‘House prices should be right’

Kiyai: There is urgent need for automation of land registries and faster transfer of titles. (PHOTO: WILBERFORCE OKWIRI/STANDARD)

How can commercial banks in Kenya like Consolidated Bank encourage mortgage uptake despite the recent increase of Central Bank’s lending rates?

At a time when interest rates are rising, it is important for banks to underwrite cautiously and balance uptake to ensure that even as we attempt to increase mortgage uptake, borrowers are not struggling to repay. That notwithstanding, despite the increase in the Kenya Bankers Reference Rate by 1.33 per cent, most banks have not significantly increased interest rates for mortgages.

Some banks have absorbed some of that cost and increased tenure of existing mortgages to ease the burden on customers. Banks can also find other ways to fund their mortgage books other than customer deposits, whose pricing is largely pegged on the prevailing economic situation.

However, prudent underwriting is key to ensuring poor servicing does not lead to banks increasing the price of mortgages or totally suspending mortgage lending for segments that experience high default rates.

What Government policies would help banks in Kenya to increase mortgage uptake?

Banks have been lobbying the Government to reduce the cost of doing business in Kenya. From a mortgage perspective, the registration of titles still takes too long. There is urgent need for automation of land registries and faster transfer of titles.

Banks would also like to see much more affordable rates as a general principle and are making efforts in that direction. The reduction of operating costs and improvement of efficiency in the sector over time will help reduce costs and mortgage prices.

How has the devolved government affected mortgage lending?

Before devolution, most banks were financing mortgage developments and purchases mainly in major cities such as Kisumu, Mombasa and Nairobi with loan-to-value (LTV) rates in the region of 80 to 90 per cent.

They now offer similar financing facilities across their networks at between 70 and 90 per cent LTV to support acquisition of homes by Kenyans and construction of office space in the counties. Banks have also trained their sales staff countrywide to ensure proper underwriting standards to meet customer expectations and minimise risks.

What do financial institutions look for before financing a property development?

Financiers make sure the potential borrower demonstrates a stable and adequate source of repayment which could be either employment income, business income or income generated from pooling together. This is established from pay slips, account statements or financial accounts as applicable.

Other documentation required normally includes sale agreements in the case of financing acquisitions or bills of quantities in financing of a development or construction. Considerations like the right location of property also come to bare.

What are some of the challenges you have faced as a bank?

Our profitability has been in the decline over the last three years mainly because of non-performing loans. The bank grew pretty much in line with the industry over the last decade but was lagging behind in establishing the right credit underwriting and monitoring structures and standards that are essential in lending to medium and small size enterprises.

Between December 2014 and June 2015, mortgages have had the highest default rates followed by business loans. The bank has now implemented robust debt monitoring and collection strategies. The positive impact of these efforts is evident in the Sh45 million profits we reported in the first half of 2015.

What support and incentives are banks in Kenya giving to property developers and the construction industry?

Banks are increasingly funding property developers and the construction industry, extending project financing way above the developers’ immediate financial capacity and waiting to redeem the loans after completion and commencement of sale of the developments.

Banks are giving lower interest rates currently between 16 and 17 per cent for construction projects and a high level of financing of between 70 and 105 per cent of the project costs.

What is your advice to property developers?

Property developers should avoid plunging into projects head-on and instead think of the entire project from conceptualisation to sale. Where possible, they should engage professional project managers to assist in getting suitable financing and avoid getting into losses when banks have to foreclose and take over to complete the developments.

End products should also be priced correctly based on market demand and realistic project costs. In terms of demand, there is a serious shortage of housing units for low and middle-income earners. This is an area developers should target.