The Role of Cooperative Societies in Creating ‘275 New Home Owners’ Daily
Provision of affordable and decent homes is a key priority for the government in achieving the long-term development agenda spelt out in the Vision 2030 and engrained in Kenya’s supreme law. The constitution emphasizes the right of every person to accessible and adequate housing as well as to reasonable standards of sanitation. When this is achieved, Kenya would attain the Sustainable Development Goal 10, which aims at making cities and human settlements inclusive, safe, resilient and sustainable.
As the government gears up to implement Medium Term Plan III, one of the key areas of focus, which is also part of the President’s ‘Big Four Agenda’, is a commitment to facilitate creation of 500,000 new home owners in the next five years. This means striving to create an average of 275 new home owners per day.
In Kenya, it is estimated that every shilling invested in housing yields seven to nine more shillings. As such, the housing industry has the potential to enhance economic growth while at the same time addressing key development issues. For example, the housing sector has a multiplier effect on job creation through sand mining, cement and timber production, mortgage lending, employment of real estate agents and retail of home goods. In addition, enhanced access to high quality and affordable housing has the potential of improving financial security and individuals’ quality of life, reduce expenditures on health, increase productivity, increase the sense of national pride, and lead to a socially cohesive population.
Kenya has an estimated annual demand of 244,000 housing units in different market segments against an estimated annual supply of less than 50,000 units. This massively outpaced supply has culminated in a housing deficit over the years. The situation is further exacerbated by an urbanization rate of 4.4%, the equivalent of 0.5 million new city dwellers every year. The first implication of this shortfall in formal housing is that the low-income earners and other vulnerable groups have turned towards self-built and informal settlements, which in urban areas translate to growth of slums. The second implication is the shortfall is the continuous rise in property prices, with Nairobi ranked as the highest priced city in Africa.
Availability of finance is a major constraint to growth of the housing market and a key challenge in realizing access to decent and affordable housing in the country. This element is two-faceted. First, the extreme costs associated with housing developments require a potential developer to acquire debt. Considering the high and fluctuating interest rates, time needed for construction as well as potential delays, the cost of debt usually weighs negatively on total financing, which is a key component of bringing down the cost for the end-user.
Second, access to finance is a constraint to a buyer as mortgage penetration rate in the country is low, standing at 3.15% of GDP in 2015. Furthermore, the few institutions that offer mortgage facilities tend to serve high and middle-income clients who have clear credit records, sidelining the low-income market. As a result, majority of informal sector borrowers are inclined towards incremental financing and self-construction loans, which are mainly provided by cooperative societies.
Cooperatives play a crucial role in providing affordable shelter by bridging the gap in the housing finance market in Kenya. For example, the National Cooperative Housing Union (NACHU) and Kenya Union of Savings and Credit Cooperative Society Ltd (KUSCCO), through housing schemes, are financing long term mortgages for individuals and societies to put up houses. In addition, most of the Savings and Credit Co-operative Societies (SACCOs) are offering large amounts of shorter medium-term loans for as little as 12% per annum, ideal for self-construction. The loans are typically unsecured or at least not secured with a mortgage line over a property and are more easily accessible for any amount of up to three times the savings balance the cooperator holds with the SACCO. Further, the housing cooperatives often facilitate members to pool resources to purchase land then offer some financing support for self-building. They may also act as full developers, with projects ranging from ten houses to several hundreds.
Currently, there are 1,980 housing/investment cooperatives with an asset base of Ksh 21 billion. While official statistics are unavailable, annual estimates show that the cooperative sector is providing over 10,000 housing loans, with 10% being actual registered mortgages. In fact, the share of cooperative society-financed housing in the country is approximated to be as high as 90%, with banks providing the remainder of the finance. And with a membership of 14 million, the cooperative societies then have a significant potential to bridge the existing housing gap.
Lack of adequate financing is, however, limiting the potential of the cooperative sector. SACCOs have only one main source of liquidity — member deposits — which are determined by households’ disposable income and saving culture of individuals. Without access to longer term sources of finance, SACCOs are unable to grow their loan portfolio. Besides, the large parcels of land owned by housing cooperatives lie idle as most of them are not adequately serviced with proper infrastructure to facilitate development of new housing schemes. Complex land administration structures; high cost of building and construction materials; inappropriate technologies; limited research on low cost technologies; as well as stringent planning regulations and standards are other challenges faced by cooperatives.
To encourage growth and development of the housing sector through cooperatives, the government has provided some incentives to housing cooperatives by lowering the number of housing units entitled for the 15% corporate tax relief from 400 to 100. Additionally, members of SACCOs are expected to start enjoying mortgage relief from July 2018. The State Department of Cooperatives together with other players in the housing sector are putting in place a comprehensive framework that will ensure investors in affordable homes get reimbursement for costs incurred in laying infrastructure, including roads, water and electricity.
However, to further enhance the role of cooperatives in provision of affordable housing, the government needs to re-structure and support NACHU to play its role as the housing federation and link it with strategic partners to mobilize long term financing to the housing sector. A special cooperative housing bond can also be established to lure the diaspora cooperatives to take part in the development of the sector. The government also needs to support servicing of land by facilitating infrastructure development as well as link housing cooperatives to information on low cost building materials and innovative technologies. In addition, providing land for cooperatives housing development would go a long way in reducing construction costs.
There is also need to strengthen the institutional structures of cooperative societies as well as building capacity for housing cooperative officials to bolster accountability in management of resources. Finally, it is important to conduct a baseline study to determine the actual contribution of cooperatives to the housing sector and assess the potential for expansion, especially in capturing a wider majority of the low-income group.
Author: Diana Lukalo,Young Professional, Trade & Foreign Policy Division