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15 May, 2023

The National Housing Development Fund (NHDF) aims at Expanding Access to Affordable Housing Finance in Kenya.

The Housing Act Cap 117 1967 stipulates that a Housing Fund is a public funding platform for affordable housing. The National Housing Corporation is responsible for overseeing and managing the fund, where it consolidates contributions from formal and informal employees in both the public and private sectors, as well as from local authorities, companies, and societies. The amount of contributions to the fund is determined by the Parliament and may be changed periodically and be either rendered voluntary or mandatory. Introduced in 2018 under Section 6 (1) of the Housing Act since the enactment of the Housing Fund section in 1967, the main objective of the NHDF is to provide affordable finance solutions for homeowners for the purchase of affordable homes through; i) the Tenant Purchase Scheme (TPS), ii) creation of a housing portal that will integrate all services regarding supply, demand, and accessibility of the affordable housing, update on the progress of AHP and availability to financial resources by registered members such as mortgage and, iii) implementation of an affordable Home Ownership Saving Plan (HOSP) that facilitate tax-advantage contributions from employees, employers, and self-employed individuals. Additionally, the Housing Fund will bridge the demand for affordable housing accessibility by low and middle-income earners and increase the supply of affordable housing units by private developers under a special agreement known as the Offtake Agreement.

National Housing Corporation (NHC) is mandated to; i) draw down the framework for the operations of the fund, ii) how the consolidated funds will be managed, and iii) come up with alternative measures to ensure efficiency and sustainability of delivering the goal of the fund in enabling the success of the AHP. Additionally, the NHDF was established with a self-sufficient and cost-effective financial structure aimed at addressing the demand for affordable housing in Kenya from the following sources;

  1. Statutory and voluntary contributions: the fund will accumulate funds from contributions made by self-employed employees and employers to the National Housing Development Fund as stipulated in the current Finance Act Section 31. However, the required amount deducted from the income of such individuals has faced major legal hurdles, especially from workers' and Employers' lobby groups, with the labor courts suspending the statutory contributions regulation. The latest statutory provision is contained in the Finance Bill 2023, which suggests a mandatory 3.0% deduction of gross income per month of employees in both the public and private sectors, with employers matching the amount to a maximum of Kshs 5,000 per month. Through the National Housing Corporation, every contributor is allocated a Housing Fund account, where all the monthly contributions will be accumulated in the account over the period of contribution. However, any member is allowed to increase their contributions to the account voluntarily, which shall reflect in their account.
  2. Debt and Borrowing: The Housing Fund will also obtain short-term capital from local banks and Development Finance Institutions (DFIs) through credit lines and warehouse funding. Additionally, the fund will issue mortgage-backed securities (MBS) in the local capital markets, just like the Kenya Mortgage Refinancing Company (KMRC), to lower funding costs for tenant purchase scheme homeowners. The MBS will be issued in the following categories:
  • 0 – 5 year Short-term/money market notes which will target money market funds and short-term investors and banks,
  • 5 – 10 year Medium-term notes which will target banks, insurance companies, and fund managers,
  •  10 – 20 years Long-term notes, which will target pension funds and life insurance funds, and
  •  20 – 25 years Equity and Residual investments which will be retained by Housing Fund.
  1. Other sources of income include rental revenue from completed stock, grants, and returns from the fund's investments.

NHDF provides several benefits for the government in bridging the supply and demand sides of the AHP and making the fund sustainable for the future. Such benefits include; i) mobilization of the public and private capital effectively, ii) consolidation of all relevant stakeholders in the housing sector, iii) incorporation of the private sector in the fund, and iv) minimizing project risks and guaranteeing quality housing. However, the NHDF has faced several challenges that have rendered it almost inefficient since its inception in 2018. One of the biggest hurdles has been numerous legal battles and opposition by the public and lobbies that govern and protect the interests of employees and employers with regard to the proposals made for the implementation of the Housing Fund.

One of the major recent development that is aimed at improving the NHDF is the introduction of the Finance Bills 2023, which proposes an introduction of a new amendment in Section 31 of the Employment Act. It recommends a 3.0% deduction on the basic salaries of both public and private sector employees who qualify for the low-cost housing scheme. This deduction will be matched with another 3.0% from their respective employers before the 9th of the following month after the deduction was made, and the total deduction will not exceed Kshs 5,000. The contribution will be directed to NHDF with the aim of financing the construction of 200,000 affordable houses annually across the country and also offering affordable financing solutions for employees who qualify for affordable housing to purchase housing units under the AHP.

In regards to those who will be eligible for the affordable housing scheme, the bill has proposed the Cabinet Secretary for Housing and Finance formulate new regulations for the qualifications of eligible members in AHP. This is even after an existing regulation that states that each year, the state will then run a lottery system to allocate the houses available among the contributors paying for the houses. This is to allow for equal distribution and prevent the contributors with a stronger financial muscle from acquiring all the houses available and subsequently renting them out. Additionally, high-income earners who are ineligible for the low-cost housing scheme will need to wait for seven years or until retirement to transfer the funds to a retirement benefits scheme or a pension scheme fund. Alternatively, they can opt to receive their savings in cash as part of their income, which will be taxed at the prevailing rates. The contributions will also get a rate of return based on the returns made by the fund at the prevailing conditions of the economy.

It is worth taking into account that according to the Economic Survey 2023 by Kenya National Bureau of Statistics (KNBS), there are approximately 3.0 mn wage employees in the formal public and private sectors. Additionally, the average monthly gross income for Kenyan wage employees in the formal public and private sectors came to Kshs 72,130 in 2022. Therefore, with a 3.0% deduction from gross income going through, the government expects to collect Kshs 2,164 from each employee and the same amount from the employer every month. Therefore, the fund expects to collect up to Kshs 156.6 bn annually, which is set to increase onwards regarding growth in the average monthly gross income and wage employment annually.

To ensure the effectiveness of Kenya’s NHDF, it is essential to address certain issues that can be identified by drawing from the structure and operations of case studies. As such, we recommend taking the following actionable steps to ensure the success of the NHDF;

  1. Provide Incentives to Encourage Participation: To encourage participation in the Fund, the NHDF should provide incentives such as tax breaks or matching contributions to encourage employers and employees to contribute to the Fund. In Nigeria, the National Housing Fund (NHF) exempts all fund contributions from payment of taxes. In Kenya, with the passing of the Finance Bill 2023, contributors of the Fund who will not be eligible for affordable housing will have their benefits taxed at prevailing rates upon withdrawal after seven years. In our view, tax exemptions of accrued benefits will not only encourage saving and participation by contributors but will also assist in encouraging broad-based public support for the initiative,
  2. Introduce a Tiered System of Levy Deduction: China’s Housing Provident Fund (HPF) Provisions allow cities to set varying contribution rates depending on their limits of urban areas. As such, major urban areas in China have higher set contribution rates compared to the rest of the country. The NHDF should consider introducing a tiered system for the deduction levy. For instance, employees working in Nairobi, Mombasa, and other major urban towns can have a higher percentage of deduction, while those in smaller towns and rural areas can have a lower percentage. The variation in the deduction levy can be based on the cost of housing in each region, as well as the average income of employees in those regions. This will ensure that the deduction levy is affordable and equitable for all employees regardless of their location,
  3. Promote Equitable Contribution: The proposed Finance Bill 2023 suggests that both employers and employees will be required to make a mandatory contribution to the Housing Fund at a rate of 3.0% of the employee's monthly salary, with a maximum cap of Kshs 5,000. This means that high-income earners who receive Kshs 500,000 monthly will have Kshs 15,000 deducted from their gross income, and with an equal match from their employers, the total contribution will be Kshs 30,000. However, due to the maximum cap of Kshs 5,000, the high-income earners will only contribute Kshs 2,500, representing only a 0.5% deduction, with the employer's similar match summing up to Kshs 5,000.  Conversely, low-income earners who earn the current minimum wage of Kshs 15,000 will contribute Kshs 450, with an additional Kshs 450 from their employers, leading to an increased financial burden for low-income earners.

On the other hand, high-income earners will have less money in their Housing Fund accounts relative to their gross incomes, which will not be sufficient to purchase a decent home after contributing for a very long time. The low-income earner will generate a significant amount of money in their fund account after a certain period of contribution for the purchase of affordable housing units. Therefore, to promote equality and fairness, NHDF should consider eliminating the Kshs 5,000 maximum cap should the bill pass into law to reduce the financial burden on low-income earners and enable high-income earners to generate more significant finances from the fund after a certain period of contribution for purchasing decent houses,

  1. Regular Revision of Contribution Rates: In China, Housing Committees set Housing Provident Fund (HPF) contribution ratios based on existing economic conditions and conduct annual reviews to adjust contribution rates accordingly. The NHDF can adopt a similar approach to tailor contribution ratios to the country’s macro-economic environment to avoid overburdening contributors and conduct regular reviews to ensure that the rates are equitable and affordable for all contributors,
  2. Optional contribution for existing homeowners: If the Finance Bill 2023 is enacted into the finance act, all income earners will be required to make monthly contributions to the Housing Fund irrespective of whether they already own homes or not. To ease the burden of mandatory contributions, NHDF should contemplate making the contributions voluntary for existing homeowners. This way, homeowners would be encouraged to save towards acquiring a second home without being compelled to do so. However, this raises concern as to which criteria the government will use to determine existing homeowners, particularly in rural areas where household data is almost non-existent compared to urban areas. As such, the government must formulate a framework that outlines the criteria for determining who qualifies for an exemption to ensure equitable treatment of existing homeowners with regard to the mandatory contributions. Moreover, contributions to the Fund should be voluntary, granting all contributors autonomy to decide whether or not they wish to participate in the Fund,
  3. Creation of Awareness and Encourage Public Participation: The NHDF should prioritize educating the target contributors about the Fund to discourage resistance, low compliance, and eventually failure to raise the targeted funds. Public participation in all reform stages and activities should also be encouraged to incorporate contributor views and promote seamless Fund operationalization,
  4. Compliance: The government should implement policies to improve compliance and achieve the fund's objectives, particularly in the private sector, where employers may avoid contributions. In the case of Nigeria, one of the main challenges facing the initial NHF was non-compliance by intended contributors (corporate and individual) and non-remittance of the deductions made by employers. However, a revised bill introduced penalties and suctions with the aim of driving compliance and,
  5. Working on Enhancing Private Sector Funding to Supplement Government Funding: So far, capital formation efforts by the government have predominantly focused on public sector funding through taxation. The government should enhance policies that will catalyze private sector fund formation through Real Estate sector unit trust funds, development REITs such as the proposed Kenya National Reits (KNR), and Real Estate Asset Back Securities. Private capital markets have an important role to play; as such, we need to focus on how to bring on board private sector funds into the initiative.

For more information, kindly see our topical on National Housing Development Fund (NHDF)