Credit guarantee scheme tipped to drive mortgage access

The credit scheme or PCG is a financing model that provides cover for lenders in case of defaults. [iStockphoto] Kenyans in the informal sector can easily achieve home ownership through programmes such as partial credit guarantee schemes. According to the Feasibility Study on a Proposed Credit Guarantee Model for Affordable Housing in Kenya by Lion's Head Global Partners, a UK-based investor and fund manager, this is set to transform the country's housing sector rapidly. The credit scheme or PCG is a financing model that provides cover for lenders in case of defaults. The study sought to determine if similar programmes as carried out in Malaysia, Pakistan and The Philippines would work in Kenya's housing sector. Such a programme was proposed by the State Department of Housing and Urban Development and is under review by the National Treasury. Government proposes that PCG provides a 20 per cent partial credit guarantee to banks for mortgages for projects under the affordable housing programme (AHP). "This is expected to encourage lending, especially to the informal sector which is largely viewed as a higher risk segment," reads the study. The study adds that the PCG programme could be transformational if it can address the key constraints in the market, especially within the informal sector. "This would mean opening up the PCG to the market outside the AHP program to achieve a wider market transformation," reads the study. Another study published in July 2022 by The Centre for Affordable Housing Finance in Africa analysed that the mortgage gap in the country currently has about 1.27 million households who fall within the Sh50,00 to Sh150,000 income band. Some 890,000 are from the formal sector and the rest informal. "These 1.27 million households can potentially be the PCG's total addressable market," the study reads adding that as per figures shared by the State Department of Housing and Urban Development, there are 600,000 affordable housing units in various stages of planning. Lion's Head Global Partners bounces options on how the PCG can be structured in the country in its pilot phase, one of them being that it be developed under the auspices of the Kenya Mortgage Refinance Company (KMRC). This is similar to Malaysia and Pakistan. For Pakistan, its mortgage refinance company and the government established a Trust which provides PCG for low-income housing to qualified financial institutions while in Malaysia there's a mortgage guarantee programme which offers first-loss protection on the mortgage portfolios of participating housing lenders. The study notes that KMRC's position as a wholesale mortgage lender provides it with a clear view of mortgage portfolios across the industry and is therefore well-suited to analyse risk, and price and operate a credit guarantee scheme for the sector. "However, given that KMRC is still in the initial stages of rolling out, it would need support for the structuring, capitalisation, and operationalisation of the Pilot Programme," says the study. "Additionally, KMRC has been designed as a low-risk financial institution and therefore would need to incorporate a special purpose vehicle or trust to operate the Pilot Programme," it adds. The other option is to structure the partial credit guarantee programme under industry players Kenya Bankers Association (KBA). The advantage of the plot programme being housed by KBA is that it will leverage its convening powers within the financial sector and its track records industrywide. The study leverages KBA's success in other development and industry initiatives like Pesalink (a real-time money transfer service within the banking sector) and the Kenya Green Bond Programme which the association carried out together with Nairobi Securities Exchange, Climate Bonds Initiative, Financial Sector Deepening Africa and FMO-Dutch Development Bank. "Using an existing guarantee provider leverages the organisation's existing resources and competency ensuring efficient product design, development, and modification," reads the study. Even so, the study notes that implementation by KBA would still require technical capabilities that may not lie within these organisations and so they may have to develop specialist teams to implement the partial credit guarantee programmes. A special purpose vehicle would be needed for this as well. The study proposes a guarantee provider as the suitable structure for the partial credit guarantee programme. This is what the Philippines has through PhilGurantee, the principal agency for state guarantee finance for affordable housing. Under this structure, it says, the guarantee provider would develop the PCG product for the target market segment and work with financial institutions to guarantee mortgages that meet specified eligibility criteria in line with the target market segment. The pilot programme can seek to explore partnerships with guarantee providers active in the Kenyan market including African Guarantee Fund (AGF), GuarantCo, and Multilaterals and Development Finance Institutions. Using an existing guarantee provider leverages the organization's existing resources and competency ensuring efficient product design, development, and modification, the study says. "It is recommended that the pilot programme is structured under an existing guarantee provider like GuarantCo because it has an established presence in Kenya and a track record of providing guarantees for Kenyan projects, it is currently exploring the development of Kenya and it offers local currency guarantees," the study proposes. The initial proposal of the PCG structure was that it will guarantee up to 20 per cent of the approved loans and allow the banks to provide mortgages at lower borrowing rates. "In case of default, lenders are expected to follow standard mortgage recovery procedure and lodge a claim from the National Housing Development Fund for loss incurred (if any) up to 20 per cent of the outstanding principal," the study says. How this would have worked is that the PCG programme would have been primarily funded by the National Housing Development Fund. Then PCG the programme would have attracted supplemental funding from insurers and Development Finance Institutions (DFI). The National Housing Development Fund will then implement the programme by transferring a 10 per cent deposit (cash) and issuing a 20 per cent partial credit guarantee (unfunded) to banks for qualifying mortgages primarily from informal sector borrowers. Eligible lending institutions would then be refinanced by KMRC.

Credit guarantee scheme tipped to drive mortgage access

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