The World Bank Kenya Affordable Housing Finance Project (P165034) REPORT NO.: RES49778 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF KENYA AFFORDABLE HOUSING FINANCE PROJECT APPROVED ON APRIL 30, 2019 TO REPUBLIC OF KENYA FINANCE, COMPETITIVENESS AND INNOVATION GLOBAL PRACTICE EASTERN AND SOUTHERN AFRICA REGION Regional Vice President: Victoria Kwakwa Country Director: Keith E. Hansen Regional Director: Hassan Zaman Practice Manager/Manager: Alwaleed Fareed Alatabani Task Team Leader(s): Uloaku Oyewole, Isfandyar Khan, Sheila Kamunyori The World Bank Kenya Affordable Housing Finance Project (P165034) ABBREVIATIONS AND ACRONYMS CBK Central Bank of Kenya CMA Capital Market Authority E&S Environmental and social FI Financial Intermediary GoK Government of Kenya IBRD International Bank for Reconstruction and Development IDA International Development Association IP Implementation Progress IPF Investment Project Financing ISR Implementation Status Report KES Kenyan Shillings KMRC Kenya Mortgage Refinance Company MLPP Ministry of Lands and Physical Planning MTN Medium-Term Notes NAMSIP Nairobi Metropolitan Services Improvement Project NHC National Housing Corporation NHDF National Housing Development Fund NPL Non-Performing Loan NT National Treasury and Planning PDO Project Development Objective PIU Project Implementation Unit PML Primary/Participating Mortgage Lender PPSD Project Procurement Strategy Document RF Results Framework SACCOs Savings and Credit Cooperatives SASRA SACCO Societies Regulatory Authority SDHUD State Department of Housing and Urban Development SDLPP State Department of Lands and Physical Planning TA Technical Assistance TPS Tenant Purchase Schemes WBG World Bank Group The World Bank Kenya Affordable Housing Finance Project (P165034) BASIC DATA Product Information Project ID Financing Instrument P165034 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 30-Apr-2019 30-Jun-2024 Organizations Borrower Responsible Agency Republic of Kenya Project Development Objective (PDO) Original PDO The development objective is to expand access to affordable housing finance to targeted beneficiaries OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-89580 30-Apr-2019 05-Dec-2019 02-Jun-2020 30-Jun-2024 250.00 104.82 141.94 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Kenya Affordable Housing Finance Project (P165034) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. BACKGROUND 1. The EUR 219 million Kenya Affordable Housing Finance Project (KAHFP, the ‘Project’) was approved on April 30, 2019, and it became effective on June 20, 2020. The current closing date is June 30, 2024. The development objective is to expand access to affordable housing finance to targeted beneficiaries. 2. The Project is comprised of two components: Component 1 (EUR 210.2 million): to support the establishment, capitalization, and operationalization of Kenya Mortgage Refinance Company (KMRC); a majority privately-owned mortgage liquidity company supervised by the Central Bank of Kenya (CBK), and by the Capital Market Authority (CMA) for its bond issuances. To help strengthen KMRC’s capital base, sub-component 1(a) of the Project provides EUR 43.8 million through National Treasury as long-term subordinated debt, while sub-component 1(b) is a credit line of EUR 166.4 million to support mortgage refinancing. Component 2 (EUR 8.8 million) TA: Jointly implemented by the National Treasury and the Ministry of Lands, Public works, Housing and Urban Development (represented by the State Department for Lands and Physical Planning (SDLPP) to enhance efficient property registration and land reforms, as well as support Component 1 activities (capacity building of KMRC, its supervisors and financial institutions to improve mortgage underwriting practices) and project management. 3. The KAHFP was conceived and designed to address structural gaps in the country’s financial system that have impeded the growth of affordable housing finance. At the time of Project approval in 2019, commercial banks in Kenya had only 26,000 mortgage loans outstanding. The interest rate cap of 20161 coupled with decreasing asset quality (overall non-performing loan ratio of 12 percent) led banks to tighten their credit standards and offer variable rate loans; and, while interest rates from the Savings and Credit Cooperatives (SACCOs) – who are estimated to provide almost 90 percent of the total housing finance - was relatively low at 12 percent, their loans did not generally go beyond five years as they are highly constrained by the short-term nature of their deposit liabilities. As a result, most urban households rent, or build incrementally with repeat loans. 4. As part of its Big Four Agenda, the Government of Kenya (GoK) in 2018 identified four priority initiatives to be implemented over the next five years 2017 – 2022. One of the priority initiatives was the provision of affordable housing and the GoK began to take active steps across five pillars of the housing eco-system, including: (i) unlocking land for affordable housing supply; (ii) servicing parcels of land with bulk infrastructure to attract the private sector; (iii) reducing development cost; (iv) financing i.e. on the demand-side, establishment of the Kenya Mortgage Refinance Company (KMRC) to improve mortgage affordability, and on the supply-side, creation of a National Housing Development Fund (NHDF) to act as an aggregator of demand and support savings; and (v) enabling environment to facilitate and computerize property registration. This Project aimed to support the GoK’s strategy on two fronts: expanding affordable housing finance via the provision of long-term funding to KMRC and strengthening property registration. Affordable housing is also one of the four key pillars of the GoK’s Bottom-Up Economic Transformation Agenda (BETA), which aims to build affordable housing units in major cities and towns, which contributes to job creation along the housing value chain. In furtherance of this objective, a national housing development levy2 was introduced by the GoK through the Finance Act 2023 to spur economic development and enhance delivery of affordable housing; however, the levy is currently being contested in the courts. 1 The interest cap rate was scrapped in Nov 2019 2 A mandatory 1.5% housing levy for employees and matched by employers The World Bank Kenya Affordable Housing Finance Project (P165034) 5. The Project is fully aligned with the World Bank Group Country Partnership Framework (CPF) for Kenya FY2023–28 (Report No.172255-KE). It supports Objective 1 to Boost Kenya’s Fiscal Debt and Sustainability by strengthening the delivery of affordable housing – helping Kenya deepen capital markets and mobilize longer term financing for infrastructure. This will lower reliance public financing, supporting the Government's drive to re-create Kenya's fiscal space which has deteriorated due to rising debt service, the COVID-19 pandemic, climate, and global shocks. B. IMPLEMENTATION STATUS 6. The Project remains relevant, but implementation is behind schedule due to exogenous factors – macroeconomic constraints, the continuing effects of the COVID-19 pandemic, and housing supply challenges – as well as delays in effectiveness3, which have contributed to delays in the absorption of funds. Given these pressures, the project’s results framework is over-ambitious within a challenging macro-financial context. To help meet the project targets and development objective, overcome the bottlenecks to affordable mortgages, and respond to a changing market context, the project will increase KMRC’s project range to address market demands (implementing new product offerings), including establishing and operationalizing a product to help in driving finance further down market. 7. The PDO and Implementation Progress (IP) ratings of the Project are moderately satisfactory as per the latest Implementation Status and Results Report (ISR) of November 2023. The project has disbursed EUR 94.66 million bringing the total project funds absorption to approximately 43 percent as of August 2023. The implementation progress under the different components is summarized below: Component 1 - Support to the Kenya Mortgage Refinance Company (EUR 210.2 million) 8. KMRC has recorded significant developmental impact on the mortgage and housing finance markets in Kenya since its establishment via this component. It has made significant strides in increasing accessibility and affordability of housing loans in Kenya, attracting private capital into the mortgage refinance market, and standardizing mortgage practices. Its efforts have contributed to the growth of the mortgage market in Kenya and is helping to build an effective pipeline for home loans, encouraging more lenders to participate in the mortgage market and increasing the overall supply of housing finance. It has done this via (i) provision of long-term funds so that lenders can match their assets and liabilities; (ii) better affordability of mortgage loans as financial institutions extend the maturity of their loans; (iii) creation of a safety net to the financial system as banks and SACCOs know they have a source of liquidity when they need it, which incentivizes them to produce long-term loans; (iv) enhanced competition, by removing long-term funding as a barrier to entry in the mortgage market; and (v) deepening of the private bond market via KMRC’s first bond issuance (and as they become a regular issuer). 9. To promote its financial sustainability, KMRC issued its debut bond in March 2022 after receiving the necessary regulatory approvals. The first tranche of the Medium-Term Notes (MTN) programme targeted to raise US$9.6 million (Kes. 1.4 billion) out of the approved US$72 million (Kes. 10.4 billion). The first tranche of the bond which received an oversubscription of 450 percent was listed at the Nairobi Securities Exchange in March 2022. International Finance Corporation (IFC) is one of the investors of the bond. This sends a strong message on the 3As a result of the time it took for the Kenya Mortgage Refinance Company (KMRC) to get regulatory approvals to commence the lending business. The company started lending business in September 2020 and has only been in operation for three years. The World Bank Kenya Affordable Housing Finance Project (P165034) creditability of KMRC’s bonds issuance programme. The MTN programme foresees issuance of several tranches over the next few years including an issuance of a green bond as part of the remaining tranches4. 10. Overall, the mortgage market in 2022 grew in value by 6.8 percent to Ksh. 261.8 billion from Ksh. 245.1 billion. This was due to new originations in 2022 (representing an increase of 1,063 new mortgage loans granted in the year). The non-performing loan (NPL) ratio increased to 14.4 percent in December 2022, as compared to 11.6 percent in the previous year. The average loan maturity also dropped to 10.9 years as compared to 12 years. A notable impact of the Project in the market over the last 2.5 years of implementation include a bridging of the gender gap in access to mortgage/housing loans where KMRC has refinanced 46.4 percent of loans to women out of a target goal of 40 percent as of April 2023. 11. Despite the growth in the value and number of mortgages, there have been challenges in the generation of affordable mortgage loans, driven by macroeconomic challenges, the adverse impact of the COVID-19 pandemic on the mortgage market in Kenya (subduing mortgage uptake), and the persistent and systemic market failures on the supply side of the housing value chain in Kenya. High interest rates and inflation have affected affordability and the willingness of Kenyans in making long-term financial commitments, such as a mortgage. The average interest rate charged on mortgages in 2022 was 12.3 percent compared to a 10.9 percent average in 2020 when KMRC was granted a license to conduct mortgage refinance business in Kenya. Although the COVID-19 pandemic subdued mortgage uptake, the demand has picked up since the lifting of lockdown in May 2021 (and the short- term containment emergency measures by GoK to encourage the production of mortgage loans5) but the origination of new mortgage loans remains low. 12. The limited supply of affordable housing has also constrained market growth. Several financial institutions report that very few houses in the market are under the property value threshold set by GoK i.e., KES 4 million; however, the State’s Boma Yangu National Affordable Housing program has started to deliver some units, with larger scale delivery planned for 2024 going forward. Further efforts are in place to generate public-private collaboration projects with subnational governments, private sector developers and financiers. 13. Given the changed market context, KMRC plans to expand their range of products beyond traditional mortgage refinancing. This will include providing a mortgage guarantee product to enable them to reach further down- market; exploring a product that is more suitable for SACCOs who have members that prefer incremental builds; and exploring the Tenant Purchase Scheme (TPS) as an alternative form of refinancing. Component 2 – Technical Assistance (EUR 8.8 million) 14. KMRC and NT have been conducting analytical and advisory work to build the housing demand-side capacity and promote the supply side reform agenda. Some of the activities supported under this component include: (i) ongoing sensitization and awareness (via the Affordable Housing Conferences and targeted capacity building of primary mortgage lenders (PMLs)), which aims to increase the uptake of the mortgages and enhance the overall awareness of the government’s affordable housing schemes on both demand and supply sides; (ii) capacity building for the KMRC management and Board; and (iii) consultancy services on standardization of mortgage standardization of Mortgage Lending Practices for participating PMLs to enhance uniformity and suitability. 4 This issuance is however subject to the interest rate environment. The high yield on Government debt with Government bonds currently giving a coupon rate of about 17 percent presents a challenge for private companies to raise funds from the Capital Markets. 5 e.g., lowering of the risk weight on mortgages from 50 to 35 percent to free up capital for banks when underwriting mortgages The World Bank Kenya Affordable Housing Finance Project (P165034) 15. The SDLPP will continue to implement TA activities under this component. The earlier decision to cancel all previously planned Land consultancies was reversed and the consultancies reinstated (procurable activities will remain at the SDLPP and will no longer move to the State Department for Housing and Urban Development). Currently, Lands has included two key procurement activities in the workplan for FY24: (i) TA to develop a Strategy for Large-Scale Mapping and a Modern Geodetic Reference System for Kenya in order to improve the quality and reliability of spatial data for land administration; and (ii) TA to prepare a land reform plan and a strategic plan, based on a land sector assessment, and including a plan for the required capacity building plan and estimated financial resources for its implementation. Despite early delays in implementation, this component is back on track. 16. There has been some progress in the issue of land titling, which plays a crucial role in the mortgage process, as it serves as a form of security for lenders. The ArdhiSasa online land information management system, launched in April 2021, is currently operational; however, there needs to be significant effort put towards awareness raising among various stakeholders (financial institutions, lawyers, property developers etc.) on how to effectively engage with the platform. The project will explore utilizing some of the TA funds to support awareness-raising initiatives through various channels. 17. In addition to being responsible for Lands-related TA activities, the SDLPP will also be assigned fiduciary responsibilities. This implies transitioning the Lands-related procurement activities from NT to SDLPP (in line with the Project Appraisal Document). In preparation for this transition, the National Treasury has provided capacity building to assigned SDLPP procurement officers and a Financial Management Assessment, as well as a Procurement risk and capacity assessment were conducted on the SDLPP in August 2023. The Annual Work Plan Budget (AWPB) for the project will be incorporated in the budget under the state department and processed through the normal GoK budgeting process under ministry CFO as per the PFM Act. The project will be assigned a separate budget code under the state department. The NT will be required to open a designated account DA-C for the SDLPP from where funds for component 2 activities implemented by the ministry will be channeled. The SDLPP will also open a local currency account in the Central Bank of Kenya (CBK) from where payments for goods and services will be made. The project will adopt the report-based IFR method of disbursement. Other methods of disbursement will include advances, direct, reimbursement, and special commitment. The State Department will designate a qualified accountant to manage the day-to-day accounting functions under supervision of the Head of Accounting Unit of the Ministry. The state department will prepare a financial management manual to guide the FM operations under the project. The SDLPP will be required to submit the quarterly IFRs within 45 days after the end of the respective quarter. The internal audit department at the ministry will be reviewing the project operations on risk based with semiannual reports shared to the Bank within 45 days after the end of semester. The department will prepare project specific annual financial statements and will be audited by the Office of the OAG and audit report together with management letter submitted to the Bank within 6 months after the end of the financial year. The FM risk for the project is assessed as Substantial as detailed in the FM Assessment. 18. Fiduciary: Procurement performance is Satisfactory and Financial Management performance is Moderately Satisfactory, and the Project has received clean/unqualified audit reports for all the fiscal years it has been operation. 19. Environmental and social issues. The overall Safeguards Rating remains Satisfactory. KMRC has facilitated various training to PMLs on E&S risk management with refresher trainings being conducted regularly. It has also established a grievance mechanism, as well as a grievance log. The World Bank Kenya Affordable Housing Finance Project (P165034) C. RATIONALE FOR RESTRUCTURING 20. This proposed Level II restructuring has been prepared in response to a request from the Government of Kenya (GoK) to maximize project impact and achieve the project’s development objective and informed by the outcomes of previous implementation support missions. By letter date 12 July 2023, the National Treasury requesting the following (i) an extension of the project closing date to 30 June 2026; (ii) the Ministry of Lands, Public Works, Housing and Urban Development, through the State Department for Lands and Physical Planning to be an implementing entity for Component 2 of the project; (iii) The National Treasury to continue implementing Component 2 of the project jointly with KMRC; (iv) set aside EUR 4 million under Technical Assistance to be utilized as seed capital for the Risk-Sharing Facility by KMRC, and; (v) review the results framework in tandem with the proposed changes. 21. The restructuring seeks to accommodate the introduction of new mortgage products to meet market demand and support the achievement of the PDO. It also proposes to adjust the results framework to better align it with macroeconomic realities, as well as to account for the introduction of the new product offerings from KMRC. A one-year extension of the project closing date to June 30, 2025, has been agreed with World Bank management to enable the completion/operationalization of critical/new activities directly linked to the achievement of the PDO. A second extension of one-year will be considered based on progress achieved and impact of proposed measures. With the changes proposed above, the project is expected to achieve its development objectives. 22. The restructuring does not entail changes to the Project Development Objective (PDO) and no new safeguard policies are triggered. This is the first restructuring of the Project. DESCRIPTION OF PROPOSED CHANGES 23. The Project is proposed for Level 2 restructuring with the following changes: Component 1. Support to the Kenya Mortgage Refinance Company (EUR 214.2 million) 24. Subcomponent 1a. Establishment, capitalization, and operationalization of KMRC (EUR 43.8 million) There are no changes proposed to this subcomponent. 25. Subcomponent 1b(i). Line of Credit for Mortgage Refinancing (EUR 166.4 million). There will be a breakdown of subcomponent 1b into two parts – 1b(i) Line of Credit for Mortgage Refinancing (EUR 166.4 million) with no change in scope; and 1b(ii) as described below. 26. Subcomponent 1b(ii). Establishment of a Mortgage Guarantee Product (EUR 4 million). This product will provide an incentive (mitigate the risk) for PMLs to reach down market to an unfamiliar clientele and offer affordable loans to lower-income households where the largest market gap exists. The mortgage guarantee product will be issued for a partial risk sharing with PMLs, covering the loss in case of defaults by mortgage borrowers. This would be payable on first demand when a loan is in default according to precise criteria, foreclosure process initiated, and so on. To manage risk, the mortgage guarantee product will be operated within a Trust6, being a separate legal 6The Kenya Mortgage Guarantee Trust (KMGC) was registered as a separate legal entity with the Ministry of Lands on January 31, 2023. The World Bank Kenya Affordable Housing Finance Project (P165034) entity, and with KMRC being the corporate Trustee7. Project support will be provided to KMRC for the overall design of the product and for defining parameters in the POM such as loan features; coverage rate and premium level; and procedures designed to avoid moral hazard and adverse selection risks. Following the establishment/operationalization of the mortgage guarantee product, the initial capitalization to support operations will be made upon World Bank’s approval of the revised POM, which will reflect the details around the pricing and operations of the guarantee product. 27. Given the addition of subcomponent 1b(ii), the total allocation for this component has been revised to EUR 214.2 million. 28. The other proposed expanded product offerings from KMRC do not require a formal restructuring and can be addressed via adjustments to the Project Operations Manual (Annex 2). Component 2. Technical Assistance (EUR 4.8 million) 29. Given that subcomponent 1b(ii) has been allocated funding from this component, the allocated amount for Component 2 is now EUR 4.8 million. It will still cover anticipated TA activities supporting the SDLPP and capacity building of KMRC, its supervisors and financial institutions to improve mortgage underwriting practices. 30. Closing Date: The Project’s closing date is extended from June 30, 2024, to June 30, 2025. The extension would provide time for the completion of critical project activities directly linked to the achievement of the PDO, particularly the operationalization of the RSF and newly introduced KMRC products to respond to the challenging market context. The impact of the proposed measures will be monitored prior to considering a second 1-year extension. 31. Fiduciary Responsibilities assigned to SDLPP: The project restructuring intends to formally assign fiduciary responsibilities to the SDLPP. This is aligned with the Project Appraisal Document (PAD), which intended for fiduciary responsibilities of Lands-related activities to transition from the NT to SDLPP following the required capacity building of procurement staff, which has been conducted. In preparation for this transition, a procurement risk and capacity assessment and a financial management review of SDLPP were conducted in August 2023. SDLPP will revise the Project Procurement Strategy Document (PPSD) to move existing activities from NT and to include new activities in the procurement plan following the WB procurement regulations for Borrowers dated July 2016 and revised September 2023 (fifth edition). 32. Revision of the Results Indicators: Given the changed market context and the anticipated new activities, the results framework has been adjusted to better align all project indicators and end targets to achieve the PDO by the Project’s revised closing date. This includes a reduction in the end targets of some indicators; dropping a few indicators whose achievement is outside the influence of the Project; and adding an intermediate indicator related to the establishment of the RSF. Specifically, the PDO indicators are revised as follows (Table 1). Other changes to the intermediate indicators include: (i) Volume of Mortgage lending. The restructuring paper proposes to drop this indicator as KMRC only has impact on the institutions it refinances and not the sector, thus cannot be held accountable for it. 7KMRC will be the Corporate Trustee, but the trust shall have its own assets, and the liabilities of the Trust shall be met from the assets of the Trust. The World Bank Kenya Affordable Housing Finance Project (P165034) However, as part of KMRC’s annual credit review process, the Project will monitor and report on this market indicator every 12 months. (ii) Percentage of Non-performing loans in the residential mortgage sector. The restructuring paper proposes to drop this indicator similar to the reasons stated above. (iii) Volume of affordable housing and mortgage loans refinanced by KMRC. This end-target for indicator has been adjusted downwards (from 225 million to 186 million) based on the available funding lines at an average of KES 4 million per loan, accounting for the depreciation of the KES (exchange rate KES. 150 to USD). (iv) An intermediate indicator to be added to the results framework to cover the introduction of the Mortgage Guarantee Product. Table 1: Proposed Changes to the Results Framework (PDO Indicators) Actual Rationale for change Indicator Revised Baseline End-target (August Name end-target 2023) PDO Indicators This revised end-target is proposed in lieu of the initial target since it has been duly authorized by the capital market Volume of regulator (due to the depreciation of the bonds issued 0.00 90,000,000 12,000,000 36,500,000 KES) and reflects the proposed extension by KMRC of the project closing date. However, this (USD) is subject to the prevailing macro- economic conditions specifically the high interest rate environment. Original target was over-ambitious. End- Number of target recalculated considering the affordable average mortgage size of KES 4 million, mortgage / 0.00 30,000 2,876 4,900 the total available funding - from the housing loans concessional lines of credit - and the refinanced by envisioned MTN Bond programme to KMRC raise additional funding. II. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Reallocation between Disbursement Categories ✔ The World Bank Kenya Affordable Housing Finance Project (P165034) Disbursements Arrangements ✔ Overall Risk Rating ✔ Financial Management ✔ Procurement ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Cancellations Proposed ✔ Disbursement Estimates ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ APA Reliance ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Support to the Kenya Mortgage Support to the Kenya 252.00 Revised 257.00 Refinance Company Mortgage Refinance Company Technical Assistance 10.00 Revised Technical Assistance 5.00 The World Bank Kenya Affordable Housing Finance Project (P165034) TOTAL 262.00 262.00 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-89580 Effective 30-Jun-2024 30-Jun-2025 30-Oct-2025 OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-89580-001 | Currency: EUR iLap Category Sequence No: 1 Current Expenditure Category: Mortage Refinancing prt 1(b)(i) 166,400,000.00 38,896,736.22 166,400,000.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: Gds,Ncs,Cs,Tr & IOC prt 2 8,800,000.00 259,643.11 4,800,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: Elig Exp Prog part 1(a) 43,800,000.00 8,800,000.00 43,800,000.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: ds,Ncs,Cs,Tr & IOC prt 1(b)(ii) 0.00 0.00 4,000,000.00 100 Total 219,000,000.00 47,956,379.33 219,000,000.00 OPS_DETAILEDCHANGES_SORT_TABLE The World Bank Kenya Affordable Housing Finance Project (P165034) SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  Substantial  Substantial Macroeconomic  Substantial  High Sector Strategies and Policies  Substantial  Substantial Technical Design of Project or Program  Moderate  Substantial Institutional Capacity for Implementation and  Substantial  Moderate Sustainability Fiduciary  Substantial  Substantial Environment and Social  Moderate  Moderate Stakeholders  Moderate  Moderate Other Overall  Substantial  Substantial . The World Bank Kenya Affordable Housing Finance Project (P165034) . Results framework COUNTRY: Kenya Kenya Affordable Housing Finance Project Project Development Objectives(s) The development objective is to expand access to affordable housing finance to targeted beneficiaries Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline End Target Support to the Kenya Mortgage Refinance Company Volume of bonds issued by KMRC (Amount(USD)) 0.00 36,500,000.00 Rationale: This revised end-target is proposed in lieu of the initial target since it has been duly authorized by the capital market Action: This indicator has been Revised regulator (due to the depreciation of the KES) and reflects the proposed extension of the project closing date. However, this is subject to the prevailing macro-economic conditions specifically the high interest rate environment. Number of affordable mortgage / housing loans refinanced by 0.00 4,900.00 KMRC (Number) Rationale: Original end-target was over-ambitious. End-target recalculated considering the average mortgage size of KES 4 million, Action: This indicator has been Revised the total available funding - from the concessional lines of credit - and the envisioned MTN Bond programme to raise additional funding. PDO Table SPACE The World Bank Kenya Affordable Housing Finance Project (P165034) Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Support to the Kenya Mortgage Refinance Company Percentage mortgage / housing loans refinanced by KMRC 0.00 40.00 40.00 40.00 40.00 40.00 extended to women (Percentage) Action: This indicator has been Revised Average maturity of new mortgage loans refinanced by 0.00 3.00 4.00 6.00 8.00 10.00 KMRC in the year (Years) Action: This indicator has been Revised Percentage of Project beneficiaries who feel project 0.00 50.00 80.00 activities reflected their needs (Percentage) Action: This indicator has been Revised Volume of mortgage lending 2,230,000,000.00 2,240,000,000.00 2,505,628,000.00 3,160,000,000.00 (Amount(USD)) Rationale: Action: This indicator has been KMRC only has impact on the institutions it refinances and not the entire mortgage sector, thus cannot be held accountable for this indicator. However, as Marked for Deletion part of KMRC’s annual credit review process, the Project will monitor and report on this market indicator every 12 months. The World Bank Kenya Affordable Housing Finance Project (P165034) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Percentage of Non-Performing Loans in the residential 12.20 10.00 9.00 8.00 7.00 6.00 mortgage sector (Percentage) Rationale: Action: This indicator has been KMRC only has impact on the institutions it refinances and not the entire mortgage sector, thus cannot be held accountable for this indicator. However, as Marked for Deletion part of KMRC’s annual credit review process, the Project will monitor and report on this market indicator every 12 months. Volume of affordable housing and mortgage loans refinanced 0.00 37,500,000.00 75,000,000.00 111,000,000.00 by KMRC (Amount(USD)) Rationale: Action: This indicator has been The revised end-target is based on the available funding lines at an average of Kes 4 million per loan - and reflecting the depreciation of the KES (exchange Revised rate KES. 150 to USD). Mortgage guarantee product No Yes operationalized (Yes/No) Action: This indicator is New Technical Assistance Four strategies/studies/roadmaps 0.00 1.00 2.00 3.00 4.00 4.00 completed and adopted by MLPP (Number) Action: This indicator has been Revised IO Table SPACE The World Bank Kenya Affordable Housing Finance Project (P165034) Performance-Based Conditions Matrix DLI IN01383678 ACTION PBC 1 The Project Implementing Entity is legally established, has the required regulatory capital and approvals to start operations Type of PBC Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Process No Amount(USD) 10,000,000.00 100.00 Period Value Allocated Amount (USD) Formula Baseline 0.00 June 2019 10,000,000.00 February 2020 0.00 February 2022 0.00 DLI IN01383681 ACTION PBC 2 The Borrower has provided Tier 2 Capital to the Project Implementing Entity Type of PBC Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Output No Amount(USD) 10,000,000.00 100.00 Period Value Allocated Amount (USD) Formula Baseline 0.00 June 2019 0.00 February 2020 10,000,000.00 February 2022 0.00 The World Bank Kenya Affordable Housing Finance Project (P165034) DLI IN01383683 ACTION PBC 3 The Borrower has provided additional Tier 2 Capital to the Project Implementing Entity Type of PBC Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Outcome No Amount(USD) 30,000,000.00 0.00 Period Value Allocated Amount (USD) Formula Baseline 0.00 June 2019 0.00 February 2020 0.00 February 2022 30,000,000.00 Verification Protocol Table: Performance-Based Conditions DLI_TBL_VERIFICATION PBC 1 The Project Implementing Entity is legally established, has the required regulatory capital and approvals to start operations The Borrower has established, operationalized and capitalized the Project Implementing Entity and the Project Description Implementing Entity has received the relevant licenses, permits, and approvals required to start operations. Data source/ Agency NT Verification Entity NT Supporting documents:  Copy of KMRC license by CBK. Procedure  KMRC Bank Record showing funding provided by National Treasury and Planning The World Bank Kenya Affordable Housing Finance Project (P165034) DLI_TBL_VERIFICATION PBC 2 The Borrower has provided Tier 2 Capital to the Project Implementing Entity The Borrower has executed a Subordinated Debt Agreement with the Project Implementing Entity pursuant to which EUR Description 8,800,000 equivalent has been paid to the Project Implementing Entity. Data source/ Agency KMRC Verification Entity NT Supporting documents:  Letter from NT indicating that it has provided Tier 2 capital to KMRC Procedure  Copy of Subordinated debt agreement amended, signed by KMRC and NT DLI_TBL_VERIFICATION PBC 3 The Borrower has provided additional Tier 2 Capital to the Project Implementing Entity Upon completion of a bond issuance by KMRC, the Borrower has executed an updated Subordinated Debt Agreement with Description the Project Implementing Entity pursuant to which EUR 26,200,000 equivalent has been paid to the Project Implementing Entity. Data source/ Agency KMRC Verification Entity NT Supporting documents:  KMRC prospectus and subscription of the bond issue. Procedure  Letter from NT confirming payment of additional subordinated debt  Copy of subordinated debt agreement amended, signed by KMRC and NT The World Bank Kenya Affordable Housing Finance Project (P165034) Annex 1: Revised Theory of Change The World Bank Kenya Affordable Housing Finance Project (P165034) Annex 2: Proposed expansion to KMRCs products and offerings a) Increase KMRC’s product range. A big percentage of Kenyans prefer building their homes incrementally. This is attributable to the levels of income, the limited financing options available to match their income levels as well as the preference to build rather than to buy already built houses. KMRC is exploring how to work with SACCOs to establish a developer finance product that will stimulate supply of housing units which can then be converted to Mortgages for refinancing. KMRC is also exploring Tenant Purchase Schemes and how these can be structured and qualify for mortgage refinancing. b) Review the Loan eligibility criteria. The high inflation environment, depreciating Kenya shilling and increased prices on petroleum prices have had an impact of increasing the prices of construction inputs, and as such developers have been forced to increase the prices of housing units. The same economic conditions have reduced the disposable income for the potential borrowers. In most cases the salaries are not reviewed in tandem with the changes in the macro-economic environment. In line with this, KMRC proposes to increase the maximum loan thresholds from KES. 150,000 to KES. 200,000 to cover the impact of inflation and additional taxes. It also proposes to increase the maximum loan thresholds to KES. 8 million8 across the country due to the increase in construction inputs and property prices. c) Incorporating additional Primary Mortgage Lenders (PMLs). KMRC has received several expressions of interest from other Banks and SACCOs who have mortgage portfolios that would want to benefit from KMRC financing. Incorporating additional primary lenders would increase the mortgage penetration by providing liquidity to more primary lenders that are in the mortgage business. There is a trade-off between including non-shareholder banks and SACCOs as eligible for refinancing as it breaks the ‘mutual’ model with a ‘pay to play’ approach, while on the other hand it does help grow the overall balance sheet. 8 The loan limit was previously raised from a cap of KES. 3-4 million to KES. 5-6 million.