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21 March, 2022

The Kenya Mortgage Refinance Company (KMRC) was established as a key institution to support the Affordable Housing Pillar of the Government of Kenya’s Big 4 Agenda. It was incorporated in April 2018 as a non- deposit taking financial institution under the supervision of the Central Bank of Kenya with the single purpose of providing long-term funds to primary mortgage lenders (Banks, Micro Finance Banks and SACCOs) in order to increase the availability and affordability of mortgage loans to Kenyans.  The company was licensed by the Central Bank of Kenya (CBK) in August 2018 and began operations in September 2020.

In terms of products, KMRC offers two key loan products that include;

  1. Affordable housing loans: These are loans extended to Primary Mortgage Lenders (PMLs) to re-finance mortgage loans capped at Kshs 4.0 mn in Nairobi Metropolitan Area (Nairobi, Kiambu, Machakos & Kajiado) and Kshs 3.0 mn in other parts of the country to individual borrowers whose monthly household income is not more than Kshs 150,000. The loans are issued at a fixed rate of 5.0%, and,
  2. Marketing housing loans: These are loans extended to Primary Mortgage Lenders to re-finance mortgage loans above the Affordable Housing loans threshold of Kshs 4.0 mn, and income greater than 150,000.

In January 2022, KMRC got approval from the Capital Markets Authority (CMA) to roll out a Kshs 10.5 bn medium-term bond programme. The firm aimed to raise Kshs 1.4 bn during the first tranche of issuance in February 2022. The first tranche issued recorded an oversubscription of 478.6%, attributable to the attractive returns offered by the bond of 12.5%, receiving bids worth Kshs 8.1 bn. KMRC only accepted bids worth Kshs 1.4 bn since the bond did not have a green shoe option. In light of the above, International Finance Corporation (IFC), an international financier, announced plans to buy Kshs 4.2 bn worth bonds from the Medium Term Note Program (MTN). If successful, since the purchase is expected to be on the second tranche, this will make IFC an anchor investor to the mortgage lender’s MTN, with a 40.0% stake of the bond. IFC owns 11.8% of the KMRC shares as at 30th September 2020, having invested Kshs 213.7 mn in the KMRC during formation.

The bond programme will position capital markets as a source of funding that supports the affordable housing initiative, which is one of the pillars of the Big Four Agenda. The capital raising activities by KMRC are highly welcome especially in light of the obstacles in the Kenyan capital markets in terms of access to financing which have limited private sector’s participation in the development of affordable housing. These obstacles include lack of sufficient real estate funding sources coupled with high dominance on banks as a source of funding. According to the World Bank, capital markets contribute a mere 1.0% of Real Estate funding in Kenya, compared to 60.0% in developed countries.

In order to help increase house ownership levels, reduce the ever-widening housing supply gap and help diversify sources of capital, the following can be implemented to accelerate funding for KMRC;

  1. Develop a Clear Financing Model: KMRC should come up with a comprehensive funding mechanism to prevent a negative spread between the lending rate and the borrowing rate. KMRC could either:
  • Refinance at cost which would mean no spread for the facility, as well as competition from treasury bonds which is approximately 13.5%-13.9%, possibly leading to undersubscription,
  • Refinance lenders’ mortgage portfolios using finance from the World Bank and other shareholders’ equity as they build up on entry to capital market,
  1. Increase Capital and Investor Confidence through Listing in the Stock Exchange: KMRC should in its long term plans look to list on the Nairobi Stock Exchange (NSE) in order to increase funding and grow investor confidence.,
  2. Increased Transparency: Many market participants have questions about the sustainably of the funding model and sustainability of the 5% lending rate, it would be constructive for KMRC board and management to come out and address this market concern, and,
  3. Source Funding from International Debt Markets: To accelerate funding, KMRC should in its long tern plans consider issuing bonds in the international market to raise a larger pool of resources to refinance mortgages.

For more information, please see our topical on Kenya Mortgage Refinance Company (KMRC) Progress.