The Kenyan mortgage market has been experiencing slow growth despite the upsurge of housing prices over the last few years. All commercial banks offer mortgage finance but still only a small percentage of Kenyans have used mortgages. The objective of this study was to establish the factors that hinder investors from accessing mortgage finance in Kenya. It assesses the effect of income level, property registration, mortgage cost and mortgage information on access to mortgage finance. The study involved a census survey of all the 44 commercial banks in Nairobi as published by the Central Bank of Kenya. The study used descriptive research that presented the results by use of graphs, tables and pie charts. Primary data was collected through issuing questionnaires to the credit analysts in these banks at their head offices in Nairobi. Credit analysts have more information about access to mortgages as they are involved in appraisal of all applications before any approvals are made. These questionnaires were then collected at a later date. Data analysis was done through a regression equation which analyzed the relationship between the factors and access to mortgage finance. The results showed that, the most important factor affecting access to mortgage finance was income level, a low income level increases the chances of defaulting in repayment and also determines affordability to meet the monthly payments. Therefore, high income investors formed the majority of applicants for mortgages. For the cost of mortgage factor, the majority of mortgage applicants require fixed rates of interest. For the property registration, without a title deed, one cannot obtain a mortgage due to lack of collateral for the mortgage. Finally, mortgage information also affects access to mortgage finance but to a little extent. The study recommended for banks to change the design mortgage products with low repayments for the low income groups which would enable them access mortgage. The government should form efficient policies in registration of properties and issue of title deeds to support the mortgage market.

Background of the Study 
Mortgage financing is a loan whose collateral is real estate property requiring the borrower to repay over a specific period of time in form of installments (Bienert & Brunauer, 2006). The credit offered is mainly used by individuals and companies to purchase or construct houses after which they are required to repay the mortgage over a long period of time. Owning a home has been one of the main investment demands that many Kenyans have been looking for in their effort to stabilize their income. Despite the huge demand for homes, only few Kenyans have applied for mortgage financing to enable them acquire property (Smith, 2012). The Kenyan mortgage market has improved over the last 10 years but the mortgage uptake is still low as only 11% of the urban population have used mortgage finance in acquiring property (Smith, 2012). 

There have been various developments in the Kenyan mortgage sector which are aimed at increasing the uptake of mortgage loans. In regard to this, pension-backed securities were introduced in 2009 by Housing Finance hence allowing borrowers to use up to 60% of their retirement benefit, held by their scheme providers, as security for mortgages (Banking in Kenya, 2012). However, still there has been a low uptake of these loans as recorded by the mortgage financing institutions. Housing finance data collected in 2012 recorded 24 mortgage loans secured by pension benefits and yet there were about 400,000 registered members in all 1200 registered pension schemes in Kenya (Smith, 2012). However, this collateral does not exclude the use of property as the primary security for the mortgage. 

In 2006, there were only 7,600 homes registered in Kenya which later rose to 20,000 homes by the year 2012 (Smith, 2012). The mortgage market has raised many expectations especially in the current development of government counties. CBK undertook a survey in order to assess the performance of residential mortgage market through the baseline survey conducted in 2010 (Green, 2012). It revealed that the mortgage market remains untapped as only few Kenyans can access the mortgage products. Even for those who apply, not all of them are successful. This implies that not all property investors get access to mortgage finance. 

By June 2011, the increase in number of mortgage accounts that had been opened by the mortgage lenders was estimated to be 2,300 accounts, which is a relatively slow growth that has shown a clear picture that Kenyans do not go for mortgages to support their housing projects (Kiarie, 2011). This slow growth pace implies that many of the Kenyans use SACCO loans, their own savings and even personal loans to enable them finance their projects. This was a 15% rise in mortgage accounts having increased from an estimated 15,000 accounts as at May 2010 to about 17, 300 accounts as at the end of June 2010 (Smith, 2012). This is contrary to an estimated 30,000 houses that had been constructed during the same period. The majority of accounts comprised of real estate developers (Kiarie, 2011). 

By the year 2012, there were 764 mortgages accounts classified as non-performing loans which represented about 5% of the total mortgages accounts (World Bank, 2012). It has also been noted that the mortgage market in Kenya is very small as it cannot be sufficient to serve a population of 42million Kenyans (World Bank, 2012). From statistics, an estimate of only 700,000 outstanding mortgage loans has been made, and yet there are over 1.5 million middle-income families in Kenya who may take up mortgages (Wekesa, 2012). Various amendments to the Kenyan Banking Act enabled mortgage finance companies to operate current accounts that attract consumer deposits to expand their lending capacity. In this regard, Housing Finance Kenya launched its current account product in March 2012 (Smith, 2012). This has ensured that it has a high liquidity to facilitate the lending of funds to as many borrowers as possible. 

A survey undertaken by the CBK highlighted a few facts about the Residential Mortgage market in Kenya (World Bank, 2012). The value of collateral for outstanding mortgages by May 2010 was about Sh61.4 billion which by December 2011 had risen to sh91.2 billion ; a tremendous growth of 49 per cent (Central Bank of Kenya, 2011). It was also noted that five institutions were lending in the mortgage market and therefore dominated the market; Housing Finance (Sh25.7 billion), Kenya Commercial Bank (Sh18.1 billion), CFC Stanbic Bank Ltd (Sh8.8 billion), Standard Chartered Bank Ltd (Sh7.7 billion) and Barclays Bank Kenya Ltd (Sh4.3 billion). The number of mortgage loans were 18,200 in December 2011 up from 15,049 in May 2010 while the average mortgage loan size increased from Sh4.1 million in May 2010 to Sh5.7 million in December 2011 (Central Bank of Kenya, 2012). 

Currently, all commercial banks are offering the mortgage products. Even SACCOs have established a variety of mortgage products in an effort to promote the uptake of mortgages (Banking in Kenya, 2012). Clients can therefore obtain mortgages from these financial institutions. The products are designed to suit the needs of each of the individual investors. For instance, special products for the locals as well as foreigners have been made available to serve specific needs of lenders. The housing sector has improved in terms of development over the past few years whereby real estate has been among the best performing investments whose returns are very high especially through the capital gains (Smith, 2012). A vast majority of the investors do not use mortgages to acquire such properties; instead, they use their savings and business income to finance the construction of houses (Wekesa, 2012). A piece of land in Nairobi may be valued at double the price after a period of five years (Banking in Kenya, 2012). 

According to the World Bank (2012), Kenya’s mortgage market performance has dropped three places overall, to 109 out of 183 countries. In registering property, Kenya was found to involve many procedures and take 64 days (see figure1a in the appendix section). The Kenyan mortgage market has not been tapped to a large extent, it lags behind many countries (see figure 1b and 1c in the Appendix 2). By the end of year 2011, only about 16,000 mortgage loans had been offered in the market representing a value of Sh. 91 billion that accounted for 2.5 per cent of the Gross Domestic Product (World Bank Doing Business Report, 2012). 

Most people in Nairobi pay very high rents that consume a large proportion of their income. Besides high rent paid, real estate prices have skyrocketed over the past few years. In Nairobi alone, a two bedroom house can be valued between a price of 2million to 10 million shillings depending on the location or estate within Nairobi. On average, a one bed-room house can be rented between sh.7,000 to sh. 15,000 in the middle income areas in Nairobi (Maveke, 2013). Long-term mortgages attract an interest rate of 13%-20% p.a on the borrowings and hence the lowest monthly payments for a sh. 2 million mortgage, on average, are between sh. 30,000 to sh. 39,000 per month for a period of 10 years (Maveke, 2013). For mortgage application, the banks require the client to submit bank statements that will show ability to finance the mortgage. A down payment, of about 20% of the property value may be required besides other additional costs like legal fees and stamp duty (Banking in Kenya, 2012). 

The Kenyan mortgage industry has devised various innovative products for the mortgage finance sector which in 2012 had been estimated to be about 60 billion (Banking in Kenya, 2012). This industry offers both fixed rate mortgages and flexible rates mortgages. According to the World Bank report (2012), the fixed rate mortgages can cover a period of about 10-25 years but with a mortgage insurance to cover any losses or default by the lenders. In addition to that, the Retirement Benefits Authority’s allowed all pension contributors to secure mortgages on behalf of their members to facilitate access to mortgage products (Banking in Kenya, 2012). Further, housing micro finance provides mortgage finance to the borrowers who have low incomes. 

The mortgage market is still dominated by large banks which have been estimated to be holding more than 50% of the total mortgage asset portfolio (Maveke, 2013). The large banks include KCB, Standard Chartered Bank, Co-operative Bank, Barclays Bank and Equity Bank. Kenyan banks have used their aggressive expansion strategies to expand the mortgage market. In regard to this, new markets have now been represented in Uganda, Tanzania, Rwanda and Southern Sudan especially by Equity Bank. Many of these financial institutions are listed at The Nairobi Securities Exchange (NSE) so that they can be able to raise funds from shareholders for lending purposes through the stocks and borrowing from the public in form of bonds. The Co-operative Bank of Kenya has come up with a product called Good Home Mortgage which is aimed at meeting specific needs of Co-operative Societies and other unions. This assists the development of housing projects for the members of such SACCOs. The SACCOs have idle lands due to lack of adequate resources for development and therefore the product is best suited to meet their needs. 

Despite the variety of mortgage products available, the mortgage market still remains untapped as expected from the high demand for housing units. The Kenyans who access mortgage finance represent only about 11% of the Kenyan population (World Bank, 2012). 

Statement of the Problem 
Mortgage finance enables one to own property without necessarily having to save money for many years. In Kenya, the demand for housing is very high evidenced by the upward surge in prices across various parts in Kenya ( & Njiru, 2013). However, according to statistics by the World Bank, it has been shown that Kenyans who access mortgage finance are estimated at 11% of the total Kenyan population (World Bank, 2011). For instance, there were only 16,000 mortgage loans offered in the year 2011 and this represented Sh. 91 billion in value accounting for 2.5% of the Gross Domestic Product (World Bank Doing Business Report, 2012). This leaves Kenya behind compared to South Africa and Namibia with over 20%. In addition, the annual rate of growth of mortgage finance sector has been estimated at less than 3% per annum. This clearly shows serious challenges facing the mortgage market. 

In their research, Quercia et. al. (2012) noted that more restrictive credit score and down- payment have a disproportionate effect of reducing mortgage credit access especially for the lower-income borrowers. Boston’s researchers observed that loan lenders differently treat loan applicants on the basis of their credit history, financial leverage and collateral (Hunter and Walker, 1995). Kidundi (2010) carried out a study on the profitability of financing low cost housing but did not consider access to mortgages. Muguchia (2011) studied the effect of flexible interest rates on the growth of mortgage finance in Kenya but had only focused on interest rates as a factor and yet there are many factors that affect the uptake of mortgages. Further, & Njiru (2013) took a survey to establish the growth of the mortgage industry in Kenya with focus on the employees of the National Housing Corporation (NHC). This had only narrowed down to NHC which does not provide a comprehensive view given that most mortgages are obtained from commercial banks. So far, no specific study has been done on factors that hinder access to mortgage finance in Kenya. 

The study of what specifically hinders access to mortgage finance in Kenya will be very useful especially focusing on commercial banks. This shall facilitate the uptake of mortgage finance in Kenya. From all these studies, the researcher observed that cost of mortgage, income level, information and collateral may have some influence on loan lending decisions and therefore selected these factors for the study. From this study, possible solutions to the challenges facing mortgage financing shall be obtained. It shall also facilitate adoption of appropriate marketing strategies by the mortgage institutions in order to capture the huge market of existing and potential real estate investors. Finally, scholars who wish to undertake a research on a related subject in future will find it useful in choosing their topic.

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Item Type: Kenyan Topic  |  Size: 57 pages  |  Chapters: 1-5
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