Can the Housing Element of the Big Four Agenda Lead Kenya into a Financial Crisis?

In September 2018, the central bank governor Patrick Njoroge was financial crisis quoted saying that poor corporate governance in the banking sector can lead Kenya into a financial crisis.  His sentiments are not far from the truth since significant banks have come down due to poor corporate governance.  Chase Bank and Imperial Bank are perfect examples of how poor management can trouble Kenya’s financial sector. Although bad corporate governance is a threat to the financial sector, the vulnerabilities of the real estate sector pose the greatest threat to the economy.

The property market has been growing steadily in the past one decade where prices have increased insanely.  Since 2013, there has been allegation that the sector is experiencing a bubble that is likely to burst soon. In the recent past, the property market has experienced a slowdown that is characterised by a slow uptake of new properties especially high-end properties and commercial properties. As a result, developers have failed to honour their loan obligation which has increased the book value of nonperforming loans. The truth is that the property market is not experiencing a bubble but a mere slow down emanating from market maturity. The CBK report released in June 2018 revealed that the portion of the nonperforming loan in the gross loans increased by 1% to reach 12.4% in April 2018 a growth that was attributed loans advanced to property developers.

The government plans to build over 500,000 low-cost houses in five years which will amount to adding salt to the injuries of the already saturated property market. Some of these houses will cost as low as KSH 600,000 implying that buyers will prefer them to expensive properties offered by developers. The boom that was previously experienced in the property market attracted many real estate companies that pumped billions of shillings in developing properties for sale.  The largest portion of this money was borrowed from local financial institutions implying that failure to sell properties will compromise their ability to meet loan obligations. How will these dynamics in the property sector lead to a financial crisis?

A financial crisis is triggered by a collapse of financial institutions caused by a rapid drop of assets. Non-performing loans reduce assets, and their increase is a threat to the bank’s survival. Kenya can learn from the 2008 global financial crisis whose impact was first felt in the United States before spreading worldwide. It originated from a bubble in the housing sector that was triggered by changes in lending policies that resulted in banks issuing subprime mortgages. These are mortgage advanced to customers of poor credit rating whose risk of default is high that necessitates charging a high interest rate. Eventually, these borrowers started defaulting leading to a sharp decline of bank assets that resulted in collapsing of key banks in the US.  The collapse of some banks sent panic among bank customers who withdrew large sums of money that crippled the financial sector.

The ‘Big Four’ agenda can cause a financial crisis in two ways. Firstly, flooding the property market with cheap housed will make it difficult for developers to sell the already complete houses most of which are financed by local banks. As a result, the portion of nonperforming loans in banks will increase thus halting the operations of some banks not resilient enough to withstand the impact. Secondly, homeowners targeted by the government are poor households, and they may lack the capacity to finance the houses. The government low-cost housing project will be financed by banks and other partners implying that banks will be adversely affected when the home buyers default payments.

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