The National Housing Development Fund (I): What Exactly is the Problem?

2018 saw Section 6(1) of the Housing Act of 1967 introduce the National Housing Development Fund (NHDF). The National Housing Corporation would manage the fund. As part of the Affordable Housing Program of the government at the time, its objective would be to raise funds from various sources to provide affordable housing to Kenyans.

Five years later, in May 2023, the Cabinet tabled a proposal in Parliament to make contributions to the fund mandatory. Under this proposal, the 3.2 million wage employees^[1] in both the public and private sectors would be required to remit a compulsory housing levy of 3% of their gross income (an average of KES 72,130 per person),^[2] with employees matching the amount, to a maximum total of KES 5,000 per month for at least seven years. This contribution was later reduced to 1.5% of the employee’s gross income, with a further amount matched by the employer, and the same maximum limit retained. Of course, employees may make additional voluntary contributions. The Cabinet Secretary for Housing and Finance would then make regulations regarding the qualifications of eligible candidates for affordable housing under the NHDF, who would need to have accumulated at least 2.5% of the value of the home that they intend to purchase, though this may change in the regulations. (For example, in Ngara and Pangani, the average cost of a house is KES 25,000,000. 2.5% of that would be KES 625,000, or a total contribution of KES 7,441 per month for 7 years.) The NHDF also intended to obtain short-term capital from local banks, development finance institutions, and the issuance of mortgage-backed securities in the local capital markets. However, it is unclear whether this is still the case since the fund has been changed to a tax.

The recent uproar sparked by the housing fund (now a housing levy) is by no means novel. In 2018, the Executive attempted to institute the fund through executive regulations. Less than three months later, the Central Organization of Trade Unions (COTU), Consumers Federation of Kenya (COFEK), and the Federation of Kenya Employers (FKE) had successfully persuaded the Employment and Labor Relations Court to temporarily suspend the regulation, citing improper consultation of the policy by the government. In March 2020, the Ministry of Housing set up new regulations, including a voluntary monthly contribution by employers and employees of KES 200 to the NHDF.^[3] Presumably, the NHDF was unsuccessful. Heated debates over the housing fund have seen the government amend the proposal to a housing levy, which has not helped matters much. Now, instead of going into a fund and accruing interest, employers’ and employees’ contributions will be a tax, likely unrecoverable – like other levies, including the National Hospital Insurance Fund (NHIF) and the National Social Security Fund (NSSF) – even if the proposed beneficiaries do not receive the affordable housing promised.

Few people, if any, doubt that housing is a problem worth resolving. The Center for Affordable Housing Finance Africa (CAHF) estimates that Kenya faces a housing deficit of 80%. While the demand for housing is estimated at 250,000 units per year, only 50,000 new units are delivered annually. The National Housing Corporation estimates that Kenya faces a housing deficit of 2 million units and counting. Only 2% of the formally constructed houses target lower-income families.^[4] Moreover, the CAHF estimates that the homeownership rate in urban areas is 22%, compared to the national homeownership percentage of 61.3%. 78% of households in urban areas, then, are rented – a significant fact when 83.3% of the total employed population work in the informal sector and earn an average of KES 14,000 per month.^[5] Indeed, according to the World Bank, as of 2021, Kenya’s urbanization rate stood at 3.7% while her total population growth rate stood at 1.9%. This fact, coupled with the fact that Kenya’s urban land area is so little (less than 0.6% of the total land area as of 2021, according to the World Bank), means that the cost of land and housing (mostly rented) in the ever-popular urban areas will increase steadily over the coming years, to the further detriment of lower-income families. Apart from the obvious benefit of shelter, homeownership comes with land tenure security. Title to property gives people the personal security needed to take risks, capitalize on what they own, use it as collateral for loans or to make improvements with long-term benefits, and direct their time and energies not to procuring rent, but to other productive pursuits. The Copenhagen Consensus, led by Bjørn Lomborg, makes the conservative estimate that for every dollar invested in improving land tenure security in agricultural areas in developing countries, the land becomes 15 times more productive. In urban areas, that figure could spike to around 25 times.^[6] 

The opposition to the housing levy arises largely from suspicion of the government’s motives. Given the history of mismanagement of other similar funds – the NHIF is a case in point – what guarantees are there that it will not be developers and landlords who benefit rather than the intended beneficiaries? Or, at a time when the government is desperate to increase its revenue and reduce the national debt burden, might not some of the money collected also end up in general government coffers, let alone private pockets, rather than in the NHDF? The rising cost of living only makes these questions more pressing, as does the fact that the brunt of the housing levy would be borne by those least able to pay it (recall that the average monthly earnings of 83% of the total earning population are KES 14,000).

Suspicion of the national government has led some to suggest that the move is a usurpation of the powers of the county governments to provide sanitation and housing.^[7] The suggestion is not without cause. After all, much of the intended benefit of devolution was to increase the representation of ethnicities in the government to ensure a more equitable distribution of wealth and development initiatives throughout the country.^[8] Yet, under the Constitution, the county governments have severely limited power to acquire resources. Counties can only raise a minute proportion of what is needed to discharge their responsibilities. Moreover, under Article 212 of the Constitution, counties cannot borrow unless the national government guarantees the loan, which it might be reluctant to do, both because of its debt burden and because it may thus lose precious control over the counties. This leaves the counties dependent on contributions from the nationally collected revenue. Unfortunately, too large a sum is often deducted from the national revenue before the national government distributes it to the county governments for the counties to receive significant sums.^[9] Despite the merits of this objection, then, the counties are unlikely to be capable of independently “providing sanitation and housing”.

However, this objection points us toward a deeper issue: the problem of income and revenue. Many have objected vociferously to the housing levy on the ground that Kenyans cannot bear yet another tax in the context of the burgeoning cost of living and the failure of their wages to match it. And yet, the country is deep in debt, so much so that the current government has set its revenue collection targets at KES 2.96 trillion for the next financial year, several times greater than that set by the previous government. Recourse to external debt financing is undesirable in the present political climate, to say the least. Unlike debt, taxes have no strings attached – at least, not directly. But, as has so often happened in the course of history, the uproar of the people hints at an injustice where I would like to suggest the real problem lies. Prudence demands that we ask, “What should be taxed?” The next part of this article will address this question.

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