Central Asia and Azerbaijan: Regional Mortgage Market

1. Central Asia and Azerbaijan: Regional Mortgage Market Elena Klepikova February, 2008

2. Regional Mortgage Markets Regional

3. Regional Mortgage Market Azerbaijan

4. Country Mortgage Portfolio Azerbaijan

5. 6 banks have M-programs • 2 banks attracted long-term resources from IFI’s • Banks’ long-term deposit base extended • High demand for mortgage loans Country Mortgage Portfolio

6. Mortgage Loan Parameters: Changes 2007 Azerbaijan

7. Major Changes 2007 Azerbaijan

8. Main Problems Hindering the Market Development • lack of covered bond and securitization regulations • lack of regulation on Escrow account • lack of housing certificate regulation • time of title registration and lien • unharmonized items in the existence Laws • undocumented mortgage-lending industry standards Azerbaijan

9. Working Group’s survey on existing problems Azerbaijan

10. Actual m-portfolio exceeded the projected in early 2007 mln.AZN Azerbaijan

11. 2011 Targets ACTIVITIES OUTPUTS OUTCOMES IMPACT • New Laws and amendments to Laws • Standard product/proce-dures • Trained and consulted individuals • Secondary mortgage transactions • Market players • Improving legal and regulatory environment • Improving Mortgage-lending industry standards • Increasing public awareness • Mortgage as a % GDP • Mortgage as a % banks’ assets GROWTH Mortgage portfolio to GDP is over 1% Total mortgage portfolio is 5% of bank assets TIME Azerbaijan

12. PRIVATE ENTERPRISE PARTNERSHIPHOUSING FINANCE GROUP RETREATRegional Mortgage Market Kazakhstan

13. Macro-economic Overview • GDP in 2007 amounted to 95.4 billionUSD. Real GDP annualized increase vs. 2006 -8.7%. • For the last 4 years the GDP rate kept above 9% per annum. • GDP per capita exceeded 6 313 USD; • Annualized inflation rate in 2007was18% (prelim data), November – 16%. • Annualized Unemployment Rate (2006-2007) - 7.8%; • Gross Foreign Direct Investments (FDI per annum) totaled at 10.6 billion USD (9 months). • Gross Foreign Direct Investments outflow amounted to 1.8 billion USD outflow (9 months) . Kazakhstan

14. Institutional Environment State owned participants as a part of the state program • Kazakh Mortgage Company (December 2000) • Kazakh Mortgage Credit Guarantee Fund (November 2003) • Housing Construction Saving Bank (Law passed in 2000, Bank started to work in 2003) Commercial participants • Commercial Banks - 35 (2007) • Mortgage Companies – 10 (2007) Accompanying participants • Insurance Companies – 41(37) (life insurance -7(3)) • Credit bureau – 2006 (fully operational) -2.8 million credit files • Appraisers – exceed 2,500 in the country. • Realtors • Mortgage Brokers Funding vehicle • Stock Exchange survey Kazakhstan

15. The Law on Mortgage Lending has been reviewed; The Law on Share Construction is being reviewed; The Instruction on Mortgage Lending of non-bank institutions; The State Construction Program for 2008 – 2010 years; The Law on Realtors Activity is being proposed; The “One Servicing Window” Approach to tackle corruption is implemented; Securitization Law is being amended; Housing Relations Law is being drafted; New Taxation Law Draft is being rectified; Consumer Rights Protection Law – to be proposed by the Project; Legal Environment Last Year Update Kazakhstan

16. Mortgage Portfolio Growth Currency-Break Down Regional Concentration Housing Prices Overview Mortgage Products Mortgage Market Last Year Update Tenor - 3-25 (30), KMC (20). Loan size – MC 2,500 – 500,000 USD, KMC 5 000 – 500,000 USD Banks – individual limits are imposed LTV – 50%-70% (state M-lending program excl.) Interest rate - 17% -19% in USD adjustable, 17%-18% KZT adjustable, KMC - adjustable 12.04%+4% (2007), 22%-23% unverified income Insurance cost – 0.2%-0.4% real estate insurance, 0.25-0.3% - life insurance, title insurance -0.34%. Registration charges – less than 10 USD (ap.) Appraisal charges - 20 USD (apartments) - 60 USD (houses). Realtors charges – 1%-3%. Brokers charges – 300 -700 USD Bank or companies charges less then 1%. Kazakhstan

17. Financial Sector Inadequate Risk Management –Holding Risk Concentration; Mortgage Loan Concentration; Mortgage Affordability; Lack of Financial Stock Exchange Instruments; Bearish Real Estate Market Situation (Falling Market); Inadequate Financial Sources Base; Emerging M-Lending monopolist – KMC; Inability of the M-lenders to keep with the previous year M-lending dynamics – M-lending limitations; Though interest rates are low the M-lending is not performed; M-lending performed at 23%-25% level though now down—trend to 17%- 19% is observed; Consequential LTV increase to 50%-70%; High inflation pressure due to economy over-heating; Major Problems Crisis or not Crisis –there is a Question? Kazakhstan

18. 2007 2008 2009 Market Interaction Timeline of the Project Kazakhstan

19. PRIVATE ENTERPRISE PARTNERSHIPHOUSING FINANCE GROUP RETREATRegional Mortgage Market Kyrgyzstan

20. Macro-economic situation in 2007 • Real GDP grew by 8.2% - 3 746,6 million USD • GDP per capita - 714 USD • Annualized inflation rate in 2007 was 20.1% • Annualized Unemployment Rate - 11.5%; • Nominal exchange rate USD/Som appreciated by 7% during 2007, to 37.3 KGSom/$US • Remittances – ($1 billion or about 27% of GDP) Kyrgyzstan

21. Financial sector development • The Bank assets grew up to 51% • Outstanding credit portfolio grew up to 85% • Equity capital grew up to 39% • Deposits up to 42% • Non-bank financial institutions assets grew up to 12.8% • The Stock market capitalization grew up from $80 million up to $162 million Kyrgyzstan

22. Mortgage industry has been experiencing significant dynamics from 2.0% to 2.6% of GDP As of December 31, 2007 the total value of the mortgage market is $98 millions Share of mortgage: 8.4% bank assets, 17.3% loan stock 19 of 23 banks lending mortgage. 44 of 456 non-bank financial institutions offer mortgage loans. ATF Bank, Halyk Bank, AUB, Finance Credit Bank and KICB account for 71.2% of the mortgage market. Statistics of Mortgage Market in Kyrgyzstan Kyrgyzstan

23. Average Mortgage Loan Parameters • Most common type of mortgage is home or flat acquisition • Fixed interest rate with annuity payment • Average loan size: $21,000 • Term: up to 10years • Interest rate (USD): ≤ 18% • Monthly payment: $315 • Required monthly household income: ≤ $530 • LTV ≤ 70%, PTI 60% • US Dollars and Kyrgyz Soms Kyrgyzstan

24. Actual improvements: State fee for notarization reduced, 2005-2007 Public access to Registration database, 2006 Pledge regulations enhanced through changes to Civil Code, 2007 Improvements in legislative environment Kyrgyzstan

25. The main topics of the program: Improvement of the legislation (due to list); Create the favorable environment to attract investments; Improving internal production of the construction materials; improvement of social and economic situation; Attract new construction technologies to the building industry; National Program on housing approved by the Gvt in Dec 2007 Kyrgyzstan

26. Drafts approved by the Government : Draft law on MBS Drafts initiated by the Government: Draft Law on housing certificates Housing code Amendments to the Law on “Protection of consumer’s rights” in part of co-sharing construction Amendments to the Land Code Amendments to Civil Code Drafts developed by the Government Kyrgyzstan

27. New initiative is announced: The mortgage industry is given much priority Ministry of finance is the authority to create working group within 2 months Investment council under the President Kyrgyzstan

28. Amendments to the law on registration to exclude “Preliminary registration”; Law on credit bureaus; Law on appraisal activity; Amendments to the existing legislation to avoid contradictions. Drafts need to be developed Kyrgyzstan

29. Housing finance problems • Lackoflongterm funds • Enhancing of mortgage legislation • Lack of consistent government policy on mortgage • Absence of understanding of mortgage among government officials and • population Kyrgyzstan

30. Credit Bureaus Insurance Sector • 2 credit bureaus registered • 1 operates properly • Transparent to all participants • Still undercapitalized • And concentrated in Bishkek and Osh • No title insurance Appraisers/Realtors Capital Markets • Few professional appraisers • Few established realtors and more speculative approach • No objective market information • Still small and illiquid stock market • Small bond market • Underdeveloped pension system Infrastructure institutions problems in Kyrgyzstan

31. PRIVATE ENTERPRISE PARTNERSHIPHOUSING FINANCE GROUP RETREATRegional Mortgage Market Tajikistan

32. Recent phase in Tajikistan : from theory to practice Total mortgage portfolio is a little more than 0.02% of GDP (2007) 2 resident banks are implementing mortgage products in practice: • Tojiksodirotbank: running its own mortgage program (more than 30 mortgage deals for more than 850,000 USD at 2007). 24% interest, 5 years monthly annuity. • Agroinvestbank: in 2008 is presenting the special deposit program “House”. A 2 year deposit will be transferred to initial payment, by this time the mortgage program of the bank will be started by the plan.

33. CAMP: implementation mechanism • CAMP–unified platform for all market participants to: • Develop uniform approaches • Find practical solutions • NOW • Working Group – IFC Project initiative supported by the NBT • 5 members (the NBT, Agroinvestbank, Tojiksodirotbank, Amonatbank and Tajprombank) • Fanon Bank and FMFB shortly will join • Basis of future mechanism HOW? • IN PERSPECTIVE • Thematic and general groups • Self-governing organization • Broad-based membership • Regular meetings Executive Body: IFC Project Tajikistan

34. CAMP:achieved results Draft Law of the Republic of Tajikistan “On Mortgage” February 2007 Templates of standard documents for mortgage loan origination and disbursement March 2007 Draft manual for conducting mortgage lending operations April 2007 Draft Law is passed by both Parliament Chambers but President did not approve it and proposed a new draft with his amendments December2007 Draft Law with President’s amendments is passed by both Parliament Chambers January 2008 Tajikistan

35. CAMP2007-2009: improving the enabling environment PRIORITY TASKS • Adopting of Law “On Mortgage” • Eliminating of contradictions in mortgage-related legislation • Providing support for developing a mechanism for a simultaneous registration of title transfer and mortgage • Building capacity of market players (banks, insurance and appraisal companies) Tajikistan

36. Need for broader based coverage of potential bank partners for pilot projects Potential conflict with IFC bank eligibility criteria Bank refinancing is vital CAMP2007-2009: Issues for Tajikistan

37. PRIVATE ENTERPRISE PARTNERSHIPHOUSING FINANCE GROUP RETREATRegional Mortgage Market Uzbekistan

38. Update on Legislation 2006/ 2007 2008 1 Quarter 2 Quarter 3 Quarter 4 Quarter Draft of Law On Mortgage Backed Securities Draft of Law On Registration Draft of Instruction On Mortgage Registration Draft of Document On Standard Mortgage Note Governmental Working Group (GWG) Drafting Approval within the GWG Submission to MinJust Submission to CM Submission to LCh Uzbekistan

39. Simultaneous state registration of sales-purchase agreement and mortgage; Absence of mortgage registration duty and notarization; Reduction of paper flow volume for registration; Formalization and state registration of operations with Mortgage Note; State registration of court notifications, etc.; Procedures expected to be enforced via bylaws Draft of Instruction On Mortgage Registration: Risk associated with novations implementation Uzbekistan

40. Update On Housing FinanceMarket In Numbers • Total banks number:27 • Banks, not engaged into HF:6 • Total number of deals:3320 • Total Portfolio:65615mln UZS= aprox51 mln USD Geography of HF Deals Ipoteka Bank – the leader, almost 46% of the total HFM Uzbekistan

41. Update On Terms “Commercial” terms Currency: local; Age: 18-60; mainly secondary housing; amount: ≤25000 USD; ≤10 years; 14-20%; no pre-payment penalty; down payment: ≥25% “Young Families” Currency: local; Age: 18-30; mainly secondary housing; amount: ≤25000 USD; 15 years; 5%; no pre-payment penalty; no down payment 3 main products: Uzbekistan

42. Thank you for your attention!