Friday, February 25, 2011

Kenya mortgage market crimped by low pay, high rates -report

February 17, 2011, 4:00 pm

By Helen Nyambura-Mwaura NAIROBI (Reuters) - Fewer than one in 10 of Kenya's urban dwellers can afford a mortgage, while rural incomes are too low for a mortgage market to develop, a central bank and World Bank study showed on Wednesday. The potential mortgage market in east Africa's largest economy is worth around 1.1 billion shillings. But it is crimped by a lack of access to long-term funds, low incomes, credit risk and high interest rates as well as a large informal employment sector such as small-scale farmers, traders and others. Kenya's total mortgage debt is only 2.4 percent of gross domestic product, and outstanding mortgages stood at just 61.4 million shillings as of May 2010, though that was up from 53.8 million in 2009, according to central bank statistics. The number of loan accounts doubled from 2006 to 2010 but still stood at only 15,049 as of May last year. "The report computes that about 8 percent of the urban population would be able to afford a mortgage loan. That's equivalent to about 3-4 percent of the total population of Kenya," said Simon Walley, a senior World Bank housing finance specialist. Only 1 percent of Kenyans earn more than 2.7 million shillings annually and another 4 percent make 1.8 to 2.7 million shillings, the report said. Half of the urban population earns less than 343,964 shillings a year. Kenya has an annual housing need of 210,000 units against supply of 50,000 houses. The urbanisation level is projected to hit 50 percent by 2030 from 39.7 percent in 2009. The average mortgage is for 3.2 million shillings paid over 15 years at a rate of 14 percent. "You can look to reduce interest rates gradually by improving efficiency and look to offer longer-term mortgages and lower the cost of housing," Walley said. Developing access to mortgages would help higher income earners but the needs of the majority of the population would still go unmet, the report showed. Other solutions such as building more efficiently and having affordable loans from savings and credit cooperative societies, or creating incentives for developers to build for rent, could improve access to mortgaged housing for low income earner. "If you have a system where landlords are secure and can invest in quality housing and put services in and still get a return, you can look at an expansion of good quality, safe rental housing in an urban context," Walley said.

Tuesday, February 1, 2011

Hire Purchase On Its Death Bed

Winsley Masese  Daily Nation
31 January 2011
Nairobi — Along Nairobi's Luthuli Avenue sales people employ all the tricks in and out of the book in a bid to woo customers into their electronic shops.
Successful ones manage to sweet-talk a potential customer or two who end up either with a purchase or offer a promise to return for an item or two the next time they are around those areas.
"This is a cash and carry shop but we have to sometimes negotiate the prices," says Mr Peter Mwaura, a shop owner. It is a picture replicated across the capital city and the country at large.
But a short distance from Mr Mwaura's shop; is a well-stocked outlet with all manner of household goods. Yet few, if any, customers seem to be walking through its doors.
Has lost lustre
This is not surprising because it is an indication of how the hire purchase business, once a hugely popular mode of payment in Kenya, has lost its lustre. At its peak between the 1970s and 1990s, hire purchase was a favourite mode of buying household goods, electronic assets like radios, TVs and fridges, utensils and furniture.
Demand and competition was so intense such that dealers invoked various marketing strategies, the most popular being Kenya Broadcasting Corporation radio programme, Sanyo Juu Sanyo Tops by veteran broadcaster Fred Obachi Machoka.
"The removal of foreign exchange controls opened the floodgates for electronic items coming into Kenya heralding a major challenge to the hire purchase industry," Mr Ernest Wangai, the managing director of Kenya Credit Traders (KCT), one of the hire purchase firms in the country, told Smart Company in an interview.
Besides KCT, other household names in the hire purchase business, include Africa Retail Traders (ART), indeed the oldest and Amedo Centres Kenya Ltd, the franchise holder for Singer Sewing and Singer knitting machines in Kenya.
KCT managing director said scrapping of the requirement that one must get a licence from the Kenya Broadcasting Corporation to own a TV set or radio also changed the playing surface for hire purchase dealers overnight.
"Acquiring and, therefore, possession of, especially television sets and radios was no longer in the hands of a select few," said Mr Wangai.
Ms Catherine Ngahu, executive chair at SBO Research, however, reads from a different script." The decline of hire purchase came as a result of increased access to financial services especially personal loans, from either financial institutions or savings and credit cooperative societies (Saccos) to most Kenyans," she said.
Ms Ngahu said increased accessibility especially by teachers who formed the bulk of hire purchase clients, found it easier to take loans whose proceeds they could then use to purchase the items they needed.
"It gave them the flexibility of choosing the item, dealers and even time of acquiring it," she added. She said that the idea of repossessing the "hired" item in case of failure to repay for it also played a great role in the system's decline.
Lack of independence in the system in form of guarantors etc, which banks and Saccos offer, saw a majority of the customers fall out with the former," Ms Ngahu said.
This is understandable. Besides the final cost of the item being by far higher than its actual price, the hire purchase process is cumbersome since it needs things like a guarantor and letters from the employer.
For instance, if one pays cash, a 32-inch good quality LCD television set costs about Sh44,820. Acquiring it through ordinary hire purchase, one has to pay a deposit of Sh6,860 and subsequent monthly instalments of Sh3,090, for a period spread over 20 months.
By the end of the repayment period, a hirer with a guarantor, as it is the requirement with most hire purchase dealers, would have paid an additional Sh23,440, 52 per cent more than the cash price.
Check off system
If a customer is employed, especially as a civil servant, he or she can opt for the check-off hire purchase system where he or she has to, among others, provide a letter of approval from the employer.
Alternatively, if a customer is employed and is a member of a Sacco, he or she can take a loan to buy the item while repaying the loan. As a business model, hire purchase system has inherent challenges.
Mr Thomas Mutugu, a senior lecturer at the University of Nairobi and consultant in strategic marketing and brand building, said weak or lack of effective marketing of hire purchase as a viable and available mode of payment has hindered the system's visibility in the market.
"The success of credit depends on how efficient debt collection is, besides the commission paid to those involved, which is a challenge to the system," said Mr Mutugu.
Even operators admit it is a challenge. "You have to perfect the art of collecting the monthly instalments. Otherwise, you will not survive in this field," said Mr Wangai.
Unbeknown to many Kenyans, unlike other dealers who value the high-end market, hire purchase dealers try as much as they can to avoid it. "They live in secluded areas thus making it difficult to repossess the items when they default on payments," says the KCT boss.
Another challenge has been defaulting when customers, especially civil servants, have committed much of their salaries to repaying other loans.
A report, Introduction of a Payroll Deduction Management Service, revealed in July last year that some civil servants took up loans and hire purchase schemes that consumed all their salaries. This is beyond the two thirds (of salaries) allowed by the government to cater for their other needs.
In a bid to address the challenge, the government signed an agreement with Payment Solutions Kenya late last year to enable hire purchase operators to access the credit history of civil servants before a transaction is made.
The Union of Kenya Civil Servants has, however, called upon authorities to cancel the deal. The system, if effected, will develop and run the payroll management service to validate all payroll data with a view to verifying employees' credit status before they get loans from banks, microfinance institutions and hire purchase organisations.