BNA HOUSING FINANCE WORKSHOP 4 Nov 2005

1. DEVELOPING HOUSING FINANCE: BUILDING BLOCKS, CHALLENGES & POLICY OPTIONS World Bank Olivier Hassler ohassler@worldbank.org BNA HOUSING FINANCE WORKSHOP 4 Nov 2005

2. Presentation Overview • The need for housing finance • The building blocks of a system • Selected challenges and policy options

3. The Need for Housing Finance • Urbanization: • A strong trend – the urban population rate is still low in Africa (37%) • Requires huge investments • “Cities are built the way they are financed” • Building an asset = wealth ladder • Promotion of housing supply • Alleviation of government finance burden • Synergies with the development of financial market: • Long term income source for intermediaries • Diversification of investment opportunities

4. Housing Finance is difficult to develop • Long maturities: Housing Finance makes a large investment affordable by spreading its cost over a long period of time • Necessity of efficient collateralization: a condition of long term lending, but also of a wide access to finance • Neither characteristics are easy to achieve in a nascent market

5. A Nascent Market in Most Sub-Saharan Africa

6. THE BUILDING BLOCKS • MACROECONOMIC CONDITIONS • PROPERTY RIGHTS • PROPERTY MARKET • MORTGAGE MARKET INFRASTRUCTURE • FUNDING

7. Building Block 1 : Macro-economic Stability • Long term finance requires confidence in the value of money • High interest rates make finance unaffordable • Unemployment and volatile interest rates create credit risk • Angola on the right track

8. Building Block 2 : Legal Framework of Property Rights • Sound and conducive property rights regime requires: • Clear individual right to sell and pledge land • Clear procedures to regularize informal tenure, including litigation resolution • In addition, specific legal schemes are necessary: • Property subdivision, & condominium law • Developer finance A strong impact on the supply of new housing

9. Building Block 3 : Property Market • An efficient housing supply chain Frequent obstacles: • Release of land, especially bygovernment • Infrastructure (sewages, roads, water &electricity transportation..) lack of proper municipal services, cost often incorporated in new units prices • Construction bottlenecks (weak construction industry, high import content) • A synthetic indicator of supply constraints: Price-to-Income Ratio (PIR) If PIR > 5 = housing little affordable • A minimal number of property transactions Otherwise, property pledging of little use

10. Building Block 4 : Mortgage market infrastructure(I) • Title and collateral registration systems • Objectives: enforcing rights, encouraging formal tenure, checking chain of titles, fighting corruption • Characteristics: • Validity of inputs • Security of information • Consistency of data bases ( properties, persons, transfers) • Adequate cost –not to encourage informalities or restrict transactions • Foreclosure process • Objective: ensuring lenders’ security • If judicial procedure, must be expedient • If courts clogged or ill-prepared: out-of-court process (numerous ex. in Africa: Ghana, Ethiopia , Rwanda) • Adequate Balance of rights/powerPotential best practice: Chile, Recovery Officers in India

11. Building Block 4 : Mortgage market infrastructure (II) • Risk assessment & management tools • Borrower: • Credit information • Incomeverification / Proxy for informal sector borrowers • Property: Need of credible appraisal capacities • Adequate Payment System (numerous little payments) Angola in the process of completing equipment Payroll deduction can help in both cases

12. Building Block 5 : Funding(I) Bank Deposits • In most countries, housing finance is largely funded by deposits (although sight or very short term) 70% in Europe, even 50% in he US. Rare exceptions: Chile, Denmark • To do so implies an ability to manage financial risks • Reasonably stable deposit bases See Latin America- Importance of: political stability, currency stability, banking sector soundness • No fixed interest rates unless hedging available • Liquidity management tools(asset pledging, repos,…) Critical role for the Central Bank to play • Access to capital market when needed

13. Building Block 5 : Funding (II)Decentralized Capital Market instruments • Mortgages appropriate to back long term secured financial instruments • Securitization- Huge market in the USA, growing in Europe., Recent take off in Latin America, Asia, RSA • Benefits: bankruptcy remoteness, transfer of financial risk, possible reduction of capital requirement • Challenges: transfer of credit risk (credit enhancement), pricing • Mortgage bonds- Strong in continental Europe, well known in some LA countries, new in UK/NL • Benefits: two level of security (general debt obligation + collateral), prone to liquidity (simple pricing and trading) • Challenge: only partial transfer of financial risk

14. Building Block5 : Funding (III)Centralized institutional options • Second tier liquidity facility Pool small funding requirements, enhance lenders' credit , help manage liquidity Ex.: Malaysia (Cagamas), Jordan (JMRC), Algeria (SRH),RSA (NHFC). Projects in Egypt, WAEMU • State lending:a generally inefficient solution • Direct: Generally ends up being very costly and inefficient(Chile, Brazil, Venezuela..): low recovery & moral hazard consume budgets • Indirect : Better credit risk management, but still limited capacity Better is to use public finance for direct , explicit subsidies and seek leverage of private resources

15. Selected Challenges and options • Property rights • Inflation • Individual Savings mobilization • Channeling institutional savings • Market strategies and access to HF • Housing assistance policy • Development strategy

16. Issue : Property rights • Legal insecurity of property rights in urban expansion areas is a common and acute problem in Africa For anti-speculative purposes, conditionalities are often set that limit ownership rights on previously informal, or government owned land . Examples: • Delivery of title withheld until near building completion • Short term or withdrawable lease hold rights subject to compliance with land use regulation • Temporary Certificates of Occupancy • Unclear leases renewal conditions These uncertainties affect transferability and the capacity to raise funds. Fighting land price inflation must take other routes

17. Issue: Inflation • May hinder long term investment , or make it unaffordable through a high risk premium • Indexation can be an answer, but raises difficult issues • CPI indexation can make borrowers insolvent if wages do not follow (Ghana) • Protecting borrowers can make lenders insolvent(if bear the discrepancy CPI/wages) • Basic conditions for successful indexation: • Inflation within certain limits (Chile) • Need of objective and well accepted index

18. Issue: Individual Savings Mobilization (I) • Domestic savings often scarce, or outside banks • A counterproductive option: compulsory savings funds • Numerous experiences • in Latin America (Mexico Infonavit, Venezuela Fundo Mutual Habitacional, Jamaica..), • In Asia (Philippines Pag-IBIG, Malaysia, China) • also in Africa (Nigeria National Housing Trust Fund) • Numerous shortcomings: • Implicit taxation of individual savings • Non-transparent management of borrowers' waiting lines or even of funds • Below-market return self depletion • Exclusion of informal sector • Similar negative results with directed allocation of Social Security Fund

19. Issue: Individual Savings Mobilization (II) • Better options: • Voluntary Contractual Savings for Housing Schemes: • Compatible with the market development • Can include informal sector borrowers Ex. Rwandan Banques Populaires : • Phase I savings amounts = phase II mortgage payments • Market rates • Inducement to build downpayment, not a commitment to lend • Grass root networks : credit unions, savings groups, can be mobilized to build up downpayment • If subsidies, prior savings important as an eligibility criteria • Careful mobilization of expatriates savings - may distort housing prices

20. Issue: Channeling institutional savings towards investment needs • “Reverse term transformation”: a common phenomenon in Africa Some institutional savings exists, butstays in deposits (besides T. or Central Bank Bills and Real Estate) due to underdeveloped capital market • Option: Introduce “pre-capital market” financial instruments to bridge long term savings and investment. Examples: • collateralized, tradable promissory notes (FR) • Transferable mortgage loans (Chile) • Sale of mortgage portfolios (Mali)

21. Issue: Financial Institutions Willingness to lend • The lack of long term funding can be perceived as an absolute deterrent Possible option: Central liquidity facility. • Experiences of catalytic impact: Malaysia, Jordan • Can be funded by WBor other IFIs (Paraguay, Tanzania) • Specific obstacles to serving moderate income groups • Credit risk  Default insurance? Ex.: Mali, RSA (HLGC). Adequacy to market needs is key, several failed attempts • Commercial strategy Promote lending by alternative FIs • Often have a wider outreach than banks (Rwanda Banques Populaires, Mali Nyesigiso) • May require a “plug” to external funding source and credit enhancement( Ex: Mex SHF for SOFOLES, IFI support)

22. A costly temptation: State Housing Banks • Many governments , especially in Africa, seek to overcome market failures by creating a state-controlled retail lender • This route is not recommended: • Generally an obstacle to the global l housing finance supply because of their privileges • A factor of mis-allocation of subsidized resources and poor recovery performance because of governance problems • They mostly end up insolvent, and often are bailed out at a high cost for tax payers. Ex.: Pakistan, Bangladesh, Indonesia, Argentina, Brazil, Colombia, Uruguay, Algeria Ivory Coast, Tanzania, Rwanda, Niger

23. Issue: Social Housing Policy • A Housing Policy is necessary: • Explicit social objectives • Measure of opportunity costs • Consistency of actions • Conditions for an efficient assistance policy • Avoid interest rate subsidies (affect the supply of finance) • Avoid subsidizing institutions (high risk of capture by the entity) • Promote leverage by private resources (avoid direct lending) • Incentive for more savings • Combination with lending – for bankable households- = multiplier effect • Subsidies via guarantee schemes: link accessing favorable funding conditions with serving low-income groups (US FHA, RSA HLGC, Mexico SHF) • Precise targeting , transparent eligibility and priority criteria

24. Development Strategy • Afavorable macro economic background can spark the growth of the market Recent examples: Algeria, Pakistan (bank liquidity, fall of interest rates) • Develop building blocks early in the process - but not all the components have to be in place before take-off • Carry out catalytic actions and support “ market makers”, often necessary Examples: Specialized lenders (India: HDFC, Mexico: SOFOLES, Bangladesh), Second tier institutions (Jordan: JMRC) • Develop first a large enough, well tested primary mortgage market before organizing a secondary market • World Bank can support GoA and the Central Bank in creating market foundations, designing a roadmap, building capacities and initiating catalytic actions