Sustaining single-digit mortgage amid tough economic conditions

Since the Covid-19 pandemic four years ago, the economy, both domestically and globally, has been reeling from gusting headwinds, a major one being the cost of credit.

Just recently, the Central Bank of Kenya (CBK) Monetary Policy Committee retained the Central Bank Rate at 13.0 per cent, sustaining the high cost of credit.

While inflation reduced from 6.3 pe rcent in February to 5.7 according to the Kenya National Bureau of Statistics (KNBS), and the shilling gained against the USD, such tell-tale signs were not enough for the CBK Governor Dr Kamau Thugge, who chairs the MPC, to rethink a drop in the CBR rate.

Such phenomena intrigue questions of the sustainability of customer-friendly products in the market, like Kenya Mortgage Refinance Company (KMRC) single-digit mortgage facilities extended to homeowners through financial partner institutions.

Chief Executive and Managing Director of KMRC, Johnstone Oltetia, shares that he is aware of the changing macroeconomics that have spilled into the Kenyan economy, compounding domestic challenges.

Such challenges have resulted in increased costs of inputs, which will lead to costly housing units.

However, he notes that the cost of KMRC mortgages is determined by one factor: the source of financing. And if KMRC continues to access financing at the same or better rates, then the single-digit loans, currently issued at 9.5 per cent, will be sustainable.

KMRC, a State body, is funded mainly through concessional financing that allows the institution to access cheap loans from financiers such as the World Bank and the African Development Bank.

“And the rates are good if borrowing is done through the Government. That is what will influence the sustainability of the single-digit rate,” he says. “For the foreseeable future, as long as we can raise financing at concessional rates, we want to maintain the single-digit rate.”

He acknowledges that market dynamics can change, but he hopes they favor the domestic market, influencing the flow of funds from European and Americas markets. This will cause Dr Thugge and his team to reduce the CBR, hence making credit more affordable.

Mr Oltetia, nevertheless, is neither banking on this inflow of foreign direct investment nor on cheap credit from institutional financiers to sustain the single-digit rate.

He shares that bonds are the surest way to go.

“We have an additional source of funding which is a lot more sustainable: the issuance of bonds in our capital market,” he says. “You remember we issued a bond in 2022, and we have a medium-term note which we are yet to go back to the market to get a new tranche.”

He says the reason KMRC has delayed going back to the market is because of the unfavorable interest rates.

“When you look at the Government paper, the rate has been around 17 or 18 per cent. We issued the last bond at 12.5 per cent,” he explains. “The moment you try to issue a bond at 18 percent, that funding is not affordable.”

He says what made KMRC loans affordable last time they went to the market is the issuance of the bond at 12.5 per cent and the concessional financing that the institution received from the World Bank and AfDB.

“We did a blend and reduced the weighted average cost then still extended to the market at five percent,” he says. “That is what we want to do going forward. We will still go to the market and issue bonds, and we have a bit of concessional financing, then we do the blend. That way we maintain sustainability over time.”

Mr Oltetia insists that the focus of KMRC, as it was incorporated in 2019, is still to provide means for Kenyans to access affordable housing, and it seeks to retain this mandate. The target then, as pronounced by former President Uhuru Kenyatta, was to increase the number of mortgages to 60,000 by 2022, a figure that is yet to be attained.

The number of mortgages in the market is barely 28,000.

The MD states that KMRC has played a role in ensuring some 3,250 individuals have been empowered to be homeowners through Sh10.5 billion financing. This financing has ensured tenures hence fewer monthly payments.

“The interest rate at which we are providing is below market. We extend at five percent to banks and Saccos, and they do at below 10 percent. We have also introduced fixing of those rates,” says Mr Oltetia.

He adds that about 88 per cent of the loans offered in the market have variable rates.

“And the variability issue is a challenge to low-income earners because the Central Bank of Kenya manages inflation and current risks by raising the CBR, which is the lowest cost of funds in the market,” he says.