Income Tax Act cap 470 defines a Home Ownership Savings Plan as a savings plan established by an ‘approved institution’ and registered with the commissioner for Income Tax for receiving and holding funds in trust for depositors. It is a tax-sheltered savings plan whose main objective was to enable individual depositors to save for home acquisition or development and was introduced in Kenya in 1995. As per Section 22C (8) of the Income Tax Act, an ‘approved institution’ means a bank or financial institution registered under the Banking Act (Cap. 488), an insurance company licensed under the Insurance Act (Cap. 487) or a building society registered under the Building Societies Act (Cap. 489). The regulation was effected on January 1 1996, and from the initial regulations, depositors were allowed tax rebates of Sh4, 000 per month maximum or Sh48, 000 per annum (effectively reducing an individual’s taxable income by the amount of their monthly contribution) with the condition that it is with a Registered Home Ownership Savings Plan. In 2007, the Income Tax Act was amended to allow any interest earned on the deposits to be tax exempted upon withdrawal albeit at a maximum of Sh3m. However, as part of the Government’s measures to fulfill its pledge to promote low-cost housing, the tax-deductible contributions by a depositor to a registered home ownership savings plan were increased from Sh48, 000 to KSh96, 000 annually (KSh4, 000 p to Sh8, 000 per month), effective July 1 2018, and effective for an individual’s savings for the subsequent ten-years. Registered Home Ownership Savings accounts in Kenya are restricted to first time home buyers and to purchase of a ‘permanent house’, which the Income Tax Act defines as a residential house that a financial institution would accept as collateral for a mortgage, and includes any part or portion of a building, used or constructed, adapted or designed to be used solely for human habitation. The accumulated funds are withdrawn tax-free to strictly purchase or construct a house. However, if the depositor utilizes the funds for any other purpose other than to acquire a house, they become taxable in the year of withdrawal.So far, unfortunately, only one institution, Housing Finance Company (HFC), offers Home Ownership Savings Plans in Kenya. It is not clear why other banks have not offered HOSP, and we also believe it is important that other savings vehicles such as Money Market Funds and investment banks should qualify as Home Ownership Savings Plans. Globally, Home Ownership Savings Plan are referred to as Contractual Savings for Housing (CSH) schemes, which are defined as a contractual agreement between a financial institution and a customer that grants the customer the right to obtain a preferential mortgage after a minimal saving period (World Bank). Depending on the contractual agreement and the laws of a country, these savings can be used for land acquisition, housing construction, home improvement, or to purchase a new home. Globally, they are characterized by contractual deposits, tax deductions for mortgage interest payments and tax exclusion for capital gains for owner-occupier residential property, government subsidies, and direct provision of homeownership loans for low and middle-income households.There are two main types of CSH schemes: Closed systems, where home loans are funded wholly with savings pooled together by the individual under the CSH scheme, and; Open systems, where a lender is permitted to access other funding sources (such as capital markets) in case the inflow of savings is not enough to meet loan demands.
Contractual Savings for Housing Schemes originated in Europe where they have been considerably successful. The French Plan Épargne Logement (PEL) for instance, and the German Bauspar system, both established in the 20th century.Although not very common in Africa, Contractual Savings for Housing has been adopted in countries like Nigeria, Tunisia, Ethiopia, and Morocco:
In Nigeria, depositors are required to save with the Nigerian National Housing Fund (NHF) for at least six months before acquiring a home loan from the fund.
In Morocco, only banks are permitted to offer CSH schemes where the maximum amount that can be saved is the equivalent of Sh4m. Depositors, who must be first time homebuyers, are required to make a minimum deposit of the equivalent of Sh5, 000 and subsequent top-ups of at least equivalent of Sh30, 000 per year. At the end of the savings phase, the depositor can acquire a loan of at least three times their savings. The interest rate charged on these loans is 0.5% points lower than the interest rate applied to a normal housing loan
In Ethiopia, CSH scheme has been relatively successful enabling uptake of over 175,000 affordable units since 2006. The scheme was introduced by the government in a bid to provide housing for low and mid-income families and promote a culture of saving among Ethiopians. However, these funds are used for government’s affordable housing project, together with proceeds from housing bonds, and therefore subscribers are strictly limited to purchasing a house under the government’s Integrated Urban Housing Development Program (IUHDP). The scheme, managed by the state-owned Commercial Bank of Ethiopia (CBE), offers three saving options depending on an individual’s income class, with minimum monthly contributions of equivalent of Sh800 to Sh12, 200 for three to seven years, which are remunerated at approximately 6%. Subscribers are then offered a housing loan with repayment periods of 17-25 years and interest rates of 7.5% – 9.5%, in comparison to 18% offered by other financial institutions
Generally, CSH schemes are still nascent in Africa and with minimal success, which attributed to several factor including; lack of public knowledge; general lack of appropriate regulatory and technical structures and; the fact that they are mainly led by government-controlled institutions whereas in developed countries such as France and Germany, they are mainly managed by private financial institutions and building societies, with minimal government restrictions.