affordable or not, to its clients, a bank would need to stretch
the tenure of its lending to in excess of 10 years, a level which
significantly scales up maturity risks beyond its ability to handle.
This is where the government’s intervention(s) is always sought; partly because it has unique capabilities to absorb such risks.
This
is why I find the latest effort by the National Treasury to establish a
window for a mortgage refinance company highly laudable. The
announcement by the National Treasury, back in April 2018, of the
creation of Kenya Mortgage Refinance Company may have kicked off
Government’s latest intervention.
Indeed, the Treasury
Cabinet Secretary’s proposals, as contained in the Finance Bill 2018, to
vest regulatory and reporting functions of mortgage refinance companies
with the Central Bank of Kenya crystallises the intervention.
The
debut mortgage refinance company can help drive housing affordability
by playing two critical roles: (i) absorption of both maturity and
credit risks from commercial balance sheets through a refinancing window
thereby helping soften pricing; and (ii) sourcing and provision of
long-term financing for either its own lending activities or social
housing on-lending. This is a good start.
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