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Affordable Housing and Its Intersection With The Financial Sector

The Affordable Housing Project (“the Project”) was developed as a means of safeguarding the right under Article 43(1)(b) of the Constitution of Kenya, 2010 on accessible and adequate housing. The Project is targeted towards the low and middle-income households who have long been precluded from homeownership. Since its inception, there have been 20 developments in various cities in Kenya with the government promising to kick start more projects this year.

Despite the Project being geared towards realization of social rights, it has had ripple effects on various sectors including the finance sector. The Project, through the Finance Act, 2023 introduced the Affordable Housing Levy (“the Levy”) as a means of diversifying the sources of funding to reduce overreliance on loan facilities. The Levy has seen employers deduct their employees’ salaries and direct them to the Affordable Housing Fund, sparking general public uproar and eventually leading to litigation. The High Court, led by a three-judge bench held that the provisions were unconstitutional but suspended its judgment until this year. Therefore, Kenyans will still continue to pay the Levy until the matter is conclusively determined.

In an effort to streamline the financing of the Project, the Government created the Kenya Mortgage Refinance Company (KMRC), a public-private company mandated to provide long-term funding to financial institutions to provide loans to homeowners.  The Company is supervised by both the Central Bank of Kenya as a money lender and the Capital Markets Authority as a bond issuer.

The Company, dabbling as a financial institution, mortgage market and a bond issuer, poses several benefits to the economy. For instance, it offers longer-term loans hence improving the affordability of mortgage loans for borrowers. This is because longer maturities lead to lower monthly payments, making homeownership more accessible. It has also resulted in creation of a safety net to the financial system against illiquidity. As a result of a reliable source of liquidity, banks and SACCOs are encouraged to issue long-term loans. This contributes to the stability of the financial system, as institutions are less likely to face liquidity crises.

Moreover, KMRC has also lowered the barrier for entry for small, medium and micro financial institutions. By making long-term funding easily accessible, these financial entities like SACCOs can enter the mortgage market. This consequently leads to increased competition and better products and services for consumers.

The issuance of bonds by the Company also jumpstarts the Nairobi Stock Exchange which has been experiencing a drought in terms of new market entrants. By becoming a regular issuer in the private bond market, KMRC can contribute to the development and deepening of the private bond market. This can attract more investors and increase the overall liquidity and efficiency of the financial market.

In addition, the project has led to an uptake in Public-Private Partnerships. Private developers enter into agreements with the Government to build at least 100 houses on public land granted by government or on private land purchased by the government. To incentivize more private developers, the government has offered tax incentives such as reduction of Corporation Tax from 30%-15%, scrapping off stamp duty and VAT for construction material and reduced customs tariffs on imported inputs for construction of houses under this project.

The Project has also attracted a lot of foreign investments particularly in the provision of technical support and provision of energy efficient structures. This is in part because of the tax reduction measures by government on importation of construction materials. The Import Declaration Fee (IDF), for instance, has been reduced from 2% to 1.5%. This will result in a considerable increase in foreign currency reserves which will spur Kenya’s global trade.

The project has also resulted in increased financial intermediation. Through financial intermediation, savings are transformed into investments through the banking, capital, insurance, pension and savings and credit cooperative markets. The participation of SACCOs has also resulted in increased financial inclusion. Low and middle-income earners are more prone to financial exclusion processes that prevent them from gaining access to the financial system which is remedied through conversion of their savings towards investment in the affordable housing project or facilitation of loans.

Overall, the impact of the Affordable Housing Project on the financial sector cannot be gainsaid. Although it has been plagued with myriad of challenges such as low perception, litigation, high cost of land and construction implements, it has brought with it numerous benefits for the financial sector players, the low and middle-income earners and Kenya’s financial position in general.

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