A publication by the African Housing Finance Year book 2020 stated that the current construction finance by the capital markets stands at 5.0% with the banking sector taking up 95.0% of the rest. It is therefore, our view that the main reason why housing will remain a challenge is lack of capital markets financing for real estate, and that the Loan Funds market will be a key player in improving the funding crunch.

Loan funds can be defined as specialized investment vehicles that are formed by fund managers or investment firms with the intention to borrow from investors and allocate the funds into deserving asset classes that will in turn generate returns for the investors. Depending on their particular investment strategy, loan funds can be classified as loan originating funds which grant and restructure loans by prolonging duration and deferral of payments or participating funds which are allowed to partially or fully restructure existing loans from banks and other lending institutions. The Loan Funds market is mostly comprised of unregulated investment vehicles set up as Limited Liability Partnerships (LLPs) and commercial paper vehicles, though there is an emergence of some regulated loan funds.

A proper adoption and utilization of Loan Funds will help developed and deepen our capital market thus creating a sustainable, low-cost distribution mechanism for multiple financial products and services across the country. We cannot achieve our goal of being a regional financial services hub without an active and vibrant Loan Funds and private markets lending activity, which have shown that they can play a crucial role in financing a growing economy and complementing the mainstream bank debt financing, especially for real estate development. To develop Loan Funds, there is a need to align regulatory frameworks for capital markets with socio-economic policies, such as the President’s Housing Agenda, in order to enhance efficient financial intermediation. A well-developed capital market will encourage the flow of loan funded capital investment into infrastructure and real estate development that will go a long way to help achieve socio-economic development goals.

We therefore recommend the following actions so as to speed up the adoption of Loan Fund instruments in the Kenyan market: (i) Continuous investor education for current and  potential investors, so as  to understand the products and returns prospects of the product and how they fit into their portfolios, (ii) Creation of a regional body that will  support the growth of structured products and spearhead education initiatives and the creation of a standardized framework for issuing and classifying loan funds (iii) Encouraging industry wide adoption by  market participants and the regulatory framework, there is need to evolve from the mentality that all financial products must be regulated, and clearly allocate what is a private offer and what is a public offer, therefore, allowing both to co-exist for the benefit of advancing our capital markets.

For more information, please see our Loan Funds Investments in Kenya topical