Big Four Agenda: The Housing Fund Regulations 2018

In 2018, the Kenyan President, Uhuru Kenyatta, announced that his government will in, his current last term in office, focus on a four-point action plan dubbed ‘the Big 4 Agenda’. The four key pillars of the agenda include enhanced manufacturing, ensuring food security, universal health coverage and provision of affordable housing.

The agenda on provision of decent and affordable housing has attracted a lot of interest from different sections of the society, especially with the introduction of the Housing Fund by the government.

Article 43. (1) (b) of the Constitution of Kenya provides that, “Every person has the right to accessible and adequate housing, and to reasonable standards of sanitation.” The constitutional and statutory standards for housing differ. The constitution uses the term ‘adequate’ while the statute uses ‘affordable’. Affordable housing is part of the broader right to adequate housing. The characteristics of the right to adequate housing at a minimum are accessibility, affordability, availability of services, materials, facilities and infrastructure, cultural adequacy, habitability, location and security of tenure. It also encompasses entitlement to public participation in housing related matters, equality and non-discrimination, freedoms including freedom of movement and choice, and protection against arbitrary interference and forced evictions.

Affordable housing on the other hand is a question of cost. The cost of purchase determines purchase availability which considers whether a household can borrow enough funds to purchase a house. The cost of repayment determines repayment affordability where the question is on what burden imposed on a household in repaying the mortgage.

As of 2017, 73.4% of Kenyans lived in rural areas against a global average of 45% and African average of 43% rural population. The Kenyan urban population is projected to be close to 50% by the year 2050.

Affordable housing is seen as a problem particularly in African cities where the median housing price is close to 5 times the annual household income in most cities. The recommended ratio is 3 times. The government of Kenya has put in place various short, medium, and long-term methods to achieve affordable housing, among them - the Housing Fund Regulations.

The Housing Fund

There exists a Housing Fund established under Section 6(1) of the Housing Act. This was first established in 1967 under the control of the National Housing Corporation. The Fund is to be financed by appropriations from Parliament, certain repayments by local authorities on loans advanced in accordance with the Act, all repayments by local authorities, company, society or individual person on loans advanced in accordance with the Act and sums from investments.

Housing Fund Regulations 2018

Section 24 of the Housing Act grants the Cabinet Secretary in charge of Housing power to make regulations to enable the objects and purposes of the Act.

The new Section 31A of the Employment Act provides for monthly payment by employers into the National Housing Development Fund, the rate set by The Finance Act 2018 being 1.5% of the employee's monthly basic salary, contribution each by both the employer and the employee, and in any case not exceeding KES. 5,000.

The Housing Fund is to be an Affordable Housing Scheme which is a three-tiered scheme consisting of Social Housing for those who earn between KES. 0-14,999, Low cost Housing for those earning between KES. 15000- 49,999 and Mortgage gap housing for those earning between KES. 50,000-100,000. Those eligible are: citizens above 18 years of age, with proof of registration under the scheme, proof of contribution to the scheme and a first time home-owner under the affordable housing scheme.

The potential benefits to an employee depend on the earning capacity of an employee. For employees who qualify for the affordable housing, the contributions accrue to the employee and shall be used to finance the purchase of a home under the affordable housing scheme. For employees who are not eligible for affordable housing, upon the expiry of fifteen years from the date of the start of making the contributions, or after the attainment of retirement age, whichever is sooner be entitled to: (i) a transfer of their contributions to a pension scheme registered with the Retirement Benefits Authority or (ii) a transfer of their contributions to any person registered and eligible for affordable housing under the National Housing Development Fund or (iii) a transfer of their contributions to their spouse or dependent children or (iv) to receive their contributions in cash in which case the cash shall be taxable as income for that year of income at prevailing rates.

The return on the contribution shall vary depending on the return on the Fund. Further, the contributions are tax deductible making them a potentially favourable saving.

There are several employer obligations. The employer is required to remit contributions before the ninth day of the following month. Failure to remit the payments attract a penalty of 5% of the contributions payable by the employer for the duration of the month that the amount is unpaid.

How the Housing Fund Works

All employers with more than one employee are required to register with the Housing fund as a contributing employer. Every employee under a contract of service shall also register as a contributing employee. Further the employer is required to maintain employee records for up to ten years. An employer who qualifies but fails, neglects or refuses to register or to contribute, or who fails to keep the records is liable to imprisonment for two years or a fine of KES. 10,0000 or both in each case.

Persons falling outside the employer-employee relationship can contribute as voluntary members. Voluntary contributions are a minimum of KES. 200  consisting of KES. 100 for operations and subsequent minimum monthly payments of KES. 100.

Contributions are only accessible after five years of uninterrupted contribution and only for purposes of offsetting housing loans, security for mortgage or housing development. For those who are not first-time home owners or do not otherwise qualify, they can only access their contributions after 15 years of making contributions or upon retirement whichever is earlier.

Employers’ Concern

The main concern for employers is the increased cost of labour. The Housing contributions are seen as an additional and compulsory burden as several employers already provide housing allowances for their employees.

The employer also faces very stiff penalties including criminal sanctions for non-compliance with the provisions of the regulations including a two-year imprisonment sentence.

It is not clear from the Income Tax Act whether the remittance is tax deductible in relation to the employer. However, the employer will be able to deduct them from taxable income as staff cost.

What the Government Needs to Address

There are three main mistakes commonly associated with housing schemes: sacrificing location for housing quality, poor and unrealistic planning, and missing on actual affordability. The first mistake is in relation to location. It is important to note that for affordable housing residents, desirability of the location, such as being close to a town, usually takes precedence over house quality. Second, there is a tendency for housing schemes to be inadequately designed and suffer poor workmanship. Proper and realistic planning should be made to avoid this pitfall. The priority should be in providing basic infrastructure and services. Lastly, the scheme should not be such as to turn into an undue encumbrance to the participants in terms of repayment, both purchase and repayment affordability should be ensured.

The government should consider the effects of these regulations on employment and ease of doing business, the broader issue of adequate housing, land title and land security, improving infrastructure in cities to accommodate increased urban populations, corruption, and mismanagement, scope of beneficiaries of the fund, burden on employers especially the cost and sanctions involved, informal sector workers, and how relocations to affordable housing will be conducted with particular attention to forced eviction.

The employers in Kenya have enough burden with wages and associated remittances and the additional contributions may lead to increased wages that might impact the ability to take up or maintain the employees. This may lead to reduced employment rates.

The government may not be able to bring in all informal sector workers under the ambit of the scheme. Given that some of the biggest housing issues are in the slum dwellings among people of low income, it may not sufficiently address the housing problem in slums.

Previous forced eviction cases are a cause of concern especially in social housing cases. The government should have better means of eviction and engage communities in cases where persons may be relocated to social housing.

Even if the Housing Fund was to be properly managed, there is still a concern that those who have prior arrangements to buy houses are being compelled to contribute to a scheme whose benefit may not be in their best interest. There are already those with mortgage loans to pay, and the contributions are an undue additional contribution. Employers who provide housing allowances and other housing plans to employees may not be encouraged to maintain such other more beneficial schemes or they might reduce the benefits.

The contributing non-beneficiaries including those who earn above KES. 100, 000, non-resident individuals and those who are not first-time home owners are similarly placed in an unfair position - they do not directly benefit from the contributions and yet their contributions are potentially to be taxed at the point of contribution and withdrawal. Those who live in rural areas may also not benefit since the housing will most likely be situated in urban areas. Further consultation should be had on the regulations before implementation.

The housing problem is not new or unique to Kenya, only 13% of cities in the world have affordable housing. The global best practices in affordable housing include: inclusionary zoning and housing mix for more sustainable neighbourhoods and to prevent the often rapid deterioration of the poorer neighbourhoods, transit oriented developments to improve labour mobility and enhance socio-economic integration, utilising government held land to reduce land costs, land assembly and readjustment for improved value, application of industrial construction methods including standard building contracts with short construction periods, and improving home financing. Kenya can and should strive for not only affordable but also adequate housing in both rural and urban areas.

Should you have any enquiries regarding this article or any general queries on the subject matter, kindly contact Carole Ayugi, Managing Partner, MMAN Advocates.

Disclaimer: This article has been prepared for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing on this article is intended to guaranty, warranty, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations


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