Effects of Inflation and Interest Rates on Mortgage Finance Offered by Commercial Banks in Kenya

Abstract

Mortgage finance is the provision of finance or capital for housing. In Kenya the institutions that lend money for real estate projects include: banks, mortgage firms, saving and loans firms, insurance companies, government parastatals, pension funds, trusts and other real investment institutions. Unlike unsecured loan, mortgage finance is a secured loan whereby the mortgaged property acts as collateral by the customer as a pledge for security of the extended credit. This study sought to evaluate the effect of inflation and interest rates on mortgage financing by Kenyan commercial banks. To achieve this objective, the study employed a descriptive-correlation research design. Ten commercial banks offering mortgage finance in Kenya were considered. This research relied on secondary which was obtained from banks‟ annual reports and financial statements and the Kenyan Economic Surveys over a period of fives between the years 2008-2012. The collected data was edited, coded and entered for analysis using the Statistical Package for Social Sciences (Version 17.0) computer package. Both descriptive and inferential statistics were used. The research findings revealed that there was a strong positive relationship (R= 0.717) between the variables. The study also revealed that 51.4% of mortgage financing in Kenya could be explained by inflation and interest rates. From this study it was evident that at 95% confidence level, the variables produced statistically significant values and can be relied on to explain mortgage financing by Kenyan commercial banks. However, interest rates explain mortgage uptake in Kenya than inflation rates. The research findings were presented in pie charts, bar graphs, and tables for clarity. The findings of this study will be of great use to the government, lending institutions in formulating mortgage financing policies so as to promote the uptake of mortgage facilities in Kenya. Based on the research findings the following policy recommendations were proposed: The management of commercial banks should ensure that interests charged on mortgage facilities are competitive in the market so as to attract consumers of this product. The government should enact legislation which regulates the inflation and interest rates in the banking industry so as to protect the interests of both consumers and lenders in the market. The government should also enforce monetary and fiscal policies through the Central Bank of Kenya (CBK) so as to regulate money supply in the market.