Analyzing the Impact of Financial Deregulation on the Risk of Mortgage Delinquency: A Case Study of the Kenyan Mortgage Market

In most developing countries, housing finance and mortgage lending are undergoing changes driven by financial deregulation policies, which include interest rate decontrol and privatization. In this study, we analyze detailed residential mortgage data from housing finance institutions (HFIs) in Kenya, to determine the impact of deregulation on loan performance. Using a hazard model, we find that interest rates, real Gross Domestic Product (GDP), exchange rate, and deregulation are significant in explaining the hazard of mortgage delinquency. We use a before and after deregulation framework to analyze the influence of deregulation on the probability of mortgage delinquency, and find that the number of delinquent loans increased after deregulation, the duration of loans from time of loan origination to time of delinquency decreased, and that loan repayment was also faster after deregulation. The study concludes that deregulation increased both the probability of delinquency as well as the probability of loan prepayment in Kenya. Our interpretation of the results is that, borrowers reacted to increasing interest rates, trigger events, and availability of cheaper funds elsewhere, while lenders reacted to increased competition introduced by deregulation by adopting more flexible credit risk analysis as well as teaser rates to attract demand. Given the scarcity of literature relating to mortgage finance in sub-Sahara Africa, this study provides valuable insight into the current lending environment, feasibility of future lending, and includes suggestions for improvement