NOT JUST A SPECIAL PRODUCT LINE: Understanding microfinance for housing!

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Gerald Hart
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1 1 NOT JUST A SPECIAL PRODUCT LINE: Understanding microfinance for housing! 6 th Biennial Micro Finance South Africa Summit Financial Inclusion Conference & Exhibition Trade Conferences International 4-5 July 2012 Indaba Hotel, Fourways, Johannesburg Kecia Rust kecia@housingfinanceafrica.org Outline 2! From the housing side of the picture:! Making housing finance more appropriate to borrower capacity! Unsecured lending: housing microfinance! Who or what is it for?! How does it work?! How is it done?! Key challenges! Progress

Affordability of consumers 3 According to the World Bank, only 3% of the population in Africa has an income sufficient to support a mortgage In most cases, subsidies don t bridge affordability to buy

2 Affordability of consumers 3 According to the World Bank, only 3% of the population in Africa has an income sufficient to support a mortgage In most cases, subsidies don t bridge affordability to buy a new house. In others, they cause new affordability challenges. Served Underserved Unserved 10.8% earn US$10 - $20 per day 9% earn US$4 - $10 per day 24% earn US$2 - $4 per day 36.5% of Africa s population earn less than US$ 2,00 per day. This is the international poverty line. 18.8% earn above US$20 per day Source: AfDB Report on the middle class, 2011!)#"%&!"#"%&!"#$%& So. tiny mortgage markets!"#$%&%'()'*$($"(+,-( 4 ')#"%& '"#"%& ()#"%& ("#"%& '"#"%& ()#*%& ('#$%& So how else can people finance their housing? )#"%& '#)%& '#+%& '#!%& '#"%& (#'%& (#"%& "#)%& "#+%& "#+%& "#+%& "#'%& "#(%& "#(%& "#(%& "#(%& "#"%& "#"%&,-./0&123456& & :-3-55-& ;.<4=46& >?<@6& AB6<C6& D-/=B6<6&,?<?E6F& 1FE?346& GE6<C6& H68?3--<& IE@J/& K06<6& 74E?346& ;6<L6<46& H06C& K69-<& H?</36F&123456<&A?J.9F45& K.4<?6& H-<E-#&A?JM& Source: World Bank data, provided by Simon Walley

3 From whole house to step-by-step 5 What is housing microfinance? 6

What is housing microfinance? 7! Less than 30% of households in most emerging countries can afford a mortgage to purchase the least expensive developerbuilt unit because of:! House prices are high!

Unavailability of long-term funding, which creates interest-rate risk and limits the supply of mortgage credit!

Instability of household income makes long-term debt risky to lenders and unattractive for many families!

8 Housing microfinance is any micro financial tool to support investment in the components of housing, including land purchase or access, provision of or improvement to services, full or incremental

4 What is housing microfinance? 7! Less than 30% of households in most emerging countries can afford a mortgage to purchase the least expensive developerbuilt unit because of:! House prices are high! High real interest rates of 10%+ amortised over years creates high monthly repayments that low income earners often cannot afford! Unavailability of long-term funding, which creates interest-rate risk and limits the supply of mortgage credit! Costly formal-sector systems for property rights, land use development, property transfer taxes etc., push families into the informal sector, and contribute to limit the demand for mortgage money! Instability of household income makes long-term debt risky to lenders and unattractive for many families! So, most households build step-by-step, room-by-room As explained previously by Bruce Ferguson: IUHF Meeting in Brussels, June What is housing microfinance? 8 Housing microfinance is any micro financial tool to support investment in the components of housing, including land purchase or access, provision of or improvement to services, full or incremental house construction, renovation or maintenance.!! Housing microloans are generally!! Unsecured or alternatively secured loans granted to individual borrowers (sometimes co-signers, goods, etc. not property)!! intermediate in size (from $100 to $ $10 000)!! of longer duration (1-5 years) than other microfinance loans given their size.!! Higher! 7nterest than secured loans but on par with microloans!! used to build or improve the home incrementally!! Productive, not consumption loans: enhancing risk management!! A niche market product: something special about the housing part! Source: Daphnis & Ferguson, Housing Microfinance: A Guide to Practice, Kumarian Press Home improvement loan

5 Category Description / examples County Informal, locally established (susu, umpato) Community based shelter funds Cooperatives and credit unions (Saccos) Savings based, locally defined. Approach and use of funds defined by group: individual or collective loans Usually donor supported; largely collective loans, targeted at most poor Individual loans for housing often a coincidental focus, although sometimes explicit. All countries Slum & Shack Dwellers International, WAT Human Settlements Trust in TZ; CCODE in Malawi NACHU in Kenya; WAT SACCOs in TZ; Namibia; Zambia 9 Non-bank Micro lenders (credit-only) Microfinance banks (deposit taking and lending to members and sometimes non-members) State owned banks offering microloans Origins in housing delivery / shelter NGOs that saw demand for finance Origins in microcredit for SMMEs; housing the next progression. Usually when micro lenders convert to banks to access capital - a focus on housing loans usually comes later Trend is now moving away from these as many sustained losses Kuyasa Fund & Lendcor in SA; Habitat for Humanity in Uganda; KixiCredito in Angola; Uganda Microfinance Ltd; Jamii Bora in Kenya; PRIDE in TZ; others Pulse Holdings in Zambia; African Bank, and Capitec Bank in SA; K-Rep in Kenya; etc. Commercial banks offering microloans SA banks have offered unsecured loans for some time. The NCR estimates that 10-30% of these are used for housing. Standard Bank, ABSA in SA; Indo- Zambian Bank; others in Namibia, Tanzania!"#$#%$&"'($)*$)($+#%,$ 10 I N F O R M A L! Obtain legal tenure of site! Put in infrastructure! Build a house! Move onto the property! Extensions / improvements! Solar! Water harvesting! Finishings F O R M A L Whether formal or informal, housing is an incremental process Incremental financing (HMF) is important Source: Ruth McLeod, Homeless International (2002), Research on Bridging the Finance Gap in Housing And Infrastructure and the Development of CLIFF

income earners Starter house Borrow micro loan to improve 2 nd dwelling for business

dwelling Improved house with backyard room (for rental) Mortgaged 5-room house with granny

Give low-income earners an opportunity to improve their housing circumstances!

cross-selling.! Offer income generation opportunities to support sustainable livelihoods.

6 Who or what is it for? Taking a long term view 11 Once homeless, now an investor, providing housing to other low income earners Starter house Borrow micro loan to improve 2 nd dwelling for business Income for retirement Sell and buy Sell to buy Mortgaged 2-room house with backyard dwelling Improved house with backyard room (for rental) Mortgaged 5-room house with granny cottage What housing microfinance can do: 12! Give low-income earners an opportunity to improve their housing circumstances! Enable lenders to extend lower down market, creating new clients for possible future cross-selling.! Offer income generation opportunities to support sustainable livelihoods.! Encourage home improvements and gentrification towards sustainable human settlements! Borrow microloan! Make improvements! Accommodation for rent! Small business! Realise income! Pay back microloan! Improved housing asset Repeat loans

7 How does it work? ingredients Funding process: Bank, investor, donor, fund, etc. borrower house 1. Lending process: Origination Servicing Admin. 3. Housing process Marketing / Outreach! Loan sales! Credit checks! Savings groups! Disbursement! Collections! Delinquency Management! Tracking! Accounting! Reporting! Cost estimates! Bill of quantities! Plans! Construction assistance! Building advice! Etc! How does it work? Strong link with the housing process Bank, investor, donor, fund, etc. investment! loan! borrower Savings group 14 NGO Origination Servicing Admin. Housing support Marketing / Outreach! Loan sales! Credit checks! Savings groups! Disbursement! Collections! Delinquency Management! Tracking! Accounting! Reporting! Cost estimates! Bill of quantities! Plans! Construction assistance! Building advice! Etc! NGO creates HMF lender: WAT Human Settlements Trust in Tanzania creates WAT SACCO / Development Action Group in SA creates Kuyasa Fund; K-Rep Comm Dev creates Makao!

8 How does it work? Weak, or controlled link with the housing process. Bank, investor, donor, fund, etc. 15 investment! borrower NGO or Building Material Supply store Origination Servicing Admin. Housing support Marketing / Outreach! Loan sales! Credit checks! Savings groups! Disbursement! Collections! Delinquency Management! Tracking! Accounting! Reporting! Cost estimates! Bill of quantities! Plans! Construction assistance! Building advice! Etc! Specialist housing product defined by partnership with housing support provider: Select Africa with Habitat for Humanity in Malawi / OR with building material supplier: Lendcor in South Africa! How does it work? No link with the housing process / liquidity link with a bank 16 liquidity! borrower Commercial bank NGO or Building Material Supply store Origination Servicing Admin. Housing support Marketing / Outreach! Loan sales! Credit checks! Savings groups! Disbursement! Collections! Delinquency Management! Tracking! Accounting! Reporting! Financial management! Cost estimates! Bill of quantities! Plans! Construction assistance! Building advice! Etc! Service company model: DIG supported pilot in India / Explored in SA!

9 How does it work? No link with the housing process / a product of a commercial bank 17 Deposits! borrower Commercial bank NGO or Building Material Supply store Origination Servicing Admin. Housing support Marketing / Outreach! Loan sales! Credit checks! Savings groups! Disbursement! Collections! Delinquency Management! Tracking! Accounting! Reporting! Financial management! Cost estimates! Bill of quantities! Plans! Construction assistance! Building advice! Etc! Commercial bank model: ABSA Bank! Bank, investor, donor, fund, etc. How does it work? Apex fund or body creates housing link Banks, investors, donors, funds, etc. Bank, investor, donor, fund, etc. 18 Apex Fund! investment! Housing support Cost estimates! Bill of quantities! Plans! Construction assistance! Building advice! Etc! Origination Marketing / Outreach! Loan sales! Credit checks! Savings groups! Servicing Disbursement! Collections! Delinquency Management! Tracking! Admin. Accounting! Reporting! borrower Apex fund: PRODEL in Nicaragua or Rural Housing Loan Fund in South Africa!

10 How is it done? Underwriting 19 Borrower affordability! Know the client:! Housing loan as a reward for existing clients! Savings group participation! Community presence! Evidence of other borrowing! Affordability assessments! Budgeting as part of the origination process! Expenditure-based assessment! Credit scoring (of a sort) Loan use! Know the situation:! Pre-loan use assessment! Provide approved plans, bills of quantities! Architectural advice to maximise building efficiency! Relationship with building material supplier! Support an incremental vision! Understand loan as a single step in a longer process and plan accordingly How is it done? Risk management 20 Collateral alternatives Servicing! Community pressure! Group savings! Co-signers! Psychological pressure! Title deeds! Financial! Savings! Attached assets, including livestock! Borrower education & training! Collections:! Frequent payment opportunities: daily, weekly! Cash collections, convenient visits! Advance statements text msg, personal visit, note under door! Swift recourse on delayed payments name and shame! Built-in safety net with a no-claim bonus! Loan use:! Inspections & advice! Sanction against misuse! SME cross-over! Management information systems

11 21 How can Hs lend where the banks won t? HMF can be affordable even at rates significantly above mortgage rates Traditional Mortgage $10,000 Home Loan at 25% interest USD 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, !"#$ Monthly installment: $233 Total repayment: $28,000 Incremental HMF Loan 5 x $2,000 Loans at 50% interest !"#$ Monthly installment: $150 Total repayment: $18,000 Principal paid Interest paid Principal outstanding Cumulative borrowings The installment associated with a Traditional Mortgage Loan at 25% interest is still 55% greater than that of an Incremental HMF Loan at 50% interest. Source: Select Africa The housing ingredients: more than just a special product line 22! A place to build (land): Access to secure tenure on which households can begin to improve their housing conditions rather than wait for the State to intervene is critical.! The skills and technical capacity to build (housing support services):! Local municipal requirements! Drawing & approval of appropriate & efficient plans! Sourcing & costing of quality building materials! Good quality builder / contractor! Ongoing maintenance and longer term home improvements! The permission to build (political support)! Can microlenders be expected to provide the housing ingredients?! Can the borrower?! But without these ingredients, the housing process is less likely to be a quality one! While microlenders grow to scale, big challenge is growing housing support services to scale.

The housing ingredients: housing support services 23 The products and services you provide (or facilitate) to address what stands between what you do, and the achievement of your mission Marketing

12 The housing ingredients: housing support services 23 The products and services you provide (or facilitate) to address what stands between what you do, and the achievement of your mission Marketing MISSION: growing your loan book Land / secure tenure Water, sanitation, roads, elec Access to building materials METHOD: offering housing micro finance Construction TA The housing ingredients: housing support services 24 The products and services you provide (or facilitate) to address what stands between what you do, and the achievement of your mission MISSION: growing your loan book METHOD: offering mortgage finance Marketing Land / secure tenure Water, sanitation, roads, elec Access to building materials Construction skills & capacity Estate agent Conveyancer Planner Engineer Supplier Contractor Developer Housing support services compensate for policy and market failures

13 The housing ingredients: Housing support services defined 25 Finance moment Finance moment Finance moment Finance moment Finance moment Acquisition and occupancy of the plot Physically occupy the plot Pay for plot Starter infrastructure Construct an initial makeshift shelter Upgrading property tenure to obtain security Maintain physical control of the plot Achieve secure tenure Obtain full legal title Provision of basic infrastructure & upgrading Upgrading of basic infrastructure Provide adequate sanitation Construction of the house structure & improvements Improve and expand unit Add accessories and space for relatives and rental Building community institutions to combat insecurity Form neighbourhood groups Local and international NGO support Partner with pubic and private sector Advocacy & networking: policy and regulatory Issues Services: Technical skills, supervision, admin support Products: building materials, plans, etc. Source: Housing Value Chain derived from Ferguson, as reported at HMF Regional Workshop, April 2010 Opportunities for housing microfinance 26 According to the World Bank, only 3% of the population in Africa has an income sufficient to support a mortgage Build in opportunities for housing microfinance & shift housing finance potential for low-income earners. Served Underserved Unserved 18.8% earn above US$20 per day 10.8% earn US$10 - $20 per day 9% earn US$4 - $10 per day 24% earn US$2 - $4 per day 36.5% of Africa s population earn less than US$ 2,00 per day. This is the international poverty line. Source: AfDB Report on the middle class, 2011

14 Conclusion: Emerging practice in Africa 27 56'+#720$56'37'$ 1):);%27)(#0$<36#9'$ JG&20$=#/("$<+%).'$ 8'/9/0$1234'$ =292.($<+%).'$! Establishing a housing loan product! Cooperative savings and loans for housing -'."/0$1234'$ K)3'".#0$K)@?'?&2$! Scaling up capacity for growth 1/4'*'$8/370$=#/("$<+%).'$ -'."/0$1234'$! Offering housing support services >'?)('($+#%$>/@'3)(40$A'9'&)$B$C"'3'$B$56'37'$! Broadening institutional actors ;23(23'%4$D'3E0$ <9)("2)'$;'L)('90$-)62%)'$ 56'37'$ A&'3G'0$F'3G'3)'! The use of cheap and effective building technology A."236'0$A'9'&)$! Services products: solar, water, sanitation! Guarantee finance! Collaboration F'3G'3)'$>A8$!C$!<F0$F'3G'3)'$ A."236'$8/370$A'9'&)$ I9'32($8)3'3.2$ -'."/0$1234'$ =292.($<+%).'$ F<8=5=0$F'3G'3)'$! pay as you go slum upgrading 5->'?)('($C"'3'$H$F'3G'3)'$

HMF PRODUCT POSSIBILITIES: Using HMF to promote housing, job creation, and sustainable human settlements, and more borrowing

1 HMF PRODUCT POSSIBILITIES: Using HMF to promote housing, job creation, and sustainable human settlements, and more borrowing RHLF Annual Client Workshop 25 October 2012 Leriba Lodge, Centurion Kecia