Is 100% mortgage financing realistic?

Beatrice Chege, Kenya Commercial Bank’s head of mortgage finance, sounds more of an operations manager of a ‘housing charity’ organisation than an employee of a regional banking service. The bank is giving clients 100 per cent financing to build homes. Now, that sounds too white to be true, huh? Well, in an interview held in a small boardroom with a wide window overlooking the expansive green hills of Nyamirambo, Chege insisted that KCB wants Rwandans to actualise ambitions to own their dream homes. “You see all those empty spaces out there?” she said, pointing at the plots of land seen through the boardroom window, “they have owners, most of whom want to build homes, but have no financing.” So what the bank did was to design a mortgage product where a client must own land on which the bank can provide full sponsorship for them to construct a home. That is the 100 per cent dream-come-true the banking is selling. However, other commercial banks see KCB’s approach like bringing the moon within human grasp. Rival bankers likened it to the ‘subprime mortgages’ that are largely blamed for having sparked off the 2008 financial crisis that almost crushed the US economy. Sub-prime mortgage is normally made out to borrowers with lower credit ratings. As a result of such a rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. ‘100% not feasible’ Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage in order to compensate for carrying more risk. Anand Sanjeev, the managing director of I&M Bank, said sanctioning a 100 per cent mortgage financing to a client with no personal savings was out of the question for the bank at present. “At I&M Bank, we don’t do that although we believe we have the best mortgage deals on the market,” Sanjeev said. A source at Bank of Kigali (BK), the biggest commercial bank per share holding, also said they only work with clients who have capacity to contribute to their dreams. A credit officer with Banque Populaire du Rwanda (BPR) said, “Banks have different levels of risk appetite, but one like ours that mainly deals with low income earners might not be in position to offer such a product.” Yet some experts in the banking sector believe KCB, which was formed in 1896 in Kenya, did the required permutations en route to launching the product. “Every bank has its special strategy to make money and while the offer might sound risky, in business, the bigger the risk the larger the money,” a source at Eco Bank, who preferred anonymity in order to speak freely, said. Eco Bank launched its own mortgage products a year ago targeting regular salary earners, but clients have to contribute at least 20 per cent of the total value of the home; the bank gives up to 80 per cent at an annual interest rate of 16 per cent over a 10-year period. I&M Bank’s Sanjeev said when the client meets their end of the bargain (20 per cent), the bank provides 80 per cent of the value at 15.5 per cent interest rate repayable in 20 years. In a recent interview, central bank governor John Rwangombwa told The New Times, “It’s an interesting product given our local housing challenges but we are also watching it closely under our general regulatory obligation of the banking sector.” Risky greed KCB’s mortgage is worrying because by lending to low capacity clients, the bank’s exposing itself to too much risk. At a time when the central bank says bad loans are on the rise, most commercial banks are careful who to lend to in order to minimise non-performing loans. Between January and June, banks rejected some 4,946 loan applications with a total value of Rwf54.8 billion. The central bank, in its August monetary policy and financial stability statement, said lack of project profitability contributed 40 per cent of all rejected loans, 18 per cent lacked collateral, 16 per cent had outstanding loans with other banks while 14 per cent had a very bad credit history. Originally, like other banks, KCB used to demand that mortgage clients save 20 per cent of the property value, but Chege said clients did not have that either. Literally, KCB chose to waive off the 20 per cent, a move rival banks deem to be having “more than normal appetite for risk.” But KCB, which has branches in Uganda, South Sudan, Burundi and Tanzania, says the 100 per cent model is unique to Rwanda mainly informed by the nature of its clients here. This assertion is supported by a 2012 housing survey commissioned by the City of Kigali that found that 96 per cent of city dwellers cannot access housing finance as it is limited to earners with monthly income of at least Rwf900,000. The survey said this bracket of earners make up a paltry 4 per cent of Kigali’s total population. No risks While its rivals think the undertaking is risky, KCB says they have covered against those fears.“The 100 per cent mortgage comes with an inbuilt insurance cover, including life of the client,” Chege said. It is like buying a car. KCB struck a deal with Soras, an insurance firm, to provide risk cover for all the mortgage assets. So, before the bank sanctions the 100 per cent funding, the client must pay out a mandatory amount with Soras to cover the risk so that in case of, say death, the insurance company compensates. “Both the bank and the client are fully covered. If the client dies, Soras pays the bank the full amount of the property’s worth and hands over the home to the deceased’s kin,” Chege said. If one loses the job and, therefore, the salary, KCB says they negotiate ‘crisis terms’ with the client to craft a flexible repayment model until they find a new source of income. “For example, a client could agree to pay just the interest repayable… the objective is to ensure you own the home,” Chege added. Critics, however, maintain that KCB’s policy sounds too good to be true. Most banks insist on working with clients who have capacity to contribute to their dreams. (File) Eric Rutabana, a former banker who currently manages a risk-buying fund, said while banks are flaunting what appears to be attractive mortgage products, consumers should be careful not to fall prey to sugar-coated products. Rutabana said interest rates on mortgages should be lower than what banks are charging because mortgages are safe loans that have automatic collateral, the property. He added that banks make it hard for a client who wants to transfer from one expensive bank to another with lower rates. ******************* Will KCB’s grand mortgage model work? If you earn a net salary of Rwf600,000 a month, you qualify for a house of not more than Rwf20 million (this based on calculations done by KCB officials during this interview). The reasoning is that what the bank gives you depends on how much you earn; but the loan is only charged on 50 per cent of one’s net. This means with a Rwf600,000 salary, the home buyer would part with Rwf263,000 per month for 20 years. “Our interest rates are not fixed, they may fluctuate depending on the market situation but vary between 13.5 and 17 per cent,” Chege said. When the client accepts these terms, and has land on which to construct, the bank enters an agreement with the prospective home buyer, and starts releasing funds in phases. “We don’t give money to clients in one-go. Instead, on completion of the foundation, the bank supervises and, if satisfied, releases funding for the second phase until the house is complete,” Chege said. But the bank also struck a deal with Region Holdings, a property investment firm that agreed to construct low budget homes for low salary earners such as those earning Rwf600,000 per month. Kefa Angwenyi, Region Holdings’ managing director, said once the client reaches an agreement with the bank, a tripartite agreement, is signed between the bank, the developer and the client and that the money is released in phases to the developer on behalf of the client. What KCB did was to task Region Holdings to develop modern home designs that can be funded on a small budget of below Rwf35 million. These are basically two or three bed-room apartments built in an estate design. “The problem is most Rwandans want big sprawling homes, which, for the most part, is not necessary and unaffordable. It’s an imported mentality,” George Odhiambo, KCB’s head of business and client services, said. In Region Holding’s upcoming housing estate of about 50 units up in Gacuriro, Angwenyi said at least 20 clients of those who have booked space are KCB clients. KCB officials said the beneficiaries in the project have already been screened and qualified.

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Is 100% mortgage financing realistic?