Unstable Ground: Analyzing Kenya’s Property Markets

Ayeona Hopkins

The COVID-19 pandemic has underscored the importance for countries to build robust domestic institutions that can provide equitable economic and social opportunities. For instance, in Kenya’s capital Nairobi, mass government evictions earlier this year displaced more than 5,000 people, putting them at further risk of contracting COVID-19. Despite having documents proving ownership from the city council or having paid rent, people were evicted, and homes, businesses, and churches were demolished. Although property rights have long been an issue in Kenya, this violation during a global pandemic has highlighted the consequences of not having adequate and enforceable land tenure systems in place.

In 2008, then-President Mwai Kibaki launched Kenya Vision 2030, a plan outlining goals to accelerate Kenya’s progress towards an industrialized middle-income country by 2030. One of the foundational pillars identified as critical to the success of the Vision was land reform, “which is an important driver of rapid economic transformation.” In 2010, Kenya also ratified a new constitution that attempted to address land grievances and strengthen land rights. Subsequently, in 2012, the government passed a series of new legislation including the Land Act and the Land Registration Act to further implement the land charters in the constitution. The 2013 Truth Justice & Reconciliation Committee’s

International Property Markets Scorecard

Land provides the foundation for security, shelter, income, and economic inclusion. Businesses – particularly micro, small and medium-sized enterprises (MSMEs) – and individuals must be able to rely on an efficient, fair, and functioning property market to sustain their livelihoods and create new economic opportunities. To sufficiently protect and promote property rights, and therefore improve inclusive growth, governments, civil society organizations, reformers, and the private sector must understand the underlying causes of property rights violations. To assess the efficiency of property markets in various countries, CIPE and IHC Global, with support from World Citizen Consulting, developed the International Property Markets Scorecard, a systems analysis tool that looks at the core institutional components of property markets.

The Scorecard consists of six Core Elements: property rights laws and enforcement, access to credit by small businesses, efficiency of governance, rational dispute resolution, financial transparency, and appropriate regulations. These elements are integral building blocks of fair and inclusive property markets. The Scorecard methodology involves secondary research from international indexes and in-country field assessments using focus groups and interviews to capture conditions on the ground. The field assessments are tailored to each country to ensure local context is captured, while the secondary research remains consistent across different countries to ensure comparability. The Scorecard can be used by reformers, policymakers, governments, and donors to understand property market conditions and identify areas where institutional components are weak. CIPE and IHC Global partners have continued using the Scorecard to inform their in-country work with guidance from World Citizen Consulting Principal Bill Endsley.

In 2011, CIPE and the Institute of Economic Affairs (IEA) used the Scorecard methodology to assess the strength of property markets in Nairobi and Mombasa, Kenya. Since the initial Kenya Scorecard was published, the country has gone through several legal developments that have contributed to changes in the core pillars of the property market. For instance, over the last decade, the government has enacted laws to protect women’s property rights in marriage. The Matrimonial Property Act passed in 2013 grants women a legal claim to land ownership. However, there are many gaps in the law and women who are divorced are often unable to claim land rights. In 2020, Paul Baite, Chief Executive of IVX Limited Consulting, conducted desktop research to update the Kenya Scorecard. This blog analyzes the six core Scorecard elements, comparing how they were rated in 2011 and their updated ratings in 2020.

Property Rights

Effective property rights are legally protected, secure, recorded in a single, accurate, widely accessible electronic registry, and lead to high levels of formal ownership for all citizens. In 2011, the Scorecard found that property rights in Kenya were very weak and should be the key focus area for improvement. In particular, there was a lack of awareness among small businesses of the legal protections and rights regarding land ownership and transactions. In 2020, the overall property rights were stronger, although some elements remain weak such as formal ownership. The legal framework has greatly improved as a result of several land acts passed in 2012 and subsequent amendments, although bureaucratic hurdles and lack of transparency remain in processes to acquire land.

Access to Credit

An efficient financial sector is a key enabler for property markets and should allow access to various forms of credit that can be used to purchase property and start businesses. In 2011, the overall access to credit for MSMEs was rated as strong due to Kenya’s strong banking and financial sector. However, in 2020, the Scorecard found that access to credit was weak and vulnerable to government interference, which significantly influences the allocation of credit. The decline in score is largely due to the interest rate caps implemented in 2016 that put a ceiling on lending rates by banks and financial institutions. The law came in response to widespread consensus that the lending rates were too high and allowed banks to practice predatory lending. According to the World Bank, the interest rate cap shifted lending to corporate clients and crowded out lending to MSMEs, making it harder for entrepreneurs to access loans.

Effective Governance

In both 2011 and 2020, effective governance, which is defined as a fairly elected government that limits and fights corruption and functions efficiently and transparently, was rated as weak. In both years, corruption was determined to be a main driver for the lack of effective governance. According to the Corruption Perceptions Index, in 2010, Kenya ranked 154th out of 176 countries and in 2019, Kenya ranked 137th out of 180 countries for the level of corruption in the public sector. Although Kenya has slightly improved its rank, corruption is still widespread and systemic. In particular, there have been many instances of corruption regarding land ownership and distribution by public officials. In 2016, the Lands Ministry underwent significant reshuffling of its staff and digitization of its services to identify and fight corruption, but corruption and abuse of power remain high.

Rational Dispute Resolution

In cases of a dispute or loan default, there must be an efficient and fair institutional framework that mediates the rights of creditors and landowners. In 2011, rational dispute resolution was rated as weak because of a lack of trust in the judicial system to resolve land disputes, which lead to low uptake of dispute resolution mechanisms. Additionally, due to underfunding of the judiciary, there are significant backlogs in various courts including the Land and Environment Court. Kenya also has a high level of informality in property markets leading to reliance on trust and reputation rather than formal contracts, making formal dispute resolution impossible. However, since 2011, systems have been put in place to more efficiently enforce contracts. For Instance, in 2016, the judiciary introduced Court Annexed Mediation that significantly reduced the time taken to resolve a case, leading to an increased uptake of formal mediation. These reforms have led to an overall strengthening of the dispute resolution framework.

Financial Transparency

Efficient property markets rely on a transparent financial system that allows for widespread access to financial services and capital. The financial transparency in Kenya has improved from weak to strong since 2011, largely driven by government reforms to simplify foreign and domestic investment. According to the World Bank’s Country Policy and Institutional Assessment (CPIA), from 2010 to 2018 Kenya marginally improved its public sector management and institutions score from 3.3 to 3.4. The public sector management and institutions category assesses Kenya’s performance in areas such as: property rights, quality of public administration, and transparency and accountability in the public sector. This is the only sub-component of the overall CPIA score to improve over this period.

Appropriate Regulation

Underpinning robust property markets is a regulatory framework that can be easily implemented and produces accurate reporting of property values and protection from risks. Appropriate regulation in Kenya’s property markets was weak in 2011 and the Institution of Surveyors of Kenya finds that it remains weak due to the persistent use of unqualified agents to assist in property matters instead of professionals. Capital markets also remain weak with little access for MSMEs to capital flows.

Commenting on the results of the 2020 Kenya Scorecard, IEA noted that despite the opportunity and institutional architecture that Kenya’s constitution of 2010 provided, the property rights Scorecard confirms that the hopes of citizens remain unmatched. This is because the reforms to ensure clean property records, cadastral information, transparency, and effective and competent National Land Commission have not happened. “For a country where the majority rely on agriculture, the paradox is why more than half of all land still lacks formal registration. Therein lies the challenge for development of property markets in Kenya,” IEA staff said. The imperative for continued reforms remains and the Scorecard is a tool that can further facilitate much-needed dialogue on improvements.

Published Date: October 19, 2020