Tuesday, July 13, 2010


The regulator of Kenya’s pension sector has issued new guidelines that will allow contributors to use part of their savings to guarantee house loans.

Contributors will be allowed to use up to 60% of their accrued pension benefits – this will include the workers’ and the employers’ contribution and the investment income earned over the years of saving.

Simply put if your account at NSSF stands at sh10m you will be able to use sh6m to guarantee a loan to buy a house. This would mean that the bank from which you hope to borrow would be safe in the knowledge that if you default on your mortgage your savings with NSSF would provide them some comfort.

Implications of this move will have a powerful ripple effect through the Kenyan economy and more particularly in the construction industry.

If a worker started formal employment at 22 and has been faithfully contributing to the scheme for the last 18 years he would now be forty, probably have several millions of shillings to his account at NSSF, but still have another 10 years before he can unlock his savings.

Meanwhile at this time in his life there is an urgent need to build a family home in addition to other financial long term goals.

It therefore makes sense to give this worker the opportunity to at least leverage his savings to build or buy the family home.

What the Kenyans are doing however is not allowing the workers to draw down their savings but just to use as security.

The knee jerk reaction by people when they hear of such schemes – including senior officials in our government who should know better, is that this is putting the workers’ retirement benefits at risk and it should not be allowed.

A valid point, but there is risk in leaving it in NSSF and in the very possible scenario that the borrowing worker gets his house and buys or builds his house and pays for it without a hitch the immediate benefit is two fold; to begin with he will have a house and secondly his savings will still be intact with accrued interest. He will have two assets where there was one before. This is opposed to if they drew down the money and bought house, effectively exchanging one asset for another with little comparable net gain.

Estimates are that Kampala currently has a housing deficit of some 50,000 units and despite the construction industry being one of the fastest growing sectors of the economy it is not generating units at fast enough pace to bridge this gap.

The main reason this is so is that despite the desire to own houses by the population the capacity to build or purchase is seriously lacking. If Uganda was to go the Kenyan way effective demand would be given a serious boost.

For undeveloped countries like Uganda homeownership is critical because it widens the base of people with a real stake in the country’s stability, lowering the risk of political and social unrest. Instability maybe triggered by a small elite, but is often fuelled by the disgruntlement of the larger population who do not see light at the end of their tunnel. Spreading the chance for home ownership would help douse this disaffection with the status quo.

With the incentive of homeownership savings rates can increase as more people – even from the informal sector, will wish to contribute to pension schemes.

Uganda’s saving rate as a percentage of GDP is the lowest in the region. Apart from our history of relative instability this is also true because apart from the mandatory savings to NSSF there no incentives to save as are in place in Kenya for instance.

As far as I know no country has developed without first mobilising its local resources, it is a pipe dream if we think we can develop on foreign aid alone.

The pension sector reform bill is still stuck somewhere in limbo, but it would serve us well to take a leaf from the Kenyan example.

Published June 2009, New Vision

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