The causes of non-performing mortgage loans in Kenya's Residential property market

Abstract

Mortgages have generally been understood to comprise the lending of money by mortgage financial institutions against the security of a fixed property that should hold a value greater than that of the value advanced. This view creates the impression that mortgage financing is generally low risk as the value of the property covers the loan and so the loan is adequately secured should there be a default in repayments. The reality however is that mortgage financial institutions experience bad debts similar to and in some cases of higher levels than found in the banking industry as whole. Interest rates on mortgages in Kenya have fluctuated between 18 per cent and 30 per cent in the last 10 years. In addition to this, economic growth in the country has been slow, with some years registering negative growth. For example in year 2000, the country registered a growth rate of negative 0.3 per cent (lEA, 2002). This has led to economic woes in the productive sectors of the economy and such consequences as retrenchments as firms and industries were forced to shut down or reduce their operations. This not only led to reduced demand for new mortgages because of rising unemployment but also to a high number of mortgagees who have been unable to service their loans as per the mortgage contracts. Mortgage defaults have led to financial institutions experience high levels of non performing loans Unfortunately, lenders have not identified with the problems facing their customers. Instead of offering discounts on interest rates and more lenient repayment terms in order to recover their money, they levy additional payments as a punishment for a mortgagees incapacity to pay, equating incapacity with unwillingness to pay. They appear to be in a position of power and often facelittle or no competition as borrowers have experienced when their properties are auctioned. This study has sought to identify the main causes of non performing mortgage loans from both the borrowers and mortgage finance companies. The main ones have been identified and expounded. The study has also sought to identify the solutions from the perspectives of borrowers and lenders as well as those advanced by Central Bank of Kenya, which is the regulator of financial systems and practices in the country. Various recommendations which are aimed at reducing the current high level of non performing mortgage loans have been given as well as measures which would ensure that the mortgage finance system is equitable and sustainable.