The Majesty of the Kenyan Mortgage Refinancing Company

Kenya Mortgage Refinancing Company is expected to boost efforts of affordable housing by creating mortgage liquidity

By gatuyu t.j

President Uhuru Kenyatta has pegged the provision of affordable housing as one of his four legacy pillars. This is an ambitious noble plan. However, there are some things President Kenyatta must get right. One of them is the financing side.


Access to decent, affordable housing is a fundamental aspect to the health and well-being of humanity and smooth functioning of economies. The United Nations Universal Declaration of Human Rights as well as the Kenyan Constitution anchors provision of decent housing among the cornerstones of human right.

Yet, in developing economies such as Kenya, and advanced economies alike, there is a struggle with providing housing to the poorest citizens at a reasonable cost.

On this account, informal settlements such as Kibera among others ‘slums’ have cropped up, and the squalor nature of housing and pitiable standards of living in these settlements is but a sting on our collective conscience.

State House! We have a Problem

To narrow the affordable housing gap, there are four approaches that the government may apply. These include:

  1. Securing land for affordable housing at the right location;
  2. developing and building housing at lower cost;
  3. operating and maintaining Properties more efficiently; and
  4. Improving access to financing for home purchases, development and rental assistance.

Provided the government creates a favourable environment, the issues of location, lower building costs and operations efficiency could be addressed by interplay of market forces.

However, improving access to finance remains an overhanging challenge. How can housing be financed to have a significant impact on affordability?

The challenge emanates from the fact that the financial systems in developing economies such as Kenya are not well developed. Many low-income citizens are “unbanked” and work informally.

For long-term financing schemes to work, it is important to have a stable macroeconomic environment that can contain inflation.

Thus, access to financing for the purchase of housing by lower-income households is limited. Many low-income households lack savings for substantial down payments for housing, which means that they take out high loan-to-value mortgages, which are riskier and require higher interest rates.

Further, if they can get credit at all, lower-income households pay a premium because of their risk profiles.  Such a situation is dispiriting.

There are various ways to improve access to credit for low-income households to purchase affordable housing. These include one, reducing loan origination costs and underwriting risk: Two, reducing the cost of funding mortgages: Three, leveraging collective savings such as provident funds to lower interest rates. One of the innovative tool of finance in solving these issues has been through liquidity creating facilities.

Liquidity Boosting Facilities: From Cagmas to Covered Bonds

To increase funding for housing broadly, and ensure affordable housing loans, governments can encourage banks to make more loans backed by core deposits and find ways to connect mortgage lenders to the secondary financial markets.

One of the ways of doing this is by creating liquidity facilities—intermediaries that match the long-term instruments of borrowers (mortgages) with the short-term goals of investors.

As per the World Bank, a mortgage liquidity facility is a financial institution that is meant to support long-term lending activities by Primary Mortgage Lenders (PML) –such as banks, credit unions and mortgage brokers with the core function being to act as an intermediary between PMLs and the bond market

Side Bar: How Mortgage refinancing works.

  • Borrowers cede their property as security for a long-term mortgage loan.
  • The mortgage liquidity facility will lend its funds to Primary Mortgage Lenders with the mortgages as collateral.
  • The mortgage liquidity facility provides a bond to private institutions and investors, with the mortgages as collateral, and
  • Institutions with medium to long-term liabilities buy the bonds at a margin above the usual government securities.

In Kenya, if such a scheme was to be availed, on bond issuance, investors are likely to buy into the long-term mortgage-backed bond for 13.9%-14.1%.

This is assuming a 1.0% margin above the minimum of the risk-free rate for a 10-year bond, which currently stands at 12.9%, or 13.1% for a 15-year bond.

For instance, Malaysia created the national mortgage corporation, called Cagamas. It helps fund mortgages by purchasing loans from banks and issuing debt securities to investors.This ensures that banks are able to issue more loans for mortgages at low interest rates.

In Europe, they have been using what are known as the Covered mortgage bonds. These are very instrumental in providing a means of securitizing mortgage debt that reduces risk for investors by giving them a claim on the underlying assets, while also offering recourse to the bond issuer.

Securitization of mortgages, with proper safeguards, remains an important means of providing liquidity and capital for home lending and can help developing economies fund mortgages for lower-income households.

However, securitization requires sufficient evolution of financial institutions and markets, as well as tight oversight.

Obstacles to Kenyan Mortgage Market

Kenya mortgage market is not well developed but has been rapidly growing. The CBK data indicates, by the 31stDecember 2015, the mortgage debt represented 3.15% of GDP. However, housing finance remains below potential.

The main mortgage lenders in Kenya are banks. The Kenya Commercial Bank and Standard Chartered are the leading banks in mortgage lending according to the 2016 Residential Mortgage Survey by Central Bank of Kenya. The only mortgage finance institution is the Housing Finance.

There are a number of constraints that hinder the mortgage market uptake. The 2016 Residential Mortgage Market Survey revealed that high cost of houses, high interest rates on mortgages, high incidental cost of mortgages, low levels of income, and difficulties with property registration and titling and lack of access to long term finance are the major inhibiting factors to the growth of the Kenyan mortgage market.

Furthermore, there is little standardization of loan underwriting, documentation or servicing procedures.

For instance, the land registration process is cumbersome and costly particularly for multi-unit developments. This leads in properties being bought on mortgage priced at as much as 10% or more to cover the developer’s cost of carry during the registration period.

Some of these issues are currently being addressed, including the project of digitisation of the lands registries in the country. But more need to be done to create liquidity on the mortgage markets

The Kenyan Mortgage Refinancing Company

In order to create liquidity in the mortgage markets and facilitate uptake of affordable housing in the country, the government with support of stakeholders has proposed the launch of the Kenyan Mortgage Refinancing Company (KMRC).

KMRC is an initiative of National Treasury and the World Bank. It is being created as a non-bank financial institution restricted to providing long-term funding and capital market access to mortgage lenders and issuing bonds to investors, with aim of enhancing mortgage affordability at attractive market rates in the country.

KMRC will be under the Central Bank of Kenya’s supervision, while its bond issuance operations will be overseen by the Capital Markets Authority.

The entity has already started on good footing. It is expected to receive equity capital contributions from the Government of Kenya and international financial institutions supporting the initiative.

The World Bank has already received an initial debt financing of USD 160 mn. This would be used for lending on to financial institutions.

The big changer with the KMRC is that it will serve as a secure source of long term funding at attractive rates to facilitate sound lending habits resulting in greater availability of fixed rate mortgages, and longer available loan terms.

This would eventually improve mortgage affordability, increase the number of qualifying borrowers and result in the expansion of the primary mortgage market and home ownership in Kenya while deepening the capital markets.

As a wholesale secondary market institution, it will neither take deposits nor lend directly to individual borrowers.

Investors such as private equity firms may take interest in KMRC as there is some form of social impact of investing. This is in view of the many social benefits associated with increased housing production,finance, and home-ownership, including job creation,improving the asset base, and providing formal sector home owners a legal stake in their community.


Refinancing facilities act as suitable intermediaries between primary mortgage lenders and capital markets. In this way, they enable countries with nascent mortgage markets such as Kenya to boost the supply of long-term capital and thus expand mortgage lending

However, for KMRC to work efficiently there is more to be done. There is need for proactive legislative reforms, especially to improve land titling and property registration that are critically important for the expansion of mortgage lending.

Further, there is need to encourage an adequate pool of mortgage loans and foster competition in the mortgage market by promoting the entry of new primary lenders.

When every citizen of the republic will have access to decent and affordable housing, we will have a healthy and happier nation.


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