Incremental Housing Finance—Perspective of Thembani International Guarantee Fund

1. Evans N. Maphenduka Incremental Housing Finance—Perspective of Thembani International Guarantee Fund September 24, 2014

2. PRESENTATION OUTLINE TIGF Overview How We perceive Housing Finance Our Goals for Partnerships The Guarantee – Model and Process The Guarantee – fees

3. TIGF Overview Background: • Established in 1996 • Section 21 (not-for-profit) organization • Founded by Shared Interest in the USA and RAFAD in Switzerland • Use loan and grant capital raised from private individuals and organizations overseas as security for guarantees • Guarantees are designed to assist clients/organizations who are unable to provide requisite collateral/security to commercial financiers • Guarantees are international guarantees in the form of irrevocable standby Letters of Credit issued by first class international banks

4. Perceptions on Housing Finance • The Reality • Rural urban migration for various reasons • UN-HABITAT research shows that by 2030, two-thirds of humanity will be living in towns and cities • putting pressure on basic infrastructure and services, • Causing overcrowding and substandard housing conditions. • Fastest growing neighbourhoods are the slums. – • Global number of slum dwellers currently at 1 billion mark (this makes the need for decent housing a human rights issue)

5. Our South Africa is not exempt! • Scale of Housing Shortage and lack of delivery in South Africa • Demonstrated by the demand for affordable housing and by the number of people living in slums and informal housing conditions. • In 2002, about 2.2 million households lived in Townships • 33% owned their own property, • 34% rented formal accommodation, • 16% rented informal accommodation (backyard shacks), and another 17% lived in informal settlements. Meaning (33% lived in informal housing - 89% increase on the 1994 figures)

6. Scale of Housing Shortage and lack of delivery in South Africa • Government has had to intervene • delivery of more than I.8 million houses since 1994 under the Development Programme (RDP) housing scheme

7. Scale of Housing Shortage and lack of delivery in South Africa • But a monumental backlog remains • Growing numbers of under-housed and/or un-housed to 3 million households in 2008 • Supply of new housing stock in Townships not sufficient to meet the demands • Promise of better living conditions and standards for the majority of South Africans under the Reconstruction and Development Programme (RDP) housing scheme seems to be in jeopardy

8. Scale of Housing Shortage and lack of delivery in South Africa • It has become a crisis • Despite this, traditional lenders still unwilling to make loans to low-income earners for housing • Only middle and upper income households have access to such finance, while the poor are generally excluded Due to • The cost of funding; and, • The risk of lending in the lower market segments

9. Scale of Housing Shortage and lack of delivery in South Africa • The cost is high • Risk based pricing in this market can vary between 4% and 13% up on prime rate for secured loans • Up to 35% on unsecured loans. • The interest rate, the terms and the collateral arrangements for smaller loans, promote incremental housing as opposed to ownership or free standing units.

10. Our Response to the Crisis • Thembani’s response to a housing crisis – • Implement The General Assembly resolution of 26 February 2002, calling on UN-HABITAT • to take “urgent steps to ensure a better mobilization of financial resources at all levels, to enhance the implementation of the Habitat Agenda, [of promoting broad access to appropriate housing financing, increasing the supply of affordable housing and creating an enabling environment for sustainable development that will attract investment”].

11. Our Response to the Crisis • Thembani’s long term strategy is to build strategic partnerships with like minded Institutions such as RHLF and the NHFC to strengthen the support to the Housing MFIs which seek to finance incremental housing and infrastructure at the required scale – the scale needed to halt the growth rate of informal settlements and ultimately reverse the number of people living in life-threatening conditions

12. Our Goals for Partnerships • We believe Housing microfinance is the way to go! • Thembani assists South African Housing Microfinance Institutions to • Improve the effectiveness, efficiency and accessibility of the existing housing finance systems • Create and devise innovative housing finance mechanisms and instruments • Promote equal and affordable access for poor people living in Townships, rural and peri-urban areas

13. Our Goals for Partnerships • We know the challenges of providing finance to low income population in Townships and Rural Areas • To help low and moderate-income households meet their housing requirements through • Small incremental loans, • Short repayment periods, • Market interest rates, and • Innovative forms of collateral

14. Our Goals for Partnerships • We Like the Rural Housing Loan Fund (RHLF), a wholesale lending Institution with its Mandate • To provide affordable housing credit to low income rural households • To support the implementation of the Integrated Sustainable Rural Development Programme • Established by Government in 1996 • Helps address the housing needs of rural working poor: currently defined as those with housing income below R7, 500 (since 2004) • Assists with financial sector development in rural areas

15. Our Goals for Partnerships • We like the National Housing Finance Corporation (NHFC), a wholesale funder and risk-manager with its Mandate to • Ensure that every South African, with regular source of income is to gain access to finance and to acquire and improve a home their own. • The mission of the National Housing Finance Corporation is to ensure: Development and appropriate funding of institutions, providing affordable housing finance at retail level. • Established by Government in 1996 • Partnering organizations and institutions to deliver innovative housing-finance solutions.

16. 2. TIGF Partners

17. Consideration for Partnership • Willingness to share risk fairly • Share clearly defined tasks in the medium to long term basis to contribute towards: • Job creation • Poverty alleviation • Gender empowerment • Youth participation • Community participation • Skills transfer and the improvement in the management of productive business activities

18. TIGF Goals • Issue Guarantees • Increase access to capital by guaranteeing bank loans to low-income communities focusing on • Housing, Agriculture, Mining, SMME Development, Rural Development • Promote investment by offering socially responsible investment vehicle for investor • Catalyze Mainstream Financing for the Majority • Partner deeply with banks and other financial institutions • Collaborate with incubators, development finance networks, and other stakeholders • Engage with key government agencies who promote relevant pro-poor policies and programs

19. What We Have Achieved • We have helped • Build and improve 102,000 safe and affordable homes through our partnership network • Catalyze Mainstream Financing with more than R130 million deployed in guarantees (unlocking more than R800 million of Bank loans to economically marginalized communities

20. Growth Plan: 2011-2016 Strengthen and scale emerging enterprises and Housing Microfinance Institutions Management Initiatives • Train 100% of guarantee beneficiaries to use financial instruments and forge relationships with DFIs and mainstream banks • Partner with at least 4 technical assistance providers to support guarantee beneficiaries • Build a network of mentors trained in development finance

21. 5. Issue Guarantees: The Model Investors provide capital Shared Interest issues guarantee Thembani due diligence, place and monitor guarantees Entrepreneurs , Employees, and Homeowners

22. 6. Issue Guarantees: The Process

23. 7. The Guarantee • The total TIGF guarantee requirement shall not exceed 75% of the credit facility required. • The guarantee value shall not exceed R10-million per project; • The term of the guarantee required by the borrower shall not exceed 3 years • Can be renewed or extended in exceptional circumstances for a further period with the express recommendation of the lending institution • NB: The LC is renewable annually

24. 8. Additional Supporting Security • The applicant will also be required to provide one or more of the following as required by the lending institution or, in addition to the requirements of the lending institution:

25. 9. Recovery Responsibility • In case of material default or insolvency of the project or the borrowers’ failure to repay for whatever reason, • the bank should submit a report of overdue advances, indicating the steps taken to recover the full outstanding balance; • All relevant information and documentary evidence as required under the procedure for payment of claims must be properly furnished by the bank as covered by the tripartite agreement; • Any recoveries made after settlement of claims, less recovery expenses incurred by the bank, are to be shared between the bank and TIGF in proportion in which they shared the risk;

26. 10. Payment of Claims • Once all the recovery processes have been accomplished, claims against the guarantee will be paid within 72 hours

27. Guarantee fees • 3 – 5% of guarantee ammount • Payable annually at the anniversary of guarantee

28. Thank You