Business Nation – Nairobi

Relief as RBA allows contributors to use savings to guarantee mortgages 

By Steve Mbogo  (email the author)

Posted Tuesday, June 16 2009 at 00:00

Pension funds regulator has issued new regulations allowing contributors to use their savings to guarantee house loans, unlocking the security hitch that has barred millions of Kenyans from home ownership.  The new guidelines published in the current edition of the Kenya Gazette allow contributors to use up to 60 per cent of accrued pension benefits to secure a mortgage from banks or an ordinary loan to repair an old house.  The move is expected to stimulate activity in the property market, whose fortunes have dwindled in recent months as the global economic recession has deepened, limiting the participation of Kenyans in the Diaspora, who were the main drivers of the 2004 – 2007 boom.  Under the new deal, pension contributors will use up to 60 per cent of the accrued benefit, which includes the employer’s contribution, the loan applicant’s and the investment income granted over the years, to secure the loan.   Commercial banks, mortgage financiers, building societies and micro finance institutions are the targeted lenders, which means individuals looking to own homes both in rural and urban areas will have a raft of financiers to turn to.  Institutions offering tenant purchase schemes such as local authorities, non governmental organisations and companies also qualify as financiers.     The cash will allow for purchase of land, building of homes, carrying out repairs on homes bought or inherited and cater for transaction costs such as legal and government fees.

Contributors are however barred from using their savings to purchase properties that have been partially financed by other mortgages or to guarantee loans more than once.   Use of pension savings to guarantee a mortgage loan is seen to be particularly supportive of young Kenyans, who have been locked out of the traditional home loans market that is tilted in favour of those with higher disposable income.   It is also a win for the self-employed – most of who have not been able to access home loans in a market that is tilted in favour of those in formal employment.

The advent of pension management schemes for the self-employed means those in the informal and agriculture sectors who have been unable to raise the security needed to access home loans will now enter the property market so long as they are enrolled with a pension fund.  Besides unlocking the home loans market to informal sector workers, the move is also expected to improve the country’s savings level by encouraging the large number of Kenyans who are currently not enrolled with any pension scheme to do so in order to access home loans and stave off old age poverty.

"We are looking at a major development in the real estate sector. This is an opportunity that opens up home ownership to millions of Kenyans, said Mr Nelson Kuria, the CEO of CIC Insurance company, an insurance that is also a pension services vendor.

This latest action by the Retirement Benefits Authority (RBA) follows in the footsteps of South East Asia economies such as Thailand, Malaysia, Philippines and Singapore that took similar action with huge benefits to their property markets.  Under the regulations published in the Kenya Gazette on Friday, pension contributors were eligible to start applying for home loans using their savings as guarantee starting June 12, 2009.

The process starts with an application to the pension manager for guarantee of loans to buy land or house.   The application is then evaluated by the scheme’s trustees and if accepted, the contributor can then approach a bank for the home loan.   The lenders are expected to ask the pension manager to present the guarantee to the financing institution as proof of the pensioner’s qualification for the loan.

Every scheme is however expected to come up with its own rules governing the guarantee.   RBA is demanding that pension managers make "adequate insurance arrangements" for the loan and the property before offering the guarantee.   The loan cannot also exceed the value of the property.  Pensioners will continue servicing their loans normally but can use 60 per cent of their pension to pay the balance.   Edward Odundo, the CEO of RBA, said pensioners qualifying for loan will not be required to pay legal fees and the stamp duty because banks will lump those costs together with the main loan.   "It gives an opportunity for the pensioner to acquire a house without paying a coin," he said.

In case of a default, the loan financier will sell the property and if the loan is not recovered, will get the balance from the scheme.   But this can only be up to 60 per cent of the accrued benefits, even if the amount is not adequate to repay the loan.   The property sector is also seeing major gains from the new development.

"It’s a positive move and a tremendous step forward," said Reginald Okumu of Ark Consultants.  The industry is foreseeing increased supply of the housing units as "fencing sitting" developers plunge into active development in anticipation of expected higher demand for property.  The new development will see a huge fraction of pension contributors hedge against housing inflation and acquire homes at lower prices.  Many are currently resigned to buying homes at retirement when they also face the challenge of ensuring that the investment does not erode their savings to a level where they have to live as beggars.

The guidelines open the door to early home ownership for all contributors except those who have fewer than five years to reach the retirement age prescribed in their employment contracts.   With the private funded pension scheme currently controlling assets of about Sh270 billion, it means the housing loans market will have access to about Sh162 billion of pension funds, which is 16 times what the market leader Housing Finance lent out in 2008.   Lack of financing and fear of taking up loans has led to a low demand for mortgage products in Kenya at a time when the country is reeling from an acute housing shortage.

The Kenya National Bureau of Statistics indicates that the demand for housing has outstripped supply— which stands at about 30, 000 units per year by five times — compared to a demand of 150, 000 units.  This is the demand that mortgage providers are looking at and which they say would translate to brisk business for home loan providers once pension assets are allowed to act as security for home loans.  The mortgage providers are preparing to claim a stake of the pensions industry growing asset base in a move that will dramatically change the fortunes of mortgage firms including Savings and Loans, Housing Finance and recent entrants like Stanbic Bank through increased demand for housing loan.

Transparency rules
Already, mortgage companies and lenders are said to be preparing new products for the new line of business.   Housing Finance earlier said it has developed a product to capture the business which it will unveil once the draft is enacted.  The lenders will be the principal partners of pension schemes in the new arrangement, according to the draft, which sets stringent transparency rules for the lending organisations that will partner with the schemes.   Such organisations will be required to apply for approval from the RBA and provide capitalisation, cash reserves and experience in the provision of housing products and services.  The guidelines also require scheme trustees to ensure that the loans are fully insured, a cost to be incurred by the pensioners.

Players in the pensions industry are upbeat that the proposed mortgage deal would act as a catalyst for more Kenyans to channel their savings to retirement schemes at a time when most Kenyans are not saving for retirement.  "It’s a huge incentive to the industry, and we are bound to see lots of activity in the pensions sector," said James Oyugi, the pensions manager at CFC Life, in an earlier interview.  The country’s retirement benefit coverage —the ratio of the working population covered by pension schemes — stands at 15 per cent, a poor comparison to the global average of 30 per cent.