Cracking the challenge of lending Across the formal-informal divide

Transcription

1 Cracking the challenge of lending Across the formal-informal divide World Bank: Washington, DC May 27, 2010 David A. Smith Affordable Housing Institute Affordable Housing Institute 21-May-10

2 Affordable Housing Institute: What we do Non-profit (US 501c3) pro-poor consulting and research firm Boston, MA, USA: work worldwide, mainly global south Developing successful affordable housing financial ecosystems worldwide India, Colombia, South Africa, Kenya, Brazil Consulting Pro-bono/ low-bono investment banker Financial product design/ program design Program development: Market principles + government aid = affordability Research Develop, explore, test, refute what we believe Two-day working symposium in Mexico City, October 2009 Major grant from Bill & Melinda Gates Foundation Affordable Housing Institute 21-May-10 // Slide 2

3 Affordable Housing Institute: What we believe 1. Housing is the key to improving cities Improve housing and cities improve Fail to improve housing and cities worsen 2. Mission Entrepreneurial Entities (MEEs) are key to improving housing The part of private sector who will play Focused subset of NGO s 3. Scalable finance is key to MEE growth 4. Municipalities are the right level of government to own slum upgrading Book: free (7 Meg) me or Give me a card with Free book on it Affordable Housing Institute 21-May-10 // Slide 3

4 Risk definition and risk mitigation R = P x L R = Risk P = Probability of default L = Loss if a default happens Loss given default + Unpaid principal balance (UPB) on the loan + Overdue interest payments at default + Costs of regaining the collateral (foreclosing) + Costs of holding the collateral (boarding up, security?) Sale value of recovered collateral = Loss given default Risk profiles differ along the capital spectrum Microfinance = Low P, high L Mortgage finance = High P, low L Home Asset Loan Finance = In between Affordable Housing Institute 21-May-10 // Slide 4

5 Challenges of lending: The formal-informal divide Land rights (obscurity) Land entitling (delay) Informality of income Irregularity of income Verifiability of income Mobility of population Informal/ illicit power structures Conflict and displacement Corruption Limited resources For borrower support Lack of infrastructure financing Capacity gaps Municipal, MEEs Housing is a process, not a product Finance the process Affordable Housing Institute 21-May-10 // Slide 5

6 Informal does not mean worthless Informal means valuable but invisible Property is valuable but invisible Lack of title but owned and occupied Lack of infrastructure but invested in Lack of building code but durable Borrower is worthy but informal Often women Income is informal, irregular No documented credit score, borrowing history You ll take her savings but you won t let her borrow Home is integral to earning power Home-based worker (add electricity, work in evenings) Child rearer (add safe water, sanitation, extend work hours) Add second room (work while children play) Assets are limited (and non-banked, e.g. gold) Affordable Housing Institute 21-May-10 // Slide 6

7 SEWA Housing Finance Ahmedabad, India Affordable Housing Institute 21-May-10 // Slide 7

8 Mitigating risk: within the financial product itself, or accompanying it In the financial product itself Debt-to-income ratios Collateral requirements (occupancy and use value if not resale value) Resident incumbency Multiple draws (e.g. Patrimonio Hoy) timed as needed Government backstops/ assistance Last Loss insurance Protection against rates, utility arrearages Interest reductions, longer terms Accompanying the financial product Delivery ( just-in-time ) Mandatory or prepackaged insurance Pre-loan counseling, technical assistance, value engineering Post-loan support, collections Affordable Housing Institute 21-May-10 // Slide 8

9 Mitigating risk: sharing with other interested parties Risk sharing/ customer support Employer-assisted plans Provident funds Payroll deductions Pooling for cross-collateralization Savings co-operatives Extended families Remittances Intermediation MFIs Non-bank financial institutions Pooling originator takes first loss, is itself collectible Alternative tenures Housing cooperatives Housing associations Hybrid value chains (Ashoka s terminology) Affordable Housing Institute 21-May-10 // Slide 9

10 For a bigger financing box, the home becomes part of the credit decision Homes are why people need to borrow larger sums Improving homes usually means adding a whole room Or adding plumbing (in-home toilets) or electricity Costs range from US $1,500 to $5,000 Much more than microfinance typically lends Home improvements take longer to repay Typically 3-5 years instead of 6-12 months Homes have asset value (even if not mortgaged) People won t lightly walk away from their home Use value versus exchange value So if the home is an asset, we ought to be able to lend more money for a longer interval a bigger box Home Asset Loan Finance = HALF Halfway between microfinance and mortgage finance Affordable Housing Institute 21-May-10 // Slide 10

11 SEWA Housing Finance Ahmedabad, India Affordable Housing Institute 21-May-10 // Slide 11

12 What makes an informal home a HALF candidate? Physical durability Good: it holds its value over time Bad: it can deteriorate or fall apart Demonstrable occupancy/ use value Good: rentable or informally resell-able Bad: occupant will not be motivated to protect Longevity of tenure Good: family has history of residency, savings Bad: transients, absentee landlords City services Good: Delivery of mail, water, sanitation, electric meters Bad: Off the grid Affordable Housing Institute 21-May-10 // Slide 12

13 Home Asset Loan Financing: Requires creating new financial products Amount of loan $3,000 $2,000 $1,000 Home Asset Loan Finance: Larger amounts Longer tenor The home as an asset figures in the credit decision Use value, not exchange value $500 Microfinance ½ Duration of loan (tenor) Affordable Housing Institute 21-May-10 // Slide 13

14 HALF in the spectrum: Product and risk characteristics Product features Microfinance HALF Mortgage Loan (average) $500 $2,500 $10,000 Tenor year 2-5 years 5-30 years Purpose Improve income Improve housing Buy formal Credit decision Personal Personal + use Resale value Collateral? None Partial Yes; home Risk features P = Odds default Low Medium Higher L = Loss default Nearly 100% Unknown Under 10% Risk manage Deny repeat Assess use val Underwrite prop Risk mitigation Repossess? Pursue evict Foreclose Affordable Housing Institute 21-May-10 // Slide 14

15 A new entity = (product + business model) x (concept + reality) = simultaneously Concepts and governance Reality and administration Product HALF loan term sheet, including pricing/ risk HALF entity, with capitalization and value chain links Business model Business plan, growth, cash flow projections People, systems, offices, networks To implement HALF, one must create both the fledgling enterprise and its market-making product and do both simultaneously Affordable Housing Institute 21-May-10 // Slide 15

16 HALF in practice, and AHI s work: An emergent financing model? Mexico Patrimonio Hoy Synthesized financial product Colombia Ashoka Foundation initiative Home Improvement Financing Entity (HIFE) Jointly owned/ controlled entity Home improvement vendors (ceramics, cement, fixtures) Microfinanciers Government: Banco de Oportunidade, Viviendas Saludables India SEWA Bank SEWA Housing Finance (SHF), non-bank financial institution Business plan completed Now in fundraising stages (Rs 2.0 crore) Affordable Housing Institute 21-May-10 // Slide 16

17 Colombia: Hybrid value chain, home improvement finance entity (HIFE) Donor Bank Vend or CSOs MFIs Others HIFE Customers Promoters Retail outlets Ceramics Cement Repayment collectors Improved house! Fixtures Affordable Housing Institute 21-May-10 // Slide 17

18 Questions? São Paolo: We re building a house. Affordable Housing Institute 21-May-10 // Slide 18

19 Cracking the challenge of lending Across the formal-informal divide World Bank: Washington, DC May 27, 2010 David A. Smith Affordable Housing Institute Affordable Housing Institute 21-May-10