1 / 15

Going Up Market to Serve Low Income Groups

Going Up Market to Serve Low Income Groups. HOUSING FINANCE IN EMERGING MARKETS World Bank Group Conference Washington, March 15-17 2006 Olivier Hassler The World Bank Financial Sector / Housing Finance Group ohassler@worldbank.org. OUTLINE.

wei
Download Presentation

Going Up Market to Serve Low Income Groups

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Going Up Market to Serve Low Income Groups HOUSING FINANCE IN EMERGING MARKETS World Bank Group Conference Washington, March 15-17 2006 Olivier Hassler The World Bank Financial Sector / Housing Finance Group ohassler@worldbank.org

  2. OUTLINE • Rationale for a Bottom up development by alternative lenders: • Implications: external funding and financial soundness • Capacity Enhancing Options

  3. The Coverage Gap • Commercial banks focus on higher end segments– especially in new or unstable markets • Opportunity cost • Lack of origination/servicing capacities for asset based retail lending • Flaws of market infrastructure • Micro-credit for housing is growing, but: • Incremental, minimal housing conditions • Serves the poorest • Often dependent on donors’ support • As a result: • Large vacuum between the two • The deficiency of distribution channels: a reason of the low financial sector efficiency in channeling resources towards investments

  4. Top Down Policies hadMixed Results • Incentives to banks: Chile • 2001: origination subsidy to banks for small loans • Contractual approach: South Africa • Records of Understanding GoSA / banks (1994, 1999), 2003 Financial Sector Charter, March ‘05 commitment by the 4 main banks to extend a certain volume of low income housing loans within in 5 years • Mixed result • Regulatory approach: USA (Community Reinvestment Act), India (Priority lending) Down market expansion: a slow and uncertain process, at least until mortgage markets reach a certain level of maturity (middle segments fully served).

  5. Bottom up option Some grass root institutions (Financial cooperatives, including Credit Unions, Savings and Loans, Cooperative banks) • Which target • low wage earners (Credit Unions in particular) • Informal sector–dual economy: a major issue for the development of financial systems • With a savings mobilization capacity • Can diversify “upwards” by offering housing loans that are not micro-credit • Amount : USD 2,000-30,000 range • Secured lending: mortgages, payroll deductions, personal guarantees, pension fund accounts

  6. Some Examples • Mali Nyesigiso S&L network (47 S&L, 200,000 accounts): • Mortgage loans since 2002 • Additional guarantees: mortgage insurance (Mali Guarantee Fund) • Up to 20 years, competitive interest rates • Rwanda Union des Banques Populaires (150 banks, 360,000 accounts): • 2nd housing loan provider of the country • 15-year housing loans, Savings-for-housing scheme, liquidity support from the Apex Bank • Paraguay • Main housing finance providers: Cooperativas de Ahorro y Credito, ”Cajas Mutuales” (closed membership). Hardly any housing finance offers by commercial banks • Savings & Loans cooperatives: 18% of the credit market Cooperativa Universitaria: 10th largest FI

  7. Lending for Housing requiresstable, sound funding • Loans for relatively large up-front investment imply • Longer amortization periods • Adequate funding • Although community based savings can be stable • Closed membership implies limited collection capacity Alt. Lenders are generally characterized by savings collection limited in breadth and depth Need to raise funds externally Financial soundness = a fundamental condition

  8. However, Weaknesses Affect Cooperative FIs. Typically: • Not all banking risk management tools are available: • credit information sharing • integration in payment systems • access to interbank market/Central Banks (liquidity management) • Constrained ability of cooperatives to raise equity • Lack of expertise • Oversight framework often integrated with non financial cooperatives, under the purview of non-financial supervisors

  9. CFIs Typical Weaknesses, Ctd • Lessons from past crises must be kept in mind: • Governance issues • Lax supervision • Asset Liability mismatches • S&L crises often linked to the removal of regulatory privileges (USA, Chile, Colombia…)  Artificially supporting specific circuits is in fact dangerous in the long run . This is not the right way to strengthen them

  10. III. Enhancing Capacities to Lend for Housing • Promote federations of lenders with Apex entity • Use access to adequate funding to promote discipline and soundness • Institutional levers: • Prudential oversight • Rating • Specialized agencies: • General agencies

  11. 1. Federations with Apex Entities Unions of CFIs can provide very important support • Technical: • capacity building • Technology platforms • Financial: • Intra group treasury management • external funding • If banking arm: access to money market and payment systems • Equity raising • Prudential: • Credit enhancement (joint liabilities, guarantee fund) • Prudential oversight – quasi SRO

  12. 2. Access to funding as incentive to discipline • Specialized second tier facilities/windows • South Africa since 1994: Beside push down attempts (banks), pull up policy through 2 wholesale finance providers: • National Housing Finance Corporation (NHFC) • Rural Housing Loan Fund (RHLF) Mixed success • Mexico: BANSEFI(not specific to housing, considers developments)

  13. 2. Access to funding asan incentive to discipline • Debt guarantees • Can connect Alt.Lenders to traditional Financial institutions, while promoting standards and soundness • Modalities are critical • Selectivity • Risk based Premiums • Partial Credit Guarantee • Graduation support: creditworthiness building, development of business relationship, reduction of amount guaranteedover time • Limited experience in housing finance: • Guarantee funds exist in other areas (SME finance, short term micro-credit) • Credit support by donors' agencies (USAID, Accion, CAF, IFC, …) • WB is working on establishing sustainable schemes (Guatemala, Ethiopia)

  14. 2. Access to funding asan incentive to discipline • Securitization / Wholesale finance (Unbundling social & financial intermediation -CFI as an underwriter – servicer) • Especially useful for capital constrained lenders • Only possible when capital market investors or wholesale lenders are available • Requires • Sufficient volumes • Sound credit policies • Risk sharing arrangements (first loss borne by originator) • Still few experiences, not for housing (ICICI bank/Grameen partnership in India)

  15. Conclusion • Where cooperative FIs exist, a better vehicle than commercial banks to cater to the housing needs of low income groups • An alternative to state housing banks to serve these groups: wider outreach, non distortive, better savings mobilization capacity • Adequate funding is the main constraint • Soundness is critical to establish needed links with the mainstream financial system, but access to adequate funding = strong motivation • Strengthening routes: • Network organization, incl. joint liability + apex + banking arm • Market discipline through guarantee / funding schemes • Adequate prudential regime (under the purview of a financial, not agricultural or commerce, supervisor) • Rating Still a prospective dynamics for the most part, but quite a few experiences = maybe the beginning of a trend

More Related