Kenyan banks tighten rules to cover risks in real estate

Tuesday November 02 2021

From left: NCBA Group MD John Gachora, KCB Group CEO Joshua Oigara and Kenya Bankers Association CEO Habil Olaka during the launch of a mobile loan product in 2019. FILE PHOTO | NMG


Borrowers will be required to provide additional security in the event the value of collateral on loans, mainly land and building, depreciate during the loan period to cover for default

Kenyan borrowers with collateral whose value has depreciated will now be required to provide additional security as banks move to tighten lending terms.

It is estimated that over $37.1 billion worth of securities held by big banks are tied in the real estate amid reports that the value of some properties have dropped.

The EastAfrican has learnt that as part of the precautionary measures the lenders will demand additional security from borrowers in the course of the loan repayment period when the value of the existing collateral drops to a level below that of the loan amount.

The latest tightening of the lending standards comes as it emerged that the country’s top lenders are heavily exposed to the real estate sector by holding collaterals estimated at over $37.1 billion, raising fears of massive losses should there be a property bubble in the economy.

According to the Kenya Bankers Association (KBA), lenders will carry out frequent revaluations of charged properties and in the event that the value of the property is found to be below the value of the loan, the borrower will be required to provide additional security.


“Obviously there is always a risk in terms of over-concentration in a segment and it is not just property but any segment. When there is over-concentration in a segment and when there is a movement in the price you feel it almost immediately so properties are no exception,” the association’s chief executive Habil Olaka told TheEastAfrican in an interview last week.

“You need to get the valuer to revalue the collateral to ensure that you are still within the required parameters. If you find that you are below some of the requirements it will mean that you require additional collateral from the borrower just to safeguard yourself and ensure that at any point in time you have adequate cover.”

According to KBA, banks will only accept the property as collateral whose value is several times bigger than the value of the loan being applied for.

“The first cushion that banks normally take is what we call the loan-to-value ratio where you ensure that you put the ratio as low as possible so that the value of the collateral covers the value of the outstanding loan by a multiple. This means that in the event the value of the property you have taken as collateral goes down you are still not underwater,” said Mr Olaka.

“You start by ensuring that at the point of the initiation of the loan facility you are adequately covered through the loan- to-value ratio that is sufficient.”

The EastAfrican has also leant that banks are looking at possible alternatives to the traditional collaterals to avoid a huge concentration of risks in real estate.

“A number of alternatives have come up including our very own movable assets.

‘‘You can use those as alternative collaterals including the actual stock that you are financing as the primary collateral and take land and building as additional. But the primary collateral is something different from land and building,” said Olaka.

According to analysts at the global investment banking firm EFG Hermes, 20 financial services companies led by 12 commercial banks had put a massive $42.9 billion of their investment into the property last year, with banks exposure through their real estate collaterals accounting for $37.1 billion of the total exposure by the financial services sector.

The analysts through their report dubbed Whispers from Kenya: Property bubble, probably not, but don’t overlook the risks show that KCB is the most exposed listed bank in the property sector with Ksh2.06 trillion ($18.72 billion) worth of investment in the sector.

It is followed by Equity (Ksh637.45 billion, $5.79 billion), NCBA (Ksh368.17 billion, $3.34 billion), DTB Group (Ksh348.55 billion, $3.16 billion), I&M Group (Ksh307.86 billion,$2.79 billion).

Others are Co-operative Bank (Ksh279.42 billion, $2.54 billion), HF (Ksh114.46 billion,$1.04 billion), Stanbic Holdings (Ksh106.35 billion,$966.81 million), Family Bank (Ksh96.08 billion, $873.45 million), Standard Chartered Bank Kenya (Ksh89.81 billion, $816.45 million), Absa Kenya (Ksh88.05 billion,$800.45 million) and Bank of Baroda (Ksh80.17 billion,$728.81 million)

“In our opinion, the quoted sector most at risk of a potential property bubble is the financial services sector and in particular investment companies, insurers and banks,” reads the report.

According to the report, the Kenyan property market shows no signs of a bubble but the risks for this economic circle should not be overlooked.

“We think structural changes are needed to improve the outlook, which looks stagnant at best. If not, the bursting of this bubble could have a significant impact on listed financial services companies and in particular, the banks,” said the report.

Property market

However, other analysts and property consultants are of the view that the Kenyan property market is not ripe for a bubble as there is no over-supply of properties and banks have tightened their lending standards

“Basically there is no property bubble in Kenya because there is not enough borrowing going on.

‘‘The market can’t collapse without a huge amount of borrowing. On the residential side that can be seen through very few mortgages,” said Ben Woodhams, chief executive of the property consulting firm Knight Frank.

According to Cytonn Investments, there are stringent underwriting rules and credit is extended to only creditworthy individuals in Kenya as opposed to the Japanese market, at the time of the bubble, when there was excessive lending with credit being extended to un-creditworthy individuals as long as one had property to use as collateral.

Analysts at Cytonn Investments argued that unlike in a bubble, where most of the demand is driven by speculators, Kenya has a genuine demand of approximately two million housing units, and has been growing annually by an estimated 200,000 units, with the majority of the demand mainly in the low and middle-income levels.

Additionally, uptake of housing units remains relatively high at approximately 20.9 percent per annum on average.