Review of the Affordable Housing Bill 2023
Over the years the Kenyan government has put its best foot forward towards delivering affordable housing to its citizens. The current regime, since assuming office, has shown consistent commitment to addressing the existing housing deficit in the country, integrating housing and settlement as one of the five pillars of its Bottom Up Economic Transformation Agenda(BETA). The plan envisages delivering 250,000 new homes annually and growing the number of mortgages from 30,000 to 1,000,000, thereby increasing the percentage of affordable housing supply from 2.0% to 50.0% by 2027.
The Affordable Housing Bill 2023 represents a strategic attempt by the government to develop a pool of resources geared towards the provision of affordable housing. The bill was first tabled in Parliament on 7th December, 2023 by the National Assembly Majority Leader Kimani Ichung’wa, to cure for the issues raised by the High Court. The fundamental concept of the bill is the contentious housing levy; first introduced in the Finance Bill 2023 under Section 84. In November 2023, the High Court rendered it a blow, terming it as unconstitutional, primarily for its opaqueness and discriminatory nature. The court’s decision was anchored on the grounds that the levy lacked a comprehensive legal framework, in violation of articles 10 and 201 of the Kenyan Constitution regarding principles of public finance. In addition, the Court noted that the levy was discriminatory in nature, since it would only be subjected to Kenyans in the formal sectors hence leaving out those in the informal sector.
In a race against time, the government, through the Majority Leader has sought to regularize the levy through the Affordable Housing Bill 2023. Simultaneously, the bill also seeks to iron out the fiscal grey areas that were pointed out by the court. Having already gone through the first reading, the bill is currently in the public participation stage. It seeks to mandatorily deduct 1.5% of an employee’s gross monthly salary and have a matching 1.5% contribution remitted by employers on behalf of each employee from their payroll on a monthly basis.
The bill has outlined its fundamental objectives as; i) to give the right to accessible and adequate housing, ii) to impose a levy to finance the provision of affordable housing and associated infrastructure, and, iii) provide a legal framework for the implementation of the affordable housing levy, programs and projects. Putting the above-mentioned into consideration, the government continues to demonstrate efforts in addressing the critical housing issue in the country. However, the bill comes against the backdrop of the High Court ruling and remains contentious especially because of the legality issues surrounding it. The anticipation of interesting developments implies potential legal complexities and uncertainties in the near future, with regard to the implementation and subsequent success of the levy in bridging the country’s housing gap. In our topical this week, we review the Affordable Housing Bill 2023 by covering the following;
- Overview of the Kenya’s Real Estate Sector,
- Current State of Housing in Kenya,
- Analysis of Affordable Housing Bill 2023, and,
- Conclusion and Recommendations.
The Affordable Housing Levy
The Housing Levy was first introduced through the Finance Act of 2018, by way of amendments to the Employment Act, 2007. Under the levy, employers and employees were required to each make a contribution of 1.5% of the employee’s monthly basic salary to the Housing Fund, provided that the combined contribution did not exceed Kshs 5,000 per month. Persons who were not in formal employment or who were non-citizens were to contribute a minimum of Kshs 200 per month. The Fund was proposed to be under the control of the National Housing Corporation (NHC).
In September 2018, the Central Organization of Trade Unions (COTU) filed a suit, alongside lobby groups Consumer Federation of Kenya (Cofek) and the Federation of Kenya Employers (FKE) challenging the implementation of the housing levy which was set to take effect on 1st January 2019. COTU contested the implementation of the levy arguing it was unconstitutional and amounted to double taxation. The lobby groups also cited improper consultation of the policy by the government. This led to a court order suspending the implementation of the levy.
In March 2020, the Ministry of Housing set up several regulations regarding the structure and operations of the National Housing and Development Fund (NHDF) and presented the notice to the National Assembly in May for discussions and approval. Several key take outs from the notice were proposals to have; i) minimum monthly contribution of Kshs 200 to NHDF by all employees and employers who will be registered under the Fund, where the Kshs 100 was to be directed towards facilitating maintenance and operations of the Fund and the rest of Kshs 100 was to be directed to member’s housing fund accounts, ii) make the deductions voluntary and not mandatory as had previously been stated in the Finance Bill 2018, and, iii) providing full authority to the National Housing Corporation (NHC) in the disbursement of loans to local authorities, organizations, companies and individuals for purchase and construction of affordable units, at an interest rate that will be adjustable from time to time. However, since the Ministry of Housing tabled the Housing Fund regulations in 2020, there were no amendments made to the deduction rates on wages until the Finance Act 2023.
In May 2023, under President Ruto’s government, the Cabinet Secretary for the National Treasury submitted the Finance Bill 2023 to the National Assembly for consideration for enactment into the Finance Act 2023. Among the various proposals in the bill was the re-introduction of the mandatory housing levy set at 3.0% of the employee’s gross monthly income, to be matched with the employer’s contribution that would be remitted to the National Housing Development Fund (NHDF). The deducted amount was required to be remitted to the collection agent by no later than the 9th of the subsequent month following the deduction, and the cumulative deduction should not surpass Kshs 5,000. The main objective of the levy was to raise funds from various sources aimed at providing affordable housing to Kenyans. On 26th June 2023, the President assented the bill to the Finance Act 2023 which allowed the Treasury to begin collection of the levy.
It is essential to highlight that, prior to its enactment in June 2023, the finance bill precipitated the submission of constitutional petitions from various parties which challenged the constitutionality of the legislative process that resulted in the enactment of the Finance Act 2023.
In November 2023, a three-judge bench of the High Court ruled on the petitions, declaring the levy unconstitutional, on the basis that it was discriminatory in nature as it was to only be imposed on workers in the formal sector, disregarding those in the informal sector. The Court noted the policy was discriminatory, irrational, arbitrary, and in violation of articles 27 and 201 (b) (i) of the constitution regarding principles of public finance. Additionally, the court ruled that the introduction of the Employment Act by section 84 of the Finance Act 2023 lacked a comprehensive legal framework in violation of articles 10, 201, 206, and 210 of the constitution respectively. Following the ruling, the High Court granted the government stay orders, allowing the National Treasury to continue with the collection of the levy for 45 days.
Subsequently, in December 2023, the Affordable Housing Bill was tabled in the National Assembly with the intention of addressing the issues raised by the High Court. The bill which was first tabled on 7th December 2023 is currently in the public participation stage. Alike previous legislations, it has not been without its challenges. Public participation was set to commence on 9th December 2023 to 28th December 2023 by the National Assembly through a published notice. In response to the short notice period, a Kisumu based lobby group moved to court under a certificate of urgency to halt the intended public participation on the Affordable Housing Bill 2023. On 20th December 2023, the Kisumu High Court ordered the halting of the public participation on the bill pending the hearing of an inter-party application. However, despite the court order barring the exercise, the National Assembly has scheduled public forums and hearings across 19 counties commencing on 17th January 2023.
The Court of Appeal will on 26th January rule on the government’s application, seeking orders that suspend the High Court decision which declared the housing levy unconstitutional.
Recommendations and Conclusion
We recognize the efforts made by the bill to establish a legal structure for the affordable housing levy and address concerns raised by the High Court. Nevertheless, certain aspects of the bill necessitate additional consideration and resolution for enhanced practicality. In this regard, we present the following recommendations to the Kenyan government and all stakeholders involved in the implementation of the Housing Fund;
- Informal Sector Compliance: We note that the strategy for ensuring monthly deductions for the housing levy in the informal sector remains unclear. While it's straightforward to deduct from salaried Kenyans with pay slips, the same cannot be assumed for those without such documentation. It is therefore crucial for the government to provide a clear explanation of how it intends to ensure optimal compliance in the informal sector, as the current lack of articulation has resulted in speculation and uncertainty,
- Explicit Exemption Criteria: The bill needs to explicitly outline all circumstances warranting exemptions from mandatory contributions to the Levy. As it is, the bill does not expressly specify a list or provide clearly defined criteria for exemptions from the Levy, as is the case with other legislated Acts in the property sector. These include but are not limited to Stamp Duty and Capital Gains Tax Acts. The absence of a clearly defined list or criteria for Levy exemptions in the bill requires to be addressed in order to ensure transparency and promote public trust and compliance,
- Construction Approach and Risk Mitigation: The government should refrain from directly engaging in unit construction to mitigate potential citizen losses and avoid potential financial risks through government led projects, as well as to ensure timely project delivery,
- Alternative Development Approaches: Instead, the focus should be on emulating successful models employed in countries such as the United Kingdom and Zimbabwe, where the government promotes self-builds through providing serviced plots affixed with essential infrastructure either at a subsidized cost or free of charge to its citizens. It is worth noting that most governments are increasingly encouraging self-builds by offering citizens plots serviced with infrastructure (roads, footpaths, drainage) and utilities (water, electricity). Alternatively, the government ought to pursue more Public-Private Partnerships (PPPs) where under such arrangements, the government offers land and leaves construction and financing to developers. These approaches relieve the government of the responsibility of overseeing construction and subsequently the burden of funding developments,
- Optimized Fund Allocation: We propose the funds collected be used only towards the acquisition and provision of land, development of supporting infrastructure, strengthening the mortgage plan, and off-taking units from developers. This entails dividing the funds among three key areas: firstly, investing in the creation of essential infrastructure on land provided by the government; secondly, acquiring completed units from developers and thirdly, facilitating the provision of affordable home loans through the Tenant Purchase Scheme (TPS). In essence, the aim is to ensure a well-balanced distribution of resources to address infrastructure needs, expand housing finance availability, and make homeownership more accessible through affordable financing,
- Eligibility and Allocation Criteria: The bill provides that to qualify for affordable housing units, individuals must be Kenyan citizens aged 18 or above and possess an identity card. This implies that anyone able to meet deposit requirements, set as a percentage of the affordable housing unit's value (e.g., 10.0%), and having all necessary documentation, can apply for a unit, irrespective of whether or not they already have a house. However, there is a need for a more structured eligibility and allocation criteria prioritizing individuals with greater housing needs. This includes those currently without homes or living in informal settlements. This approach will foster and ensure a more equitable distribution of resources,
- Eliminate Ambiguity: The bill defines affordable housing as housing that is both adequate and costs no more than thirty percent of an individual's monthly income to rent or acquire. In principle, any residence, regardless of its cost, qualifies as affordable housing if the associated rent or mortgage payment constitutes less than 30.0% of a person's monthly income. This definition is therefore vague and needs refinement to eliminate any ambiguity as to what will constitute affordable housing under the legislation,
- Impose Milder Penalties: The proposed penalty in the Bill, set at 3.0% of the total unpaid amount to be remitted to the Fund, has sparked concerns over its severity. In the current harsh micro-economic environment, this harsh penalty could exacerbate the financial strain on businesses. As such, reducing it would strike a balance between enforcing compliance and recognizing the economic hardships faced by employers, thus fostering a more equitable approach in challenging times, and,
- Provide a Complete List of Agencies: While the bill establishes an eligibility criterion for affordable housing applicants, an ambiguity arises from the lack of specificity regarding the approved agencies to which formal applications must be submitted. This uncertainty could pose challenges for prospective applicants, as they may be unable to identify the specific entities responsible for processing their applications. Clarity on the list of specified agencies is crucial for ensuring a transparent and accessible application process, thereby promoting fairness and inclusivity in the distribution of affordable housing.
In conclusion, the recommendations outlined above are essential for refining and enhancing the effectiveness of the proposed affordable housing legislation. These refinements aim to create a robust framework that aligns with successful international models and optimizes the allocation of resources for a sustainable and equitable affordable housing solution in Kenya. In addition, the success of the Housing Fund levy in contributing to the Affordable Housing Program (AHP) will depend on the government's ability to effectively engage with stakeholders, address concerns raised, and ensure compliance with the set regulations.
For more information, please see our Review of the Affordable Housing Bill 2023 topical.
