A Mouse That Roared? Housing Microfinance in South Africa: Status, Problems and Prospects FinMark Forum Sandton David Gardner 18 September, 2008 Study Background Finmark Trust & HIVOS-funded Based on literature review, interviews, workshop inputs & peer inputs Builds on other work by FinMark Trust Township Residential Property Markets study Housing Entrepreneurs Study (comprising Small Scale Landlords and Home Based Enterprises) FinScope, access frontier for housing finance in South Africa Causes of Default of Housing Micro Loan clients Literature review: housing finance development in Sub-Saharan Africa Access to housing finance in Africa Zambia, Botswana, Kenya, Namibia Focus on access to housing finance for the poor 2 1
PRESENTATION OVERVIEW 1. Key Findings 2. Definition & Scope of HMF 3. Institutional Arrangements 4. Demand for Housing Microfinance 5. South Africa s Develompental Paradigm 6. Status Quo & Lessons Learned 7. Way Forward 3 1. Key Findings The mouse has not yet roared but why? She still believes she is a mouse and not a lion HMF still not secure in its developmental role All the rats are roaring so why should the mouse? Microfinance is working. Burgeoning household credit sector Increasing microfinance finding its way into housing by default, not design She is caught in a mousetrap Structural constraints limiting HMF to specific market sub-segments, and precluding HMF from playing a major role in primary housing production processes Squeeak! She doesn t get enough cheese and probably needs steroids Actively and passively maligned HMF sector requires a voice, a presence, and proactive lobbying 4 2
2. Definition & Scope Housing Microfinance: unsecured loans used for housing purposes Used for housing and related elements (land, services, construction) Default and design Size: larger than normal microloans: R1000 to R25 000 Term: generally longer than standard MF Interest Rate: competitive even though allowance given for Developmental Credit Collateral: range of options being experimented with internationally not the norm Importance of Housing Microfinance Commercial Imperative: untapped MF market Limit and problems of conventional housing finance (mortgage and asset-backed): HMF is more affordable, better understood, more widely available and appropriate Housing Imperative: Importance of housing to low-income households: security, shelter, housing asset, economic asset Supporting Incremental housing processes (urban and rural) Developmental Imperative: Potential to bridge the divide between minimum standards and needs of urban poor and not-so-poor Potential for supporting urban transformation objectives & relieving housing burden on state 5 2. Definition & Scope: Typology FIRST TIER Commercial Banks Microfinance Banks SECOND TIER Non-Bank Microfinance Institutions Housing-Focused MFIs Co-operatives & Credit Unions THIRD TIER Mutual Entities, Comm-Based Shelter Funds Informal Moneylenders Informal Savings Groups Regulated by Banks Act Deposit-taking institutions offering microloans as part of financial service offering Banks focusing on microcredit Regulated as Non-Banks via NCA Commercial providers of microcredit Focused on provision of housing microfinance Generally focused on savings and loans to members Generally Unregulated / Informal Usually donor-supported Limited compliance Group savings Multiple Financial services Portion of lending used for housing purposes. Some considering HML Portion of lending used for housing purposes. Few considering targeted products Generally microloans, limited other financial services Portion of lending used for housing purposes Mostly to all housing related lending Extent of housing lending unclear Savings and credit instruments Membership-based savings funds. Sometimes geared with debt Non-specific, small, high interest loans Revolving credit groups 8 registered with NCR ABSA, Std, Nedcor, FNB African Bank, Capitec, Teba, etc 2338 registered with NCR >2 200 entities. Includes Blue, Mafori < 20 entities? Includes Kuyasa, Lendcor <30 entities registered Numbers unknown Numbers unknown Numbers unknown Numbers unknown 6 3
2. Definition & Scope: Forms Secured Loans Unsecured Microcredit Developmental Credit Savings-backed Housing microloans Short-Term Loans Credit Facilities / Cards Debit Cards Informal Loans Revolving Savings Takings Personal Savings? Other Products 7 2. Definition & Scope 2. Scope Scope of HMF: Up to R8- billion housing-related microloan portfolio in SA 30 25 20 15 Total Hsng-Low Hsng-High 10% to 24% of total household microfinance portfolio housing-related 10 5 0 2004 2005 2006 2007 2008 Hsng-Spec FSC 2007: R1,22-bn (96 760) housing-specific unsecured loans @ R12 600 avg FSC Growth between 2004 & 2007: 138%, value by 261% ZAMBIA UGANDA TANZANIA KENYA BOTSWANA NAMIBIA SOUTH AFRICA AVERAGE 0% 20% 40% 60% 80% 100% Banked Formal - Other Informal - Only 8 4
3. Institutional Arrangements x MINISTRIE S SUPPORT ORGANISATIONS DEVELOPMENT FINANCE INSTITUTIONS STATUTO RY BODIES National Consumer Tribunal National Credit Regulator Credit Bureaux TCB Donors & NGOs Home Loan Guarantee Company SA Microfinance Apex Fund (SAMAF) National Housing Finance Corporation (NHFC) Rural Housing Loan Fund (RHLF) FINANCIA L MARKETS Equity Debt Insuran ce Cooperative Act National Credit Dedic. Banks Bill Banks Bill Self-regulated Entities Stokvels Burial Societies Village Banks Credit Unions RETAIL FINANCE INSTITUTIONS Equity & Debt Technical Assistance Guarantees Equity Debt Technical Assistance Land Bank Development Bank of Southern Africa (DBSA) NURCHA 9 4. Demand for Housing Microfinance Potential HMF Demand: every person with secure tenure (and some without) Four main areas of potential demand Substitute Finance : people who cannot afford or access other housing finance cynical & prevailing view T REALISTIC Space left by lack of penetration by mortgage and secured housing finance Finance-related and housing supply-related problems inhibit potential Incremental Home Improvement After-Market Demand CURRENT FOCUS Improvement of existing properties: rural & urban, formal & informal title. Transferred public rental, RDP/BNG, rural housing Mobilising Primary Housing Development T YET POSSIBLE Primary access to land and housing for low-mid income people not possible outside of BNG HSS Increasingly recognized as only viable approach to improving housing conditions of lower-income people en masse Requires a fundamental re-formulation of human settlement & housing paradigm & processes Housing Entrepreneurship & Private Rental ADDED STRATEGY Home-based enterprises: 70% of SMMEs linked to the home Backyard Rental / Tenements: Operating housing sub-market housing 13% of urban households Perfect for realizing multiple urban development benefits 10 5
4. Demand for Housing Microfinance 11 4. Demand for Housing Microfinance Figure 10.3: Gauteng Enrolments per Category (2000-2005) 40000 35000 30000 25000 Enrolments 20000 15000 10000 5000 0 2000 2001 2002 2003 >R500,000 1217 2231 3209 3326 6804 7992 R200k-R500k 3875 6992 10185 8475 15178 17889 R100k-R200k 5188 4423 4911 3337 6755 8057 R50k-R100k 4029 4018 2950 1586 1815 962 <R50,000 281 918 536 97 43 132 Years 2004 2005 P/R 12 6
5. SA s Development Paradigm Step up to minimum standard product Linear progression up the pyramid thereafter: this is unusual HOUSEHOLD PROPORTION OF HOUSEHOLDS DEEMED INCOME (R/month) 8 VERY HIGH >R 10001 R 10,001 7 HIGH R 10,000 R 7,001 SERVICED SITE TOP STRUCTURE FUNDING AFFORDABILITY ELIGIBILITY REQ'D SAVINGS AFFORD PRICE SPECIFICATION (% inc & R/Mnth SUBSIDY (R min) (R Total) (R Total) (R Total) (R Average) SPECIFICATION 2 (m ) (% of Product) (R Total) Chasm Housing +-83m2 @ R2,750/m2 R65000 Fully serviced +-78m2 @ R2,500/m2 90%90% R65000 Fully serviced +-52m2 @ R2,250/m2 10%10% 90% 5% 5% 20% / to R1400/m -DEP. R 6,357 R 6,692 R 127,147 R 140,196 R45000 Fully serviced +-48m2 @ R2,000/m2 17.5% / to R875/m Impractical FLISP R 5,001 R 4,542 R 4,781 R 90,838 R 100,160 R45000 Fully serviced +-32m2 @ R1,750/m2 5 MIDDLE R 5,000 -DEP. R 3,973 R 4,182 R 79,467 R 87,623 R25000 Fully serviced +-42m2 @ R1,500/m2 R 61,353 R25000 Fully serviced +-36m2 @ R1,000/m2 R 3,501 R 2,782 R 2,929 R 55,643 4 LOW-MIDDLE R 3,500 R 2,501 3 LOW INCOME R 2,500 R 1,501 15% / to R525/m 12.5% / to R312.5/m 2 V. LOW INCOME R 1,500 7.5% / to R112.5/m R 801 1 SPECIAL NEEDS R 800 0% / to /m Squat (12.3%) Informal (11.4%) Private (11.5%) Co.(1.6%) SHI(0.5%) Council (7.6%) Subsidy (15.2%) Ex -council (7.6%) Tribal Private (27.2%) Rental(35.5%) 90% 5% 5% Limited Subsidy Supply R 37,736 R 26,965 R 76,923 R 66,152 +-73m2 @ R850/m2 +-60m2 @ R850/m2 65% R 14,048 R 8,435 R 53,235 R 47,622 +-51m2 @ R750/m2 +-43m2 @ R750/m2 77% 18% 4% R 1,922 R 38,630 +-36m2 @ R650/m2 R 1,027 R 37,735 +-35m2 @ R650/m2 +-33m2 @ R650/m2 +-33m2 @ R650/m2 30% 4% 100%?% imum Standards MINIMUM STANDARD HOUSE: Ownership(51.1%) 90% 10% R80000 Fully serviced R 25,906 R 233,155 R 259,062 R 18,137 R 163,232 R 181,369 22.5% / to R2250/m MIX R 30,877 R 277,890 R 308,767 25% / +R2500.25/m 6 HIGH-MIDDLE R 7,000 SV / DEP ADDIT CREDIT PRODUCT 100% Secondary Housing Mkt +-33m2 @ R650/m2 MANDATORY SAVINGS CONTRIBUTION: ADDITIONAL SAVINGS REQUIREMENT: R1 501 to R3 500/ month only LOAN FINANCE TERMS: UNSECURED LOANS: Term: 2 Yrs; Int: 35%; Dep: 0%. :, : R10,000 GUARANTEED FINANCE: Term: 5 Yrs; Int: 12%; Dep: 10%. : R5,000, : R50,000 Squatting (12.3%) Rental & backyard rental Access to Land & Services13 Informal Settlement MORTGAGE LOANS: Term: 20 Yrs; Int: 16%; Dep: 10%. : R20,000, : None 6. Status Quo & Lessons Learned Current HMF Realities HMF is different from MF Solid financial sector in SA: microfinance still shape-shifting Level playing fields for MFIs: standard operating conditions, barriers to entry, pressure to grow, consolidation of players NCA: Sector stability via blanket regulation of MF providers & protection of consumers Concerns: household indebtedness, macroeconomic changes, default Emerging literature & local body of evidence of what works and what does not: wholesale & retail Much larger than RHLF and NHFC-supported HMFIs: works across the board Organic flow of conventional microfinance into housing good, but not enough Emerging sense of differences: points of contact, parameters for successful lending, alternative methodologies & products, origination, management, risk identification & mitigation, default management Need to continue to facilitate growth of sector and help turn money into houses HMF works but is a prejudiced sector Differentiate organisational commercial failure from methodological failure Benefits to lenders and borrowers of all sizes: voluntary, profitable, growing business area HMF not only the ambit of NGOs and small HMFIs: interest from banks, non-bank lenders, community groups & alliances, even developers 14 7
6. Status Quo & Lessons Learned Current Housing Realities Implications of SA Housing Paradigm BNG does not alter development paradigm sufficiently for future success Housing programme out of touch with South Africa s state of development, real housing needs and appropriate strategic responses. Housing policy actively antagonistic to role of HMF and potential of incrementalism Need to fundamentally shift human settlement development processes & current housing subsidy programmes First and Second Pillars of housing policy developed from middle up Mismatch between housing demand and supply: quantum and nature of housing products imum standards and subsidy system create artificial divide between formal and informal housing conditions and sterilise the latter Large and growing demand and discontent about housing conditions down-market low-income housing strategy viewed from minimum standards upwards low income people relegated to sub-optimal, maligned housing situations Need to couple only viable low-income housing strategy with only viable low-income financing Mechanism fundamental political, strategy and policy change needed this is more a housing problem than a finance problem 15 6. Way Forward Turning Microfinance into houses: Institutional Infrastructure: Mainstreaming HMF in affordable housing delivery: Unblock HMF path to primary urban shelter production Lobbying for new housing paradigm including incrementalism Tackle problems inherent in current housing approach: rigid minimum standards, fully-subsidised one-step accommodation programmes Key is new methodology combining individual, state (subsidy) and private sector (microfinance) Reformulate facilitative roles of DFIs to offer institutional support to HMFIs, government, developers Organisational Infrastructure: Competition & Co-operation: Collaborative partnerships between mainstream and niche players to seek new housing development methodologies & microfinance models New HMF approaches and products need to be tested: Longer-term housing microloans Assessment of risk and interest rate Sources of fixed, movable and social collateral Formal rollover microloan products Technical Assistance options Savings-based, housing-linked, product-driven, TA-linked Support to nascent HMF / incremental housing programmes Support Infrastructure: Understand successful housing strategies that engage with HMF internationally Research true depth and breadth of HMF in South Africa Grow confidence in HMF amongst housing and finance decision-makers. Technical Assistance: Turning HMF into houses: plans, approvals, supports, technologies 16 8
THANK YOU! David Gardner Cell: (083) 399-3388 Email: david@gardner.za.net RRROOOOAAAAARRRRR! 17 9