The housing pressure in Kenya is huge driven by rapid population growth and urbanization rates, and therefore, maturity of the mortgage market is critical now more than ever. A mature mortgage market consists of a primary market, a secondary market and investors. The primary market’s role is to originate loans and is made up of lenders such as banks, credit unions, Co-operative Societies and mortgage banking institutions.

The secondary markets or the mortgage refinancing market is the arena in which these loans are transferred and packaged as securities. The main function of the secondary market is to get money to lenders in the primary market so they can loan it to consumers. Lastly, the investors purchase the mortgage-backed securities, thus, creating capital needed to make mortgage loans. Typical investors are institutional investors such as pension funds and insurance firms. In Kenya, it is expected that the Kenya Mortgage Refinance Company (KMRC) will facilitate the flow of funds for real estate financing by unlocking the secondary mortgage market. As it is, banks are the main mortgage loan providers in Kenya. According to statistics from Central Bank of Kenya, 77.5% of all mortgage lending in 2017 was originated by only 13.6% of the banks in the country.

The reluctance by banks to offer mortgages is largely attributable to the short-term nature of their liquidity which mainly comes from bank deposits, leading to asset-liability mismatch as mortgage tenures tend to be longer. On the end-buyer side, an inefficient land and property titling system affects mortgage credibility for home-buyers coupled by relatively low incomes. Consequently, the country’s mortgage portfolio is relatively small with CBK reporting a paltry 26,187 mortgages as at 2017 out of an adult population of twenty-three million adults. Majority of the loans are also limited to the upper middle- and high-end-in come classes. An average mortgage size of 10.9 million shillings and a tenure of 12 years attracts an average interest rate of 13.6%. Such a mortgage requires monthly payments of 153,905 shillings, in addition to incidental costs.

This means that only the 2.9% of Kenyans who earn above 100,000 shillings per month can afford a mortgage in the current market rates (assuming that these households have two partners earning that much – also a highly unlikely factor). With a median income of 50,000 shillings per month, majority of Kenyans can only afford to service a mortgage of 2.8 million shillings and below. The sector’s contribution to GDP is also relatively low at 3.1% in comparison to markets such as South Africa, Namibia, Morocco, and Tunisia with 31%, 15%, and 13%, respectively. This calls for novel solutions and initiatives. Mortgage refinancing companies (MRCs) are set up to address the liquidity issue, by using set up to address the liquidity issue, by using set up to address the liquidity issue, by using funds to support the lending activities of mortgage lenders in a sustainable manner.

The increased liquidity also helps to reduce risk premiums on mortgages for borrowers. A mortgage refinancing company takes mortgage portfolios from primary lenders such as banks by either extending wholesome loans collateralized by the mortgages or directly buying the mortgage portfolios, where the primary mortgage lender is bound to replace defaulted mortgage loans. The mortgage refinancing company then packages the portfolios into securities such as bonds and issues these in the capital market, with typical clients being private institutions, pension funds, insurance firms, and so forth. To attract investors, the mortgage-backed securities typically offer higher interest rates in comparison to government securities. To make sure that the securities and the underlying mortgages match in duration, the MRC manages its balance sheet by turning over its debt through extension of medium-term loans.

In Africa, mortgage refinancing companies exist in countries like Tanzania, Nigeria and Egypt, where they have been able to expand the respective mortgage markets. In Tanzania, the mortgage portfolio grew by 206.1% between 2011 and 2017 since the inception of the Tanzania Mortgage Refinancing Company (TMRC) with mortgage tenures growing from an average of 5-7 years before the institution was formed to an average of 15-25 years as at 2018. Meanwhile, Nigeria’s mortgage portfolio grew by 82.6% between 2010 and 2016 with mortgage tenures increasing from an average of 5-10 years to 15-20 years following the establishment of the Nigeria Mortgage Refinancing Company (NMRC).

We hope that once operational, the KMRC will lengthen mortgage tenures to at least 20 years which should bring down mortgage monthly payments by 14% assuming interest rates remain 13.6%. Overall, we expect that the impact of mortgage refinancing companies will be critical for the development of mortgage sector and the overall economy in Kenya, especially in making mortgages affordable to lower mid-income earners. Additionally, the availability of long-term fixed rates can help provide a degree of certainty which can help the real estate markets develop with confidence.

Wacu Mbugua is a Research Analyst at Cytonn

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    February 3, 2020 at 6:03 am

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