Affordable housing finance

Navigating risk for longer term credit: A case study on developing a comprehensive Tenant Purchase Scheme Credit Policy for the Kenyan housing market

January 16th, 2025

Tenant Purchase Schemes are gaining traction as a way to drive home ownership and sale of residential units in Kenya. They are a means of home ownership where a buyer typically occupies a housing unit and pays for it through periodic instalments (mostly monthly) and ownership is fully transferred after the payment of the last instalment.

Tenant Purchase Schemes in Kenya have previously been offered by a mix of public and private developers such as the National Housing Corporation (NHC), the National Social Security Fund (NSSF), HFDI (the investment and development subsidiary of the HF Group), and the County Pension Fund among others.

One of the major challenges that developers have experienced over time in Tenant Purchase Scheme programmes is managing payment defaults from Tenant Purchase Scheme buyers. These defaults consequently affect the credit profiles of the developers, in turn affecting their ability to raise appropriate financing for projects, further slowing down the development of the housing sector.

It is with this background that Financial Sector Deepening Trust Kenya (FSD Kenya) engaged AIS Capital Advisors to support Mi Vida Homes in developing a comprehensive Tenant Purchase Scheme Credit Policy. The assignment sought to: 

  • Identify and analyse the key risks involved in the Tenant Purchase Scheme structure 
  • Create a risk profile framework that will help assess the operational capacity and credibility of potential Tenant Purchase Scheme servicer 
  • Recommend a risk rating criteria and methodology to categorize TPS tenant applicants based on their credit risk level. 
  • Develop a comprehensive Tenant Purchase Scheme Credit Policy Document including: 
    • Risk framework 
    • Risk rating criteria 
    • Risk profiling tools 
    • Policies and procedures for Tenant Purchase Scheme 
  • Support Mi Vida in profiling 50 Tenant Purchase Scheme buyers with at least 10 expected to come from the informal sector. 

The engagement was initially meant to support the development of a credit policy for Mi Vida’s Tenant Purchase Scheme-backed housing development financing structure.

Under the framework to finance housing projects using securitisation of receivables from the Tenant Purchase Scheme, Mi Vida planned to offer returns of 18% per year to investors compared to prevailing government bond interest rates in the region of 14.5%, offering investors an attractive risk premium.

However, before the financing framework was implemented, government bond rates went up to 16.9-18% effectively making the pricing of the Tenant Purchase Scheme backed financing scheme unsustainable. If the developer was to increase the investor returns to make the financing structure more attractive, this would in turn increase the required monthly Tenant Purchase Scheme payments, limiting uptake and making the Tenant Purchase Scheme backed financial structure unsustainable, illustrating how vulnerable developers are to changing macroeconomic conditions.

Further, for the Tenant Purchase Scheme-backed financing to work, buyers were required to make a substantial down payment (34%) of the housing unit price to offset some of the developer’s financing costs during the construction period, before Tenant Purchase Scheme cashflows were received. While instalment payments during construction can reduce the overall outstanding principal, they also mean that borrowers start repaying the Tenant Purchase Scheme before occupation of the units, which impacts the affordability of the units. 

Mi Vida therefore decided not to pursue the Tenant Purchase Scheme option due to a combination of the above factors.  However, following discussions with FSD Kenya, AIS Capital Advisors continued with the assignment and is awaiting profiling of Tenant Purchase Scheme customers from an alternative developer.  

Tenant Purchase Schemes in Kenya 

Tenant Purchase Schemes have been a longstanding feature of Kenya’s housing market, with public entities like the National Housing Corporation (NHC) and the National Social Security Fund (NSSF) playing a pioneering role in their introduction. NHC, with its roots dating back to 1953, has a particularly rich history of Tenant Purchase Scheme implementation, having successfully delivered 9,074 units through 73 projects across Kenya between 1965 and 2012. (NHC has a housing portfolio that does not include Tenant Purchase Scheme, offering several projects on outright sale terms i.e. downpayment of 20% of the purchase price and balance within 90 days from the date of the offer letter). NSSF also maintains a robust Tenant Purchase Scheme offering, with Tenant Purchase Schemes offered in projects including Nairobi’s Nyayo Estate, Embakasi, Kitisuru, Mountain View and Hazina Estate South B. 

The main Tenant Purchase Scheme offerings in the Kenyan market typically have down payments of 10-15% of the unit price with repayment periods of between 10 to 15 years at fixed interest rates of between 13-15% on reducing balance. Interest rates may be adjusted upwards in line with the interest rates environment.  Examples of Tenant Purchase Scheme including Mi Vida’s envisioned Tenant Purchase Scheme, comparison of monthly rental payments vs Tenant Purchase Scheme payments and affordability analysis are described in the Tenant Purchase Scheme Credit Policy. The report on the development of a Tenant Purchase Scheme Policy is available here.

Tenant Purchase Scheme Credit Policy  

This phase of the assignment involved developing a comprehensive Tenant Purchase Scheme Credit Policy document including: 

  • Risk framework 
  • Risk rating criteria 
  • Risk profiling tools  
    • Credit risk scorecard with quantitative and qualitative scores 
    • Risk treatment and mitigants 
    • Risk action plan and reporting guidelines 

The Tenant Purchase Scheme Credit Credit Policy is available here is included in Appendix 1 of the report.

Credit Risk Scoring Tool 

The Credit Risk Scoring Tool was created in MS Excel to determine credit risk level of Tenant Purchase Scheme applicants. The tool was developed with Mi Vida Homes as a case study, but the intention was for the tool to be applicable to any Tenant Purchase Scheme provider to analyse the Tenant Purchase Scheme applicants’ creditworthiness through credit risk scoring.

Please note that this is a draft tool that was designed based on a proposed methodology drawing on the authors’ experience and incorporating various factors that are typically considered in housing credit assessments, such as income, repayment capacity, and market conditions, to provide a best-effort approach to estimate Tenant Purchase Scheme creditworthiness. Therefore, the tool is subject to future testing and validation given the lack of historical data that would be necessary for conducting thorough analysis and refining of the tool’s accuracy. The tool was initially developed with the intention of testing with 50 applicants from Mi Vida’s Tenant Purchase Scheme, however, since the property developer decided not to move forward with the Tenant Purchase Scheme, a replacement Tenant Purchase Scheme will be sought for the testing. 

The tool was not designed to work in isolation: A Tenant Purchase Scheme involves a long-term financial relationship between the offeror and purchaser, therefore for use of the credit tool, it is expected that Tenant Purchase Scheme offeror would have a credit department, supported by credit officers.

While the credit tool allowed for a systematic and standardised approach to evaluating credit applications helping to streamline the decision-making process and ensure efficiency and consistency in credit assessments, it is not a replacement of the credit department. It is expected that the Tenant Purchase Scheme developer will maintain a credit department that is responsible for monitoring and adaptation of the tool in line with changing market conditions, ensuring that it remains relevant and effective in capturing evolving credit risk factors, prudent decision making through applying expertise and experience interpret the results of credit analysis, customer relationship management and effectively communicating credit decisions to customers. 

The department should provide rationale behind those decisions and continuously improving creditworthiness, compliance and portfolio monitoring. Credit officers are expected to proactively manage their Tenant Purchase Scheme portfolios and identify potential default risks and employ strategies to mitigate risks. 

Credit Risk Rating criteria and methodology   

Credit risk assessment will consider all forms of income (formal and informal).  In developing the risk rating criteria for the Tenant Purchase Scheme, applicants were classified into formal sector and informal sector with quantitative and qualitative assessment criteria developed for both.

The Tool works by having a credit officer input preset scores against multiple qualitative and quantitative criteria depending on information provided by an applicant and supporting documentation. The credit officer can also select the weighting of each criterion depending on the risk appetite of the organisation in question. In the initial version of the tool, all credit questions were equally weighted. Assessment begins at the application stage where all information required from applicants is requested and processed as summarised in figure 1 below. 

Figure 1: Risk assessment process summary 

 

Scoring Criteria in the credit scoring tool are summarised in the table below: 

The criteria in the screening stage are converted into aggregate numerical scores that then categorise applicants into high risk, medium risk and low risk categories which are then used to make a credit decision to accept or reject applicants based on the Tenant Purchase Scheme provider’s risk appetite. The table below illustrates the risk levels and score thresholds for the credit rating tool.  

Table 1: Risk levels based on aggregate scores 

Based on an applicant’s total score and the risk thresholds, the credit rating tool allocates a risk rating and resulting decision.  

The report on the development of a Tenant Purchase Scheme Policy is available here.

The credit rating tool can be found here with an instruction manual here

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