A credit guarantee system should promote access to mortgage loans

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The credit scheme or PCG is a financing model that provides cover to lenders in the event of default. [iStockphoto]

Kenyans in the informal sector can easily access property through programs such as partial credit guarantee schemes.

According to 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 rapidly transform the country’s housing sector.

The credit scheme or PCG is a financing model that provides cover to lenders in the event of default.

The study aimed to determine whether programs similar to those in Malaysia, Pakistan and the Philippines would work in the housing sector in Kenya.

Such a program has been proposed by the State Department of Housing and Urban Development and is under review by the National Treasury.

The government is proposing that PCG provide a 20% partial credit guarantee to banks for mortgage loans for projects under the Affordable Housing Program (AHP).

“This should encourage lending, especially to the informal sector which is widely considered a high-risk segment,” the study reads.

The study adds that the PCG program could be transformational if it can address key market constraints, especially in the informal sector.

“This would mean opening PCG to the market outside of the AHP program to achieve broader market transformation,” the study read.

Another study published in July 2022 by the Center for Affordable Housing Finance in Africa analyzed that the mortgage gap in the country currently has about 1.27 million households who fall in the income bracket of 50,000 to 150,000. shillings. Some 890,000 come from the formal sector and the rest from the informal sector.

“These 1.27 million households can potentially make up the total addressable market of the PCG,” the study says, adding that according to figures shared by the state Department of Housing and Urban Development, there are 600,000 affordable homes. at different stages of planning.

Lion’s Head Global Partners offers options on how PCG can be structured in-country in its pilot phase, one of which is 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 have set up a trust that provides PCGs for low-income housing to qualified financial institutions, while in Malaysia there is a mortgage guarantee program that offers first-of-its-kind protection. loss on the mortgage portfolios of participating real estate lenders.

The study notes that KMRC’s position as a wholesale mortgage lender gives it a clear view of mortgage portfolios across the industry and is therefore well suited to analyze risk, set price and operate a guarantee scheme. credit for the sector.

“However, since KMRC is still in the early stages of its rollout, it would need support in structuring, capitalizing and operationalizing the pilot program,” the study says.

“Additionally, KMRC was designed as a low-risk financial institution and should therefore incorporate a special purpose vehicle or trust to operate the pilot program,” he adds.

The other option is to structure the partial credit guarantee scheme under the Kenya Bankers Association (KBA) industry players. The advantage of the conspiracy program hosted by KBA is that it will leverage its convening powers within the financial sector and its track record across the industry.

The study builds on KBA’s success in other development and industry initiatives like Pesalink (a real-time money transfer service in banking) and the Kenya Green Bond program that the association led with Nairobi Securities Exchange, Climate Bonds Initiative, Financial Sector Deepening Africa and FMO-Netherlands Development Bank.

“Using an existing warranty provider leverages the organization’s existing resources and skills, ensuring effective product design, development and modification,” the study reads.

Even so, the study notes that implementation by KBA would still require technical capabilities that may not be found within these organizations and therefore they may need to develop specialist teams to implement the partial credit guarantee.

A special purpose vehicle would also be needed for this.

The study proposes a guarantee provider as an appropriate structure for the partial credit guarantee program. This is what the Philippines has through PhilGurantee, the leading state guarantee funding agency for affordable housing.

Under this structure, 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 based on the target market segment.

The pilot program may seek to explore partnerships with guarantee providers active in the Kenyan market, including African Guarantee Fund (AGF), GuarantCo, and multilateral and development finance institutions.

According to the study, using an existing warranty provider leverages the organization’s existing resources and skills, ensuring effective product design, development, and modification.

“It is recommended that the pilot program be structured under an existing guarantee provider such as GuarantCo as they have an established presence in Kenya and experience in providing guarantees for Kenyan projects, they are currently exploring the development of Kenya and they offer guarantees in local currency”, proposes the study.

The original proposal for the PCG structure was that it would guarantee up to 20% of approved loans and allow banks to provide mortgages at lower borrowing rates.

“In the event of default, lenders should follow standard mortgage recovery procedure and file a claim with the National Housing Development Fund for losses incurred (if any) up to 20% of the principal outstanding,” the statement said. study.

How it would have worked is that the PCG program would have been primarily funded by the National Housing Development Fund. Second, the PCG program would have attracted additional funding from insurers and development finance institutions (DFIs).

The National Housing Development Fund will then implement the program by transferring a 10% deposit (cash) and issuing a 20% partial credit guarantee (unfunded) to banks for qualifying mortgage loans primarily from informal sector borrowers.

Eligible credit institutions would then be refinanced by KMRC.

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