For most Kenyans, residential mortgages have always been synonymous with the Housing Finance Company of Kenya (HFCK). Other smaller firms included EABS & S&L (a KCB subsidiary). Recently, banks like Barclays & StanChart have entered the market.
HFCK had an IPO in 1990, followed by Uchumi in 1991. Both firms were financially stable at the time. Then their paths diverged dramatically.
HFCK suffered during & after the "Goldenberg Scam" years as interest rates shot through the roof. Goldenberg had accelerated monetary expansion thus leading to high inflation. Read Milton Friedman's theory on the link between Monetary Expansion & Inflation.
The new CBK Governor, Cheserem, favoured using short-term but high-yielding T-Bills to mop up the excess liquidity to control runaway infaltion. The unfortunate side-effect was the shift of deposits at Financial Institutions to T-Bills.
HFCK made long-term construction & real estate loans was faced with a asset & liability mismatch. They paid much higher interest rates for short-term deposits but were unable to pass on the entire "increase" to their customers.
Ironically, Uchumi under the brilliant manager Suresh Shah, saw the opportunity & invested its surplus cash in T-Bills at rate exceeding 70%!
The asset-liability mismatch & the related increase in interest rates led to extremely high default rates at HFCK. The increase in NPAs & Bad Debts depleted HFCK's Capital Reserves. At various times during this period, HFCK was in default of CBK's Capital adequacy ratios. Nevertheless, for political reasons, HFCK (just like NBK) was never put under statutory management by CBK.
Since then, HFCK has used the courts, a long, expensive & laborious process, to bring some defaulters to the negotiating table. This resulted in a better quality Loan Book & Balance Sheet. Nevertheless, the path to "acceptable" profitability has been long & hard.
There was speculation in 2005 that one of the larger banks e.g. BBK or SCBK will buy out HFCK but nothing came of it.
2006 was a turning point for HFCK with the appointment of a new CEO & considerable interest from Trans-Century (a buy-out fund). Furthermore, it is no longer on CBK's watch list & HFCK profitability through 3Q 2006 is much higher in 2006 vs 2005.
HFCK plans a Rights Issue in 2Q 2007 to:
- Strengthen its Share Capital
- Expansion into core banking with a strong focus on mortgages
- Meet Basel 2 requirements
- Position itself for expected building boom in Kenya.
- Counter competition from other banks e.g. Barclays, StanChart, KCB
There are no firm details as to the amount to be raised but it will probably be at least KES 1 Billion. An interesting outcome will be the diminished influence of the government (assuming it relinquishes its Rights) while setting in motion the possibility of a takeover.