This archive report was first published on 21 September 2019.
When Land or House Turns into Bad Debt ¶
Published on September 21, 2019, at 5:00 PM
Francis Wanyeki, a 55-year-old surveyor turned real estate developer, had a vision for a 10-acre piece of land in Kitengela in 2012. He saw 70 three-bedroom houses, manicured lawns, and tarmac roads. However, fast forward to 2019, and he sees the land as a potential source of liquidity if he can sell it as serviced plots for Sh7.5 million.
Wanyeki was shocked to discover that even with the rate cap, banks could charge as much as they wanted once a borrower fell behind on mortgage payments. This led to undefined penalties on banks, forcing Wanyeki to adopt a new method of remaining relevant in business. He now sells serviced plots, but even this is not attracting buyers.
"Banks risk assessment fear is hindering easy approval of loans," Wanyeki says, standing on a 50 by 100 serviced plot currently selling at Sh2.8 million. "Financing remains a key challenge developers are facing, and the major stumbling block when it comes to bank loans is the lack of penalties control definition. We need a capping rate of 20 per cent and minimize penalties charges on delayed loan repayment," he adds.
According to Jared Osoro, the Kenya Bankers Association director of research and policy, borrowers can try shopping around for another lender if they are distressed. If the property is auctioned, the borrower is entitled to the money paid up to the point they fell into distress.
"The law is that you can only auction at market value, whatever state. The lender can only recover the portion that is outstanding, and the rest is due to you legally," Osoro explains.
The rise in default is opening up conversations at the insurance sector on whether there are enough products that can save a borrower in case of a default. Peter Kagia, a general life insurance at Monarch, says that initially, insurance just covered lenders but now even those taking the mortgage are seeking cover.
"What insurance usually pays is the interest on the mortgage for a period of time not exceeding nine months. It's not for the full period of service but to allow you to get back on your feet," Kagia says.
Andrew Chimphondah, the Shelter Afrique executive officer, attributes project failures or stalling of projects to improper feasibility studies, inadequate financing, and capped interest rates. He also notes that local banks have tightened their credit standards and introduced stricter rules of engagement, leaving the borrower at the mercy of the lender.
