Housing Microfinance: An Overview · The Patrimonio Hoy Program of CEMEX in Mexico • 70% of CEMEX...
Transcript of Housing Microfinance: An Overview · The Patrimonio Hoy Program of CEMEX in Mexico • 70% of CEMEX...
Housing Microfinance: An
Overview
Franck Daphnis, CHF International
Bruce Ferguson, World Bank
October 28, 2004
Microenterprise Lending & Housing
Microfinance: A Comparison
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
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
Definition
Housing
MicrofinanceHousing Finance Microfinance
Examples of Linked Products
Source: Housing Microfinance Initiatives. USAID/DAI, June 2000
Organization Average
Loan Size
Maximum
Repayment
Period
Security/
Collateral
Required
time with
Program
Savings
Required
Solution
Type
Grameen Bank $100-
$600
120 months 5 co-signers
+Center
guarantee
Two
years
minimum
Yes Fixed
(incl.
Latrine)
SEWA Bank $532 60 months One year
savings as
lien; 2
cosigners
One year
minimum
Yes Variable
CARD $359 12 months Five co-
signers
One and a
half year
Yes
($39)
Variable
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
General Characteristics
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
Stand Alone – Incremental Build- Product
To Assist, or Not to Assist?
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.
“Clients already know how to
build their home; it’s not cost-
effective for our MFI to provide”
“Our Mission is to ensure a
house is built; We’ll get better
repayment, more satisfied clients
if the completed project is higher
quality”
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
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!
• 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.
On the Horizon:
Three approaches to scaling up:
1. Second-tier liquidity facilities
2. HMF funds
3. Business alliances between HMF lenders &building materials suppliers
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
I. Second-tier liquidity facilities:
Colombia and Mexico
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
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
II. HMF Fund
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.
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.
III. Business alliances between MFIs
and building materials suppliers
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
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