Essay: Housing delivery systems

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  • Housing delivery systems
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1.1. Background
Housing delivery system in most of developing countries is an integration of various interrelated components which comprises land, building materials, infrastructure, building policies and regulations and the most crucial component is finance. Finance component in housing delivery is very important due to the fact that it cause huge financial requirement for housing production. Residential housing as a shelter is one of the Universal Recognized basic Needs (Mushoga 1986:1). It protects people from element of nature like rainfall, Cold, Wind, Sun rays, Wild animals, and others. Provision shelter enables people to engage themselves in various activities with a sense of comfort, security and privacy, enjoyment and confidence. Also according to the Human Right Declaration of 1948 housing is declared as a basic right; “That everyone has a right to a standard of living adequate for the health and wellbeing of himself and his family, including food, clothing, housing and medical care, necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control. This is stated in article 25.1 of the Universal Declaration of Human Rights, 1948” (Kraus, 1999:1). Following this declaration, the priority accorded the issue of housing is immense to most of the governments and availability of sufficient but basic housing for all is stated as priority for the enhancement and development of social needs of the society. For instance the constitution of South Africa, 1996, lays a new foundation for housing in South Africa where housing is a fundamental human right embodied in section 26 of the constitution denotes that every citizen of the country has a right to access to adequate housing. (Moss, 2000:1).
Housing investment can be considered as capital investment in the economic point of view, it generates stream of services over a considerable period of time and has a positive effect on social welfare, capital formation, income creation, external and domestic price levels.
Housing development process is a long term undertaking project which requires huge sum of money. Based on the long term nature of commitment and huge sums of money involved, risk takers have traditionally been institutions rather than individuals. Therefore without financial backing developers are unable to transform their dreams of owning house become just a night mere. Thus, the first important question in real estate development is concerned with how to undertake the financial arrangement for carrying out the project.
Critical evaluation of the factors that influence financing for housing in the country could lead to the formulation of models that if well assimilated into the existing financial system could yield effective and efficient results.
1.1.1. Case Study; Tanzania
This study focuses on Tanzania as a developing country, where the development of its built environment has been described as vibrant. The research will aim at urban area. Real estate establishment takes place in all parts of the country and this research will attempt to find out whether the factors that affect housing finance in Tanzania are uniform are uniform or vary with that in another part.
Tanzania offers both a micro and macro-economic platform enabling critical evaluation of all factors available in both economic environments. The micro-economic environment attempts to find out the attitude of individual households in the demand and supply of housing finance. The impact on the country’s money market due to macroeconomic shocks for instance volatility of interest rates consequent to inflation, unemployment rate and employment rate among other factors.
1.2. Statement of the Problem
In the line with the government’s efforts in achieving vision 2025 and the overall development of the economy which famously stipulated by the statement “Tanzania Industrial Economy” (Tanania ya Uchumi wa Viwanda), provision of housing is essential with an acute shortage of 200000 units annually and the increasing population, a housing problem arises and as a result consequently, it creates social and economic problems. Housing here is not the only problem but adequate housing that can allow the comfortability of mankind. The most importance attached to housing is the problems by government resulted from lack of proper housing policy and regulations in previous years. The Deputy Minister for Lands, Housing and Human Settlement Development, Ms Angelina Mabula, said that “the government is looking forward to establish an authority that will oversee and regulate all operations in the real estate sector, after the enactment of the Real Estate Development Act. Also the government is in the process of establishing a law that aims at regulating the sector in a fair and professional manner (
Lack of finance has been caused by the intermittent sources of income and low income from the informal employment. (UN-Habitat, 2003) puts forward that the informal sector which provides for the bulk of employment to the low income earners, has not been generating regular and enough income to undertake the expensive housing construction and improvement. As a result those low income earners need to save for many years if they ever dreams to live in an adequate house.
Fallis (1994) noted that that housing problem might be focused on the causes, for instance, the housing problem may be described as being caused by underdevelopment of mortgage market which leads to loss of simple rental housing. There were various reasons deducted as causes of housing problems, the most important reason has been the variation between the price of habitable and decent accommodation and the individuals who can afford it. In the long run, market forces and government intervention determine the specific size of each housing tenures (Warnock and Warnock, 2008).
There exist a large gap between the demand and supply of housing finance. It needs critical analysis and clear understanding of the money market and the current financial in the country for effective housing finance and house delivery. The construction or purchase of housing in many countries is inhibited because individuals cannot borrow the funds. The available loans are channeled to high and middle income earners. The problem is how to avail the loanable funds to the low income earners? Finding the reasonable measures address this problem and followed by implementation of will provide for adequate affordable housing for the low income earners.
Lack of finance has been caused by the intermittent sources of income and how the low income from the informal employment; (UN-Habitat, 2003) puts forward that the informal sector which provide for the bulk employment to the low income group has not been generating regular and adequate income to accommodate the expensive housing construction and improvement. As a result to this, those in low income group are required to save for many years in case they want to realize a dream of living in an adequate and comfortable house.
In addition to those problems, another problem is how to avail loanable funds to the low income earners who do not have collaterals to act as security and risk bursting the real estate bubbles? Can the available financial models allow it? If so, how to do we avoid a scenario like that happened in U.S.A in 2007; too much borrowing and assumptions that the prices of houses would only go up led to the mortgage crisis. According to (Baker, 2010) before the mortgage crisis, banks offered easy access to money that one could qualify for mortgage with little or no documentation.
Considering the critical analysis and evaluation of the factors that influence financing for housing in the developing country’s could lead to the formulation of models that if well assimilated into the existing financial system could yield effective and efficient outputs
1.3 Research Objectives
1.3.1 The main objective
The main objective of this study is to investigate factors that influence the development of property in Tanzania, Particularly in Dar es Salaam City.
1.3.2 Specific Objectives
Apart from the main objective of this research proposal, the following may be considered as some of the specific objectives of the study.
 To establish whether interest rate level influence performance of mortgage financing among financial institutions and commercial banks in Dar es Salaam, Tanzania;
 To analyze to what extent that income of the borrowers influence performance of mortgage financing among financial institutions and commercial banks in Dar es Salaam, Tanzania;
 To analyze the extent to which mortgage valuation cost influences the performance of mortgage financing among financial institutions and commercial banks in Dar es Salaam, Tanzania;
 To view the legal system regarding mortgage financing in Tanzania

1.4 Research Questions
(i) What are the main factors that influence the supply and demand for loanable funds for real estate development in Tanzania?
(ii) What causes most of financial institutions and commercial banks in the country not to engage in mortgage financing?
(iii) What is the impact of Socio-economic and financial factor and government policies in housing development or real estate investment?
(iv) To identify direct and indirect sources of housing finance for households and what strategies can avail the funds to low income households?

1.5 Significance of the Study
The findings on the study will be useful to the stakeholders and various players in the real estate sector. It will find out that the availability of housing is not determined only by the interplay of demand and supply but also other factors such as financial factors, socio-economic factors, and the government policies and regulations. The study will help individual in decision making processes and assessing various ventures that can avail funds for property investment and development.
Knowledge of the factors that significantly influence Tanzanian investment real property demand could help the government, land, housing and settlement sector and other associated sectors and policy makers in planning growth strategies, which will promote standard of living among Tanzanian in the country.
Furthermore, the study is expected to contribute to the body of knowledge on the determinants of housing demand in the countries. In addition the study will provide a future base for more in-depth studies on housing demand and delivery in Tanzania.

2 Theoretical Literature Review
The literature on finance reveals that there are only two types of finance available which are debt and equity finance. Using either as a source of financing a project either depends on the characteristics of assets being financed and transaction cost. Reasoning suggests the use of debt to finance re-deployable assets and equity used to finance non re-deployable assets (Williamson, 1988). Debts are used if the ability to exploit potentially profitable investment opportunities is limited by the resources of the owner (Jensen and Meckling, 1976). Bank lending as a form of debt can be categorized into two: Either as asset specific or corporate loans. Again, the debt can be either secured or unsecured. Debt finance can be obtained from formal financial institutions like banks, micro-finance arrangements, indigenous moneylenders, family members, employers and government.
Equity finance gives the household total control over the decisions when undertaking the project if the household completely funds the project using equity. According to (Tirole, 2006) claimed that financial instruments vary widely according to the characteristic of term to maturity. Equity has no redemption date and therefore possesses an infinite term to maturity. One of the biggest problem facing financial institutions is the lack of information of the promoters and the projects to be financed to determine whether the borrower will be able to pay the principal and interest when they fall due. According to (Altman and Saunders, 1998) emphasized the selection of information on various borrowers’ details to include their character, capital, capacity and collateral.
According to the Land Act, 1999, Cap 345, section 111 (3) make reference to the mortgaged land to mean and include a mortgage right of occupancy, mortgage lease and sublease and a second or subsequent mortgage. In addition section 112 (1) state that; “An occupier of land under a right of occupancy and a lease may, by an instrument in the prescribed form, mortgage his interest in the land or part thereof to secure the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfillment of a condition”.

2.1 Mortgage Financing as a Means of Property Development
2.1.1 Mortgage Financing
Mortgage financing seems to be a solution to the housing problem in many countries. The mortgage is a debt instrument attached to fixed collaterals of specified real property that the borrower held responsible repay with a predetermined set of payments. Individuals and businesses often use mortgages in the acquisition of large estate or property without paying the entire amount upfront. It is a fixed income investment for the investor supplying the mortgage money to the borrower (Rutledge, 1997:3)
According to the Land Act, 1999, Cap 345, section 111 (3) make reference to the mortgaged land to mean and include a mortgage right of occupancy, mortgage lease and sublease and a second or subsequent mortgage. Furthermore, section. 112 (1) state that; “An occupier of land under a right of occupancy and a lease may, by an instrument in the prescribed form, mortgage his interest in the land or part thereof to secure the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfillment of a condition”.
2.2 Theoretical Concept of finance
2.2.1 Mortgage Financing
Generally investors and real estate developers commonly, they often use “leverage” or mortgage financing in addressing real estate investment. This is according to Rutledge (1997:1) in the article titled “How real estate debts affect allocation”. He defines leverage as actually the use of borrowed money in relations with acquisition and ownership of assets. In the Investment settings Rutledge (1997), “mortgage debt is normally non resource that is to say the lender may claim the estate property when the borrower’s default but may not recover other assets from the borrowers. The variables in the mortgage finance includes, Independent variables are Interest rate, Cost of processing mortgage finance.
2.2.2 Title Theory and Lien Theory of Mortgage (Models)
These are models in which financial institutions used to deal with mortgage financing, since the mortgage is said to hold a title interest on the property mortgage. The lien model gives the mortgagee a lien interest in the property. In the title theory banks, the mortgage is treated as transferred title to the mortgagee, subject to the mortgagee’s duty to recovery if payment is made. The title is said to remain to the mortgagee until the mortgage has satisfied and foreclosed. Although the mortgagee has the right of possession to the property, there is generally an express agreement giving the right of possession to the mortgagor. The mortgagee is said to hold the title for security purposes only. The mortgagor is given the right of possession(Buckley and Kalarickal, 2004).
In the lien theory Banks, the mortgagor retain legal and equitable title of the property but conveys an interests that the mortgagee can only foreclose upon to satisfy the obligation of the mortgagor. This is equivalent to the future interest of the property that allows the mortgagee to process a foreclosure. The interest is security interest or mortgage which forms a lien on the property, in this theory the possession of the property arises upon a default. The mortgagor has the right to use mortgagee for any interference with the right of possession (Buckley and Kalarickal, 2004).
For practical applications there is generally a little differences between a title theory and a lien theory. The core difference arising in the title theory bank is that the mortgage is given the right to possession of the property before the foreclosure is complete. The language of mortgage provides for possession right being to the mortgagor up to the time of the foreclosure.
2.3 The Housing Overview
This study focuses on the problems of real estate development in Tanzania. Therefore looking at the issues escalating mortgage financing it will better to have a general overview on housing delivery. Various authors have defined the word housing differently. Jorgensen (1977:12) in his book “Housing Finance for the Low Income Groups” define housing as the process and product of creating shelters for humans. He further writes, “In official terminology a house is not house unless it is approved under the existing laws”. However, in this case we will deal with both formal (Legal) and informal (illegal) housing.

According to Stafford (1978:25) in his study on, “The Economics of Housing Policy”, he defines, “Housing is durable and good producing both necessary and luxury flows of consumption services as well as representing a capital asset to its owner”. Implies that it is consumption as well as an investment,

Previously, housing sector in different countries was owned by governments and it was the government responsibility for providing housing to their citizens. However the situation has changed governments are no long housing providers. Governments now play the role of creating favorable and conducive environment for the private sector to invest in housing delivery. According to the 1993 World Bank policy paper gives the roles that governments have to play in the provision of housing. It states “The role of the government in the provision of housing is to remove imperfections in the market and to ensure its smooth operation. The idea that housing needs can be met through subsidies is untenable. Governments should create conditions whereby households are able to house themselves, without direct government as a producer or subside”.

However, Jorgensen (1982) has criticized the government intervention, he writes, “Government intervention has been a productive because scarce resources have been directed to meet many demands of few instead of demands of many”

Governments were advised to throughout the earlier roles as housing producers and instead adopt role of housing sector as a whole and enhance Makoba (2000) in his thesis titled “Financing Mechanism for Home Ownership: A proposal for Tanzania “Suggests for the government to provide enabling environment to housing financing, land for housing, availability and prices of building materials and all items related to housing provision like building regulations etc.

2.4 Present Housing Situation in Tanzania
It is undoubted the shortage of houses is annually increasing at acute rate in Tanzania. Immediately after independence in 1961 Tanzanian government came up with the strategy of housing provision, eradication of illiteracy, hunger, poverty and diseases would be a cornerstone of her domestic policy (Kraus 1999:17). For clear understanding of the housing situation in Tanzania it will be good to know who are living in those houses particularly the characteristics of the population and households. The importance attached in the housing problems by different government have resulted has been boosted by the country’s efforts to develop its mortgage markets, with the introduction of the Tanzania Mortgage Refinance Company in 2010 under the Central Bank’s Housing Finance Programme which can either be institutional, comprehensive, residential or social in nature. There were various reasons deducted as the causes of housing problems but the most important reason has been the variation between the price of habitable and decent accommodation and the number of individuals who can afford it.
2.4.1 Population Growth and Urbanization
Tanzania experienced impressive GDP growth rates over the past decade averaging almost 7% per year, with at least 31.6 percent of the country’s 53.47 million people live in urban areas with population growth rate of 3% and an urbanization rate of 5.5% per annum. The strong and sustained economic growth, coupled with fast growing population (expected to more than double by 2050) have greatly contributed to the acute growing housing sector demand. The acute housing demand has also been boosted by the country’s efforts to develop it mortgage markets, with the introduction of the “Tanzania Mortgage Refinance Company” in 2010 under the Central Bank’s Housing Finance Programme. This has had immediate, tangible impact of the number of mortgage lenders in the market to increase from 3 in 2009 to 28 by June 2016 and the average mortgage interest rate falling from 22% to 16%, Housing Finance in Africa Yearbook 2016(7th Edition) (Africa, 2012).

2.4.2 Economic Characteristics of Households
Obviously, the households’ income backed his capability to repay and thus to borrow. When the amount the borrower is willing to devote annually in repaying the loan is computed in terms of percentage of his/her income. Thereafter, it is possible to express the capital sum as multiple of borrowers’s annual income for a given interest rate and loan term (Makoba, 2000:34)

Self-employment is a very good source of income in most of urban areas. Data indicates that only in Dar es Salaam is a small majority of people are assured of regular income, which those employed in private or public sector is 53.4% (Krauss, 1999:17). Thus formal income is important for individual to have access and manage to secure loan from financial institution where no security of income, then the borrower must have a property as collateral in order to obtain loan.

2.4.3 Housing Problem in Tanzania.
It is undoubted the shortage of houses is annually increasing at acute rate in Tanzania. The housing problem is connected with the country’s urbanization development. The urban areas is where the housing problem is critical, hence the demand for housing outweighs the supply available. Various writers and researchers have described this problem in their works, for example according to Makoba (2001) overcrowding levels that are found in urban areas confirm the growing housing shortage. He further writes, on understanding that an occupancy rate of more than two persons per room constitutes overcrowding, the percentage of families in overcrowded homes in Dar es Salaam city is 34.4 percent, Mwanza city is 34 percent, Arusha and Moshi is 37.2 percent”.

Also, Simba in his papers on “Political Economy of housing financing in Tanzania” has also covered question of urban housing problem. He wrote inaccessibility to urban planned land by they would be house developers and lack of funds (emphasis supplied) are the major reasons for this problem.
Tanzania experienced impressive GDP growth rates over the past decade averaging almost 7 percent per year, with at least 31.6 percent of the country’s 53.47 million people live in urban areas with population growth rate of 3% and an urbanization rate of 5.5 percent per annum. The strong and sustained economic growth, coupled with fast growing population (expected to more than double by 2050) have greatly contributed to the acute growing housing sector demand. Housing Finance in Africa Yearbook 2016(7th Edition) (Africa, 2012).
2.5 Financing Mechanisms for Real Estate Development
Real property is concerned with obtaining money by people who want to build or buy a property. Real property finance could be similar in structure to commercial finance or regular consumer finance, but it has certain characteristics which carries some inherent risks in financing other investment opportunities. Differences that has been cited between property finance and other kinds of finance according to Mahanga, (1998) includes
 Real property finance is a very long-term investment; the period of property finance management is longer than any other loan. This is due to the fact that real estate are usually built of durable materials that are expensive relative to current income hence providing service for long time. Here the borrowers would like to extend repayment period over long time.
 An immovable asset secures loan; the borrower cannot hide the collateral, however when securing a property development loanable fund needs proper security such as occupancy document and registration thereof.
 Repayment is usually on annuity basis; that is equal periodic payment covering both the interest and principal
The loan arrangement seldom covers the full price or value of the asset to be built or purchased. Borrower is usually required to contribute a certain percentage of the total funds needed from his personal savings or other sources. Sometimes, the borrowed amount usually is large, several times the annual income of the borrower.
2.5.1 Principal forms of Finance
As provided earlier the funding of property development is a complex and needs a pecialized area of practice. Property financing shows that only two forms of finance available which are debt and equity finance. Reasoning suggests the use of debt to finance re-deployable assets and equity used to finance non re-deployable assets (Williamson, 1988). Debts are used if the ability to exploit potentially profitable investment opportunities is limited by the resources of the owner (Jensen and Meckling, 1976) Equity Finance for Housing
Equity finance may be said to consist of all monies pulled together from actors-friends, relatives or business entities, who are interested in maintaining interest in the house purchased with the money raised. Canada Mortgage and Housing Corporation define equity as any material contribution that a funding group controls and that reduces the amount of mortgage financing and/or government subsidies required. For instance of equity include:
 Land and/or buildings that the sponsor group owns or that is being donated by the local government, another nonprofit organization or a faith group.
 Cash that the sponsor has saved, or raised in a fundraising campaign
 Deposits from committed purchasers in the case of a life lease or home ownership option.
The most common equity-financed model for housing is the Real Estate Investment Trust (REIT). Real Estate Investment Trusts are basically shares in Real Estate Assets that trade on an exchange. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. The concept of REITs began in the United States in the 1960s but became popular in early 1990s (Seiler & Seiler, 2009). In Tanzania, however the REITs were recently launched through Watumishi Housing Company Real Estate Investment (WHC-REIT) after being authorized by, The Capital Markets and Security (CMSA) of Tanzania in 2015. WHC-REIT was created to help filling the gap for public servants’ housing for which demand is strong in Tanzania ( Debt Finance for Housing
The gap between total project costs and the amount of equity and capital grants invested is made up for through debt. Debt finance can be classified into short-term and long-term. There are different types of debt but the most common in housing are construction and mortgage financing. Construction financing in most case is provided in lump sums, referred to as advances, as components of the project are completed. Interest on the outstanding balance is added to the total accumulated loan amount, repayable on occupancy of the completed building (Mortgage and Corporation, 2013). Mortgages are used for long term financing. Mortgage lenders typically include; banks, trust and life insurance companies, pension funds and cooperatives.
The most popular funding instrument for housing is the term loan. Here, a specified maturity date sets the time for repayment of the loan amount and interest. Van Order (2007) identifies models for funding loans to be either portfolio lender model or securitization model. While portfolio lender model involves financial intermediaries originating and holding loans which are funded with debt or deposits, the securitization model involves raising funds through the bond markets.
Term loans vary from short term through the medium term to long term (project finance, capital expenditure)-which might have tenure of between 10 and 30 years. Lending for commercial purposes is short-tenured while the typical tenure of mortgage loans varies between 10 years and may be as long as 30 years.
In many developing countries, families are frustrated by their inability to borrow the money to make a house purchase. Housing finance may be limited to those with a high and steady income. Individuals able to secure finance are usually required to provide an initial down payment of 30% or higher, of the value of the unit and the mortgage may be large relative to income Asian Development Bank. Those unable to secure a mortgage are forced to save for many years or abandon the dream of owning their own home. Moreover, when housing improvements are incremental related to the rate at which people can save, the outcome may be inefficient. For example, people start by using cheap, poor quality materials that soon need replacement(UN-Habitat, 2009).
2.5.2 Financial arrangements for Loanable funds
As Darlow (1988:266) outlined, there is no definite list of loanable fund methods. New techniques develop in response to the market conditions which varies considerably over time and continually challenge the integrity of those whose role is to design appropriate funding packages. Funding arrangement includes; Traditional Techniques and Innovation Techniques Traditional Techniques
 Bank loans; the traditional form of finance needed for the development period. This comprises overdrafts, revolving credit, fixed term loans and mult-option facilities which offer the developer a wider choice in the period, interest rate, currency, repayment schedule and security required.
 Project Management; According to Rilly (1994) states, project finance is money amount provide to company in respect of a single project which is secured in some ways against that project. Normally, project finance is given by funding institution to development Company under the terms of a funding agreement between the two. The developer acquires the land and develops it, the funding institution provides the finance.
 Joint Ventures; This done through combining of the resources of land, development expertise and finance to carry out a given project and then share in the profits.
 Sale and leaseback; It involves the conversion of a capital asset into development finance at the expense of a regular repayments.
 Forward Sale; this arrangement, developers secures his short-terms finance by producing a contract for the forward sale of completed project to a third party person.
 Mortgage finance; It involves an arrangement which involves pledge of real property as security for a debt. The promissory note from the borrower to the lender services as evidence of debt. Innovative Techniques includes:
 Unitization and Securitization; under this arrangement ownership of the property or portfolio of properties would be spread among a number of investors. Instead of owning a property out right, the investor would own a piece paper that gives him equivalence of ownership right to a portion of the property (Brett, 1994:220)
 Secondary Mortgage Markets (SMM); these are markets which deals with mortgage debts which are collateralized by assets like land and buildings. Like any other secondary market, the main function of secondary market is to increase the liquidity of the instrument being traded. The greater the liquidity or marketability of the security, the deeper and broader the market for it.
 Multiple Option Facility (MOF); this is the flexible method of processing the money markets for short term funds. It provides cheap funds due it encourage a synergy of banks who agree that they will provide a required amount. The interest rate is agreed at his joint point, not as an absolute amount but as a margin over a London inter-bank offered rate (LIBOR, the normal yardstick of the cost of funds in the money markets.

2.6 The role of the government
Experience indicates that the level of government intervention varies significantly in different countries. For example in U.S.A the most important role is creation of enabling institutions such as mortgage insurance institution and liquidity facility in the form of secondary mortgage markets. These institutions have enabled the private institutions in mobilization of funds, Originate credit and manage risks more effectively. Likewise, in Canada the government has generally opted for an enabling strategy with its support coming in the form of joint loans originated and serviced by private sector (Shoki, 2000;42)

2.7 Real Estate Development Financing from Other Countries
Considering other countries experience in fund raising for financing real property, one can observe that fund raising development has taken different forms depending on the level of development of the economy of a particular country.
In Canada, long term private debts are issued through issuance of debentures by mortgage loan companies and funds raised on the UK capita markets were major sources of property finance until 1990 when, due to their funding cost advantage, mortgage finance companies lost the market share. According to Diamond and lee (1995) (as cited in Mahanga, 1998) a mortgage backed securities markets was created Canada in 1977 when central mortgage and housing Corporation (CMHC) sold a large portion of its portfolio. However, the Canadian secondary market insignificant source of finance, it is not as significant large like the secondary mortgage market in U.S.A.
United State of America
In USA (Mahanga, 1998) building Societies and savings Banks gathered the initial funds for property development and had the characteristics of private equity, that shareholders faced uncertain returns and risks or loss of investment. It is such risks associated with deposit system, which promoted the use of long term private bonds. The mortgage bonds introduced in 1870’s one century later, in the 1970’s the development of secondary markets and evolution financial innovation of securitization refined the mortgage security system and provided liquidity apart from allowing for more effective management of cash flows risks. On the other hand, the growth of the government sponsored enterprises (GSE) in the US has meant that institutional investors have become major dominant sources of funds for property development.
GSE and Mortgage Backed Securities (MBS) market issuance has greatly expanded the investors’ base for property development as mutual funds, pension funds and foreign entities are new major sources of funds. To a small extent, private equity in USA is used in the mobilization of funds for real property finance. American banks and investment houses have developed a very strong in house property capability, which allows them providing finance, to market major buildings and occasionally whole property companies.
United Kingdom
In UK the investment and development of real estate are undertaken by the private persons, property companies, private trusts and institutions such as pension funds, insurance companies, charitable institutions, property bond funds and property trusts. Property lenders in UK are categorized into two major forms; those who provide senior debts such as 75% to 85% of the whole cost of the project. For example British clearing banks and overseas counterparts, other merchants and specialist property lenders who are much inclined to take the equity risk by putting up mezzanine finance/enter into profit sharing agreement.
The second category is that, the bank could approach the syndication on “best endeavours” basis trying to put their funds together as a syndicate of banks, each of which would agree on the specific proportion of money needed. Another form of funding system used in UK is securitization. For instance securitization can be obtained in residential mortgages, that mortgage lenders to home buyers put a thousand or so of mortgages into a pool then sell bonds or other forms of tradable loan in as securities markets, backed by pool of mortgages (Brett, 1994)

The interest paid by the homebuyers on the mortgages and their repayments of principal, provides the income for the bond and the capita with which ultimately to redeem it. While the mortgage lenders has recouped his original outlay from the proceeds of the sales of bonds and realized funds with which they will make further loan to the homebuyers.
The financial market of Kenya experiences a range of financial institutions and broad range of commercial banks as well as capital market institutions including the NSE. There are also channels and instruments for mobilizing long term funds for development. There are estimated to be 43 Commercial banks in Kenya; two mortgage finance companies, Housing Finance and The Mortgage Company (TMC) and 11 Non-banking financial institutions, (Central Bank of Kenya, 2012). Financing non-residential properties is usually of a maximum of 10 years whereas for residential properties lending is up to 20 years. Keeping the average interest rate on 3 months deposits stood at 19.62 percent in 1997, average weighted savings rates was only 10.59 percent. Meanwhile interest on loans and advances average 26.59 percent. Building societies that offer mortgages for house purchase and construct charged an average interest of 25 percent.

2.8 Sources of funds in Developing Countries.
Most of the people living in the developing countries belong to the low income earner group. However they have been building their houses. Major sources of finance of those people are not the formal loans; instead they highly depend on personal efforts (Makoba, 2000:17). He also quotes Merril, 1980 that “Low income households make big sacrifices in the consumption of items such as food for building a house. Hence they depend on informal financing system, which also includes loans from relatives and friends.
The most common means of financing property building in developing countries comprises the following (Makoba, 2000).
 Build while they save; this is referred to as incremental building; it means households construct and occupy a party built house and improve, or extend it over time. This system allows the households to save on rent as well as, it provide shelter for a relatively small initial investment.
 Save/earn by building; this is done through renting finished rooms while building proceeds, and it is obviously a standard practice in developing countries. It is also recognized and utilized by the formal financial institutions in issuing loans.
 Save when building; building at costs that are below the formal market rates. This can achieved by households partly because through preparing of construction site and space standards to a minimum and partly through astute purchasing and management, haggling over inputs. Other households will use their own labour and that of others on exchange basis. This method may be in conflict with building regulations and procedures in urban areas when savings goes far below the building regulations and even some may be demolished because of non-compliance to the regulations and procedures.

2.9 Figure 1: Conceptual Framework. Empirical Review
As already explained about housing financing and delivery, it can be frustrating and confusing. Mortgage financing has been a long term solution to solve this problem in many countries and as a result focus financial institutions has the immediate implications.
Renauld (1994) wrote that “The financial institutions as their name indicates financial intermediaries constitute the interface between the housing market on one hand and capital market on the other”. Whereas referring to the developing countries he recommends that “as part of more efficient and more effective financing of urban development, the emergency of a strong and adaptable system of housing finance capable of meeting the expanding needs of urban economy is important for several concurrent reasons which are;
 Residential investment is directly tied to urban infrastructure investment and the internal efficiency and productivity of cities.
 In the highly developed countries a very high proportion of residential investment is provided through private individual initiative without the support of effective and responsiveness of financial institutions.
However, the studies leaves the two questions unanswered; why a high proportion of residential investments are provided through private individual initiative instead of mortgage and why those financial institutions do not support the residential investments.

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