Subrata Dutta Gupta

Dr. Friedemann Roy

Thierno Habib Hann

IFC – Financial Institutions Group

Building Viable and Sustainable

Housing Finance Operations in

West-Africa

Learn how to design, implement and manage affordable

housing finance products in a given market in West Africa

Products

Operations Funding

Risks

Course objective

Outcomes/results

3

• Capable of designing right product for a given market segment in a

given country in Africa

• Understand how to underwrite and service mortgages for informal

borrowers

• Increase knowledge of risks in housing finance and funding

instruments

Proposed target group of course: affordable segment

4

Access to regular

mortgage loans

Limited to no

access to

mortgage loans

Community

based shelter

funds, savings

Upper:

(Formal income, legal title)

Moderate to lower:

(Formal/informal income

Legal title/no legal title)

Low income group:

(informal income, no

legal title)

4

5

Definition of affordable segment

Households with stable

incomes which could be formal

or informal:

• Self-employed not

professional

• Salaried employees

• Micro-entrepreneurs

6

Conundrum: how to lend to these people and make a profit?

Halina, engineer, $500

per month

Olivia, food trader,

$380 per month

Humphry, fisherman,

$250 per month

Structure of course – DAY 1

• Session 1 – Market assessment and strategy development

• Session 2 – Product design to reach “affordable segment”

• Session 3 – Underwriting and servicing of mortgage loan

portfolios

7

Source: ifia.com

Structure of course – DAY 2

• Funding - Presentation by AfDB

• Session 4 – Alternative housing

finance schemes

• Session 6 – Funding strategies

and risk management

• Presentation by CRRH

• Program closure and feedback

8

Structure of course – DAY 3

• Day 3 – Site visit to

affordable housing

project in Abidjan

9

Icebreaker – who are you?

• Who are you?

• What do you specifically like at your home

(one detail)

• Time for presentation: maximal 1 minute

10

My favorite place is the kitchen ….

11

Module II. Market Assessment and Strategy

Development

1212

Learning objectives of Session I

• Understand impact of enabling environment on your

housing finance operations

• Design market entry strategy/expansion strategy to

target new customer groups

• Group exercise: understand mortgage market

dynamics

13

Group exercise – understanding

mortgage market dynamics

• Within your group, please work on the following task:

• Prepare an overview of your country’s mortgage market

• Regulation and title regime

• Housing market (supply, demand for housing, house

prices, developers etc.)

• Housing finance market (players, interest rates,

funding etc.)

• Access of low income groups to housing and housing

and finance

14

What are the challenges or barriers to enter mortgage

market or expand current product offering?

15

Source: sowhatfaith.com

Supply of houses

Enabling

environment

Capacities

Informality

Multiple stakeholders –

increased complexity

Lack of long funding

in local currency

Affordability

Housing Finance involves various dimensions and

stakeholders and leads to increased complexity

16

→ Different perspectives/expectations → Increased complexity

16

• Your customer

▫ Affordability and reliability

• Lenders

▫ Risk management, funding and security

▫ Developers

▫ Land, materials and capital

• Investor

• Stability and adequate return in

relation to risk

• Government

▫ Access to housing and access to

finance

Stakeholders in housing sector and their interests

1717

Source: directionservice.org

18

Market

segmentation

criteria

Income

Housing

needs

Improvement of

existing home

New

home/apartment

Extension Apartment

New appliances House

Location

Rural

Urban or central/peri urban

18

Market entry strategy – first step: what is the market

in your country?

Formal/informal – income ranges

Market entry strategy – vision and strategy

The Vision

• Clear statement of what you are and what you are trying to achieve

The value proposition

• How would you deliver against the vision?

Magnitude and direction

• Define benchmark to show where you are heading

The competition grid

• SWOT analysis/environmental analysis

• Definition of business plan

Branding

• Organize approach to customers

19 19

How could this be laid out?

20

Millmillions

21

Example SWOT analysis

• Young and dynamic staff• What are your weaknesses?

• Housing finance barely tapped

market/many renters/young people• Weak legal framework

• Competition with banks?

Strengths Weaknesses

Opportunities Threats

21

What are your distribution channels?

Branches

22

Agents?

• Hardware

stores

• Developers

Others?

• Digital

• Savings

Groups

Takeaways (I)

• Housing finance development depends on

macro-economy, legal system and

institutional framework

• Supply of housing is critical to development

of housing finance

2323

Takeaways (II)

24

• A successful market entry/expansion requires clear strategy

• Vision and value proposition

• Which product for given target segment

• Which distribution channels

• Before roll-out

• Understanding of market conditions and own capabilities

• Business plan

Source: universitas21.com

Session II: Product design

2525

Learning objectives of Session II

• Learn from models of lenders from other countries and draw

conclusions for housing finance product design for your organization

• Discuss product variants to tap new market segments in your country

• Learn how to prepare a product launch/market entry

• Group exercise

26

Lessons learnt from IFC advisory experience

• Understanding of enabling environment

• What can be done under given circumstances?

• What are the low hanging fruits?

• Clear identification/definition of target segment

• Needs

• Preferences

• Capacities

• Partnerships (e.g. LafargeHolcim)

• Internal processing

• Marketing and sales strategy

• Funding strategy

27

Ideas to enhance product offer of your organization

Source: Huffington Post

• Micro rollover mortgage

• Credit linked savings products

• Housing loans in combination with

housing support services

28

General rules about mortgage design

• Never copy models from other countries without adapting to given

context!! Why?

• Inflation rate is critical factor

• Proposed design needs

• Profitability

• Robustness to changes in environment

• Income analysis

• Type of funding

• Your customers’ design needs

• Affordability

• Diverse needs of borrower

2929

How to reach

a fit between

both needs?

Which income groups do you wish to target in future?

30

Source: AUHF

Micro rollover mortgage

• Interest rate is initially fixed but will adjust

periodically (e.g. every two to five years)

• Common in Canada and Spain (and

Myanmar)

• Pre-payments may be without charge when

interest rate adjustment is pending

Source: dogs.about.com

31

Allocation pool

tLifetime of contract

Inflow of funds Outflow of funds

Savings

Redemption

paymentsDeposits

Loans

Mechanics of credit linked savings products

32

Credit linked savings products – key features

• A ‘time money’ system

• Main challenge is management of

allocation pool to balance fluctuating inflow

and outflow of funds

• Open systems: more flexibility to cover

shortfall of fund inflows

• Complement mortgage loan or are used for

improvements

33

Credit linked savings products – good brothers

Good Brothers’ are savers

who do not take out loans: the

more there are the more

quickly financial institutions

can allocate loans, and the

larger the borrowing

component can be

3434

Source: sayingImages.com

Source: Roy/Dübel

The tricky thing – managing liquidity risk

Liquidity profile of

institution managing

credit linked

products, which

lacks sufficient inflow

of savings

35

Housing loans in combination with housing support

services

Definition:

• Technical assistance to construction, financial issues around

housing finance and services that enable a household to improve

their house on their own

3636

Housing value chain and housing support services

Source: Habitat for Humanity

37 37

Types of housing support services

– 3 levels

1. Technical information:

• Brochures, videos, contact lists of masons,

construction cost estimates etc.

2. Professional services:

• Support to design and planning process, trainings, support to

permit processing, may include visits of technical staff at

borrower’s home

3. Construction technical assistance/engineering advisory

• On-site support to borrower at her/his housing unit

• Ranges from basic (repairs) to structural work (plumbing,

electrical work etc.)

3838

Example for partnership between lender and building

material supplier to organize construction technical

assistance

39 39

• Train the engineers

• Promote and pre-screen

customers

• Refer them to the

engineers

• Grant loans

• Manage the portfolio

• Allocate engineers

• Train the loan officers

• Assist the customers (conception / monitoring)

• Train masons and cinder blocks producers

• Leverage certified masons and cinder blocks producers

• Provide

construction

materials

• Ensure quality

of the materials

delivered

Roles of partners (example from Haiti)

40 40

Lender

Hardware store

CTA provider

Before After

Value of construction technical assistance (Haiti)

Source: Build Change

41

Making a home more resistant against earthquakes

(Haiti)

42

Source: Roy

42

Takeaways

• Success of IFC clients has been result of

• Good understanding of market conditions/enabling environment

• Client preferences and capabilities

• Expertise in managing mortgage lending process

• Products variants presented aim to enhance your product offer of your

organization

• If their implementation is considered, further research and testing is

recommended

43

Group exercise – product design

considerations

• Q1: Feasibility of credit-linked savings products in Africa

• Q2: Feasibility of micro-rollover mortgage/home improvement loans or

small loans to finance incremental construction

• Q3: Which additional support services can you offer and how to finance

them?

• Q4: How can you leverage your developer relationships to sell more

mortgage loans?

• Q5: Potential of shariah-compliant housing finance products in Africa?

44

Session III. Underwriting and Servicing of Mortgage

Loan portfolios

4545

Source: globalaccessibilitymap

Source: Aadhar

Source: Aadhar

Learning objectives

• Learn from Indian Shelter’s underwriting and

servicing model and compare it to your own

operation:

• Credit risk management

• Identify creditworthy borrowers

• Limit overall exposure to one market segment

• Monitor repayment behavior of existing

borrowers

• Marketing and sales/branding

• Position yourself as trustworthy lender

• Opportunity for cross-selling

46

Example India Shelter

Affordable Housing Building A Business With Respect And

Compassion

India : A Story Of Optimism And Diversity

▪ A $ 2 trillion Economy

▪ GDP Growth Rate 2015-16: 7.9%

▪ 53 towns with population > 1

million

▪ 468 towns with population > 100

thousand

▪ Population 1.2 Billion (17.5% of

World Population

▪ Urbanization – 31.16 % and

growing at 2.4% per annumm

▪ 36 Provinces

▪ 22 Official Languages

This Segment Is Getting All Round Support

Government Thrust on the affordable housing segment :

“Housing for all” mission which is addressing both

demand and supply constraints

Well Capitalized currently given

the PE interest in this segment

Servicing a large and unaddressed segment,

where borrowers do not have formal income

proof and are ignored by traditional financial

institutions

Many Factors Generating Demand Of Home Extension, Improvement And Construction

50

Home Improvement/Extension

Home

Improvement/Extension

Home Purchase

(A) New Family

formation in existing

towns creates need for

renovating and

extending current

dwelling unit

(C) Rise in income

leads to a desire for

better living

standards. Individuals

want to improve their

current housing unit

to display

repositioning in

society

(D) Migration to Industrial

cities for work

opportunities leads to

rental needs, this creates

a new source of income

for residents therefore

they look for credit to

extend homes

(B) Rural to Urban

Migration for

education,

marriage, security,

employment

Journey

522009

2010

2011

2012

2013

2014

2015

2016

16,500 + Customers 47 Branches 420 EmployeesCrossed $ 61.5 Mn. In AUM

11000 Customers 33 branches254 Employees

2000 Customers 22 Branches126 Employees

600 customers 15 branches70 Employees

6000 Customers 31 branches255 Employees

3500 Customers 24 branches152 EmployeesBroke even at corporate level

7 Employees 2 Branches

IndiaShelter Finance was conceptualised

J

O

U

R

N

E

Y

$ 40 Million Equity

Infusion

$6 Million Equity

Infusion

$ 4 Million Equity

Infusion

2.14%

9.89%

2.27%

85.70%

Promoters ESOP Other individual investors Financial Investors

Strong Capitalization And Employee Participation Is

Important To Shock Proof The Enterprise

IndiaShelter Continues To Create Significant Impact

75,000+Lives Impacted

5

4

4,209Entrepreneurs Supported

16,752 Women Financially Empowered

11,016 Washroom Created

16,754House Holds Served

53 Cities

9Provinces

55

Raising Funds Remains A Challenge But Diverse Sources

Are Available

0%

20%

40%

60%

80%

100%

120%

FY15 FY16 FY17

21%30% 36%

16%

19% 14%

48% 26%18%

13%

5%

16%25%

15%

Banks NHB NBFC/FI NCD Commercial Papers Securitisation

IT

Support

HR

Collection

Finance

Management

Operations

Credit

Sales

Total Spent : $1.9 MillionCount

1 1%

1

5%

5%

45%

13%

9%

8%

8%

5%

279

64

24

10

Cost %

9

5

27

✓ Sponsoring Training &

Development

✓ Short Term Benefits – High

variable pay out

✓ Mid-Term Benefits –

Deferred Payments

✓ Long Term Benefits -

ESOPs

Retention Strategy

✓ High energy freshers

are hired & groomed

✓ Internal job promotion

given priority

Hiring Strategy

People Management Is A Key Success Factor

To construct house on land

that has already been

purchased

To upgrade your home

eg: adding new room,

bathroom, floor plastering,

making a terrace, courtyard

etc

To Buy a New home - Third

Party or Builder

Our Full Spectrum Product Offering Improves Efficiency

Direct access

provided to the

customer to

company’s Head-

office through web,

mobile, Whatsapp,

toll free line etc

Loan without Proof

of Income Documents

Instant Approval

3 level redressal and

escalation of all

complains

Strict turn-around time

monitoring at every

stage of the process

No Third Party

Sourcing Allowed

Real Time system

generated information

given directly to

customers on their

phone

Important To Deliver Superior Customer Service To Gain

Credibility

Nature of the target customer segment

Unpredictability of income

Lack of adequate documentation

Complicated credit appraisal

Need to be present near the customer

Cost of underwriting

There Are Significant Challenges In Building Scalable

Enterprises In Affordable Housing Finance

Magic Sauce

Smart Investment In High ROI Marketing

Below the Line marketing

• Leaflet, canopy, umbrella activity at

target audience’s work place,

residential colonies, school, market

and recreational sites

• Van activity and Road shows to

attract TG

Partnerships

• with Taxi companies to service their

driver partner’s credit needs

• with cement and construction material

companies

• with Builders

Digital Marketing

• Banner Ads and sponsored

articles on Phone Applications

and Websites used by our TG

• SMS/Whatsapp/email

campaigns

• Social Media : facebook.

twitter

Referral

• Tele calling referral program

• Customer Engagement from time

to time eg: gifts during festivals

• Direct Referral program: strong

customer relationships provide a

steady flow of leads

Electronic Marketing

• Television Commercial on local

channels

• Radio Advertisements with high

frequency

Outdoor Branding

• Hoardings at strategic

locations

• Auto, Bus and Taxi

Branding

• Branding at Builder’s site

Simple And Empathetic Creatives Generate Good Lead Volumes

Leaflet

Canopy

Hoarding

DanglerCustomer

Achievement on

Social Media

63

40%

28%

24%

12%

100%

Customized Branch Wise Lead

Qualification

Loan Application Process Initiated By

Officer

Logged Into System

Loan Disbursed

Our Detailed Lead Management Process Results In Higher

Conversion Rates

Inquiry

Internet Cloud

Robust Cloud IT Infrastructure Helps Deliver High Quality Service At Low Cost

Branch

Head Office

Local Server

Internet

Cloud

Mobile App

Verification

Databases

Credit

Bureaus

Loan

Management

Sys

CRM

Credit

Decisioning

Engine

Google

Extensively Engaged customers in a

discussion about their life story and

documented where they come from, what

they do, their revenue, spending, saving &

household expense (education+electicity)

2016

By now we had 300+ different occupations

with corresponding income figures to

create an income occupation matrix. This

served as a guidance benchmark for future

income evaluations

Automated credit underwriting

process by integrating IOM

• Radial Income, delinquency, valuations

• On field KYC verification to get quickest

possible result

• Leverage technology to reduce human

intervention and make process seamless

and cost efficient. Developed Credit

Score Card

2010-2012

2014-2015

2012-2014

Our Underwriting Process Is Evolving Continuously

66

Main Applicant

has to be a

woman

Multiple

Streams Of

Income In The

Household

Borrower Should

be within 20 Kms

of our

Office Minimum

Income of

200$ a

month

Repayment should

not be more than

30% of disposable

household Income

All Children Of

School going age

should be in school

...As The Minimum Underwriting Fundamentals Are Held Static

Aadhar Card is

Mandatory

Ensure

customer

education and no

miss-selling

2010 -2012: IndiaShelter Started With Interview Based Underwriting

Monthly Income

Daily Sales : ______

Daily Expenses:

1.Raw Material: ________

2.Gas Etc.: _______

Fixed Expenses:

1.Mobile:_____

2.Rent:_____

3.Elecricity:______

4.Commute:_____

Net Surplus:

✓ Estimated Cash Flow To

Arrive At Repayment

Obligation

2012 -2014 : Leveraged Income Data To Develop An Income Occupation Matrix Across Our Locations

Minimum 20 data points for each

occupation

Standard deviation < than 2.5x of mean

In Case customer is satisfied with loan

amount basis this income, occupation

verification done before approval else

business visit and interview based

appraisal

By now we had 300+ different occupations

with corresponding income figures to

create an income occupation matrix. This

served as a benchmark for future income

evaluations

Credit Bureau Checks

2016 Paperless Loan Processing Engine : Data Captured

Painlessly

Decision SanctionCredit ScoreData Capture

& Verification

Personal discussion

& technical

Raj Narayan Gupta

Sourabh Gupta

15/06/1990

BGTPG9802L

Efficiently capture data in the face

of keyboard unfamiliarityVerified with Public

databases

2016 Paperless Loan Processing Engine : On Field Verification

Personal discussion

& TechnicalCredit ScoreData Capture

& VerificationDecision Sanction

Technical Verifier verifies/updates/adds information about the

property. Adds photos and geo-tag of property for confirmationBranch Manager verifies/updates/adds information through

mobile on his visit to borrower. Adds photographs and geotag of

address through mobile

TotalApplications:

(Jan 13 – Nov 15)

14,107 (100%)

Accepts:9,433 (67%)

NTC:7,366 (78%)

Good:

6,127 (83.2%)

Bad:

1,239 (16.8%)

ETB:2,067 (22%)

Good:

1,766 (85.4%)

Bad:

301 (14.6%)

Rejects:4,674 (33%)

0%

10%

20%

30%

40%

Bad

Rat

e

Score Range

Bad Rate vs. Score

Development Out of sample

Differentiation between good and bad will sharpen

as we gather experience

Historical Data was segmented into NTC and

ETC based on their attributes

Rich Databases used to develop a score

card for our segment

2016 Paperless Loan Processing Engine : Score Development

Typical Origination scorecard

information

Current development

Data Capture

& Verification

Personal discussion

& technicalCredit Score Decision SanctionData Capture

& Verification

Personal discussion

& technicalCredit Score Decision Sanction

Geographical Information Systems Used To Supplement

Valuation database to

authenticate property values

Delinquency Map

Automated credit

decisioning with our

propriety rules built in

engine

Data Capture

& Verification

Personal discussion

& technical Credit Score Decision Sanction

2016 Paperless Loan Processing Engine : Underwriting Rules Applied

Approved?

Yes No Manual Review

2016 Paperless Loan Processing Engine : Underwriting Rules Applied

These are the

reasons you were

declined.”

“Congratulations,

you’ve been

approved.”

“Pleaseprovide

additional

information.”

ApprovalDecisionCredit ScorePersonal discussion

& technicalData Capture

& Verification

On-going Investments Have Reduced Unit Credit Cycle Costs

Note: Cost includes Employee Salary, Bureau, Legal, Technical &

FCU Expenses

Credit FY’15 FY’16

No of FTE 16 22

FTE Cost (Lacs) 67.11 75.69

1.18%

1.42%

0.80%

0.99%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

Cost, % of Sanction Amt Cost, % of Disbursment Amt

FY'15 FY'16

0.26%

0.18%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

FY'14-15 FY'15-16

Collection Cost as % Of AUM

Collection FY’15 FY’16

Total FTE 19 27

FTE Cost (Lacs ) 58.2 72.2

Credit Cost as % Of AUM

A Strong Technology Enabled Collection Process Leads To A

Robust Yet Responsible System

We see a customer as a 15 year relationship & adopt a

collaborative collection mechanism involving consistent

follow up and working with the customer to make regular

repayment a habit.

A customer pays through one of 2 modes :

Electronic (87%) and Cash (13%)

A mobile enabled collection dashboard that

alerts status real time

In case of Default, Officer evaluates

whether case is willful/permanent or

just temp irregularity.

Reminders to customer & Collection Officer

visits

Mobile Route maps for optimizing travel time to

visit customers

Early Reminders thru SMS/Phone

etc before bank debit

Collateral action to

recover

>90 Days Past due

rate @ 0.27%

30 DPD < 0.70%

Takeaways

• Underwriting and servicing process is key to credit risk management

process and achieve competitive edge

• Entails potential for cost savings (through higher degree of automation

and appropriate integration of headquarter, branches

• Arrears management – restructuring is preferred to foreclosure (if

possible)

• Borrower education is poised to help lower credit risk

77

Dr. Friedemann Roy

Global Product Lead Housing Finance

Financial Institutions Group

International Finance Corporation

Tel. +1 202 473 9838

E-mail: froy@ifc.org

Disclaimer: The views, findings, interpretations, and

conclusions expressed in this presentation are entirely

those of the author and do not necessarily represent

the views of the World Bank Group, the IFC, its Board

of Executive Directors, or the governments they

represent.

Subrata Dutta Gupta

Principal Financial Officer

Financial Institutions Group

International Finance Corporation

Tel. +91-33-4401-1000

E-mail: SDuttagupta@ifc.org

Thierno Habib Hann

Senior Housing Finance Specialist

Financial Institutions Group

Tel. + 254 20 293 7729

E-mail: Thann@ifc.org