Housing Microfinance: An Overview

1. Housing Microfinance: An Overview Franck Daphnis, CHF International Bruce Ferguson, World Bank October 28, 2004

2. Typical Microenterprise Loans Impacts borrower’s income Offer very small loan amounts May or may not be “fungible” Individual or group loans Repayment capacity based on generation of future income Housing Microfinance Impacts borrower’s assets base and may impact income Relatively larger incremental loan May not may not be fungible. Is not in the case of CHF’s HILP Usually individual loans Repayment capacity based on borrower’s current income Microenterprise Lending & Housing Microfinance: A Comparison

3. Linked Microfinance Products • Why “link” housing loans? • Incremental. Income generating (or small) loans as steps towards asset building (larger) housing loans • Client retention • Analysis of repayment capacity from experience • Housing loan provided only to existing clients - client has established a lending or savings history • Can be a longer term loan financing a complete core house or a home improvement loan

4. Definition Housing Microfinance Housing Finance Microfinance

5. Examples of Linked Products Source: Housing Microfinance Initiatives. USAID/DAI, June 2000

6. Stand Alone Incremental Product • Provides housing loan based on generally accepted microfinance principles, BUT • Housing is one of many products • Diversification (and retention) of clientele • Risk management through diversified product line • Client qualification must be rigorous as there is no prior history with MFI independently of prior history with MFI why issue

7. General Characteristics Stand Alone – Incremental Build- Product Repayment Capacity: < 25% of income; total debt burden < 40% Repayment Period: 1 - 3 years Loan Amount: ($250-$4,000) Security: collateral substitutes (mostly co-signers), actual collateral. No “mortgages” Borrower Type: Individual Savings:Not always required

8. To Assist, or Not to Assist? “Clients already know how to build their home; it’s not cost-effective for our MFI to provide” Non- financial assistance may include: • Evaluating the technical feasibility of the proposed improvement. • Preparing cost estimates. • Providing technical assistance as needed in improvement design and construction. • Providing construction oversight. “Our Mission is to ensure a house is built; We’ll get better repayment, more satisfied clients if the completed project is higher quality”

9. Land Issues • Formal title often cannot be produced • Land security can be demonstrated by: • Written agreement between buyer and seller of land • Long term rental agreement between client and government • De facto ownership (time, local laws) • Accepted property tax payments

10. Challenges • Opportunity Cost: Is this the best use for the MFI’s funds? • Liquidity: Will longer term loans create a liquidity crunch? • Non Financial Services (TA): When should it be provided? What is the value added? Will clients pay for it? • Institutional Adjustments: Can the organization handle the organizational, personnel and methodological adjustments? • Legal: Land, construction permits (if applicable), and asset repossession (foreclosure laws) • Pricing: Will the new Product have a negative impact of organization by steering clients away from existing product line (if housing loan terms are more attractive)? Stay tuned for the presentations!

11. On the Horizon: • Housing microfinance (HMF) has “arrived” as an important product for some types of financial institutions – mainly microfinance institutions (MFIs) • However, HMF lending covers only a miniscule fraction of demand • Key challenge: scale up HMF and, with it, low/moderate-income home lending to a size relevant to national shelter and settlement problems.

12. Three approaches to scaling up: 1. Second-tier liquidity facilities 2. HMF funds 3. Business alliances between HMF lenders & building materials suppliers

13. I. Second-tier liquidity facilities: Colombia and Mexico Colombia – Second-Tier Liquidity Facility • Government has charged FINDETER, a second-tier municipal credit finance institution, with developing the HMF credit market • FINDETER has assigned $50 million in equity to this effort, while Government has made an agreement with commercial bank to channel an additional $110 million over 2 years into HMF • A guarantee fund (FNG) will cover 70% of the credit risk of the loans funded by FINDETER • FINDETER is working with a wide range of first-tier lenders - Cajas de Compensacion, MFIs - to rediscount HMF credits

14. Mexico – second-tier liquidity facility • Estimated effective demand for HMF in Mexico: $1.9 billion • SHF, the development bank charged with market-rate home finance, has established a pilot line of credit of US $15 million for HMF for 5 institutions • Three MF lenders – Compartamos, Financiera Independencia, and Fincomun – and 2 Cajas will originate these loans • CEMEX through its Patrimonio Hoy program will enter into business alliances with these lenders to provide construction technical assistance

15. II. HMF Fund A private foundation is planning to establish a fund • …to provide MFIs with 7-10 year finance for HMF in the amount of $30 million • Target borrower interest rate: T10Y + 350 bps • Target investors: Insurance co.s, banks, foundations, MFIs, individuals • Equity: $1 m; Senior notes: $20 m; Junior notes: $9 m. • Securitization of portfolio is optional at a future date

16. III. Business alliances between MFIs and building materials suppliers The Patrimonio Hoy Program of CEMEX in Mexico • 70% of CEMEX sales occur in small amounts, mainly for auto-construction. The purpose of Patrimonio Hoy is to strengthen the position of CEMEX in this market, and to improve the quality of life of low-income communities. • The auto-construction process, when unassisted, is inefficient and wastes 30% of construction materials • Patrimonio Hoy joins bulk purchasing and warehousing of building materials, construction technical assistance, programmed household savings, and microcredit, greatly improving the efficiency of auto-construction • Results: has upgraded the homes of 87,000 families in three years in 25 cities; profitable and growing • Patrimonio Hoy will work with MFIs in SHF HMF pilot proj.

17. III. Business alliances between MFIs and building materials suppliers Strategic alliances • To expand the reach of its HMF product, MiBanco in Peru has entered into alliances with the largest cement producer in the country, a roof manufacturer, an association of lumber suppliers and carpenters, and hardware stores • In essence, MiBanco finances the construction materials sold by these companies as part of home upgrading and expansion projects of low-income families • FUNHAVI in Mexico has done the same with cement and other suppliers.

18. Implications for scaling up HMF • The path to scaling up HMF is likely to differ in some respects from that of microenterprise credit • Governments – concerned with low-income housing – are more involved, through establishment of second-tier liquidity facilities, regulation, and joining HMF with direct-demand housing subsidies • Progressive housing depends on the sale of building materials and land. Strategic alliances between HMF lenders and firms in these industries constitute a crucial tool for expansion

19. Implications for scaling up HMF (continued) • Finance through establishment of HMF funds and capital markets – the norm for mortgage finance – is likely to play an important role • For financial institutions, HMF is a core product for low/moderate-income home finance, and for cross-selling other products, particularly savings