Presentation by Dr. Friedemann Roy, Association of Private Bausparkassen, Berlin

at World Bank Seminar (11 March 2003)

The Implementation of Contract Savings Systems in Emerging Economies -

Features, Recommendations and Examples

When should governments encourage the implementation of Contract Savings Schemes?

Affordability

High default ratios/foreclosures sales

Ill-functioning legal conditions

Restricted lending to private sector

Low “official” savings ratios

Difficulty to obtain a second mortgage-lien

Conclusion

• Under these economic circumstances, access to credit is difficult, especially for low and middle income groups.

• A complementary tool is needed to fill this gap and to make housing affordable.

SavingsAllocation fund

Loans

t

lifetime of contract (e.g. € 100,000)

How do Contract Savings Schemes (CSS) work?

Customer saves and earns interest

(40 - 50 % of contract amount)

€ 40,000 - € 50,000 € 60,000 - € 50,000

Notification of bausparkasse

Repayment of loan with interest rate fixed on

conclusion of the contract

How do CSS work?: the allocation system

Inflow of funds

Outflow of funds

SavingsRedemption payments

LoansDeposits

Termination of contract

Conclusion: a sound financing structure for a home

50 % Mortgage

30 % Bauspar funds

20 % Down-payment

= 100 % of the purchase price

Conclusion: financial perspective of Contract Savings Systems

• Option component: right but no obligation to call a loan at

pre-specified terms.

– Loan is below market rate.

– Interest rates are fixed over whole lifetime of contract.

– No underwriting process to receive loan proceeds.

Credit risk

Attractiveness

Legal conditions

Agency risk

Sound liquidity management in view

of volatile inflation rates

Specific features of Contract Savings Systems in emerging economies

Credit risk

Customer builds up creditworthiness over time

Default rate of bausparkassen industry: 0.02% of entire loan portfolio

Recommendations for managing the implementation of CSS in emerging economies

Specialised institutions?

Agency risk

Recommendations for managing the implementation of CSS in emerging economies

Stable and viable institutions managing CSS tight regulation, experienced international support

Attractiveness

Recommendations for managing the implementation of CSS in emerging economies

Sound liquidity management in view

of volatile inflation rates

Inflation rate < 10 %

Maintain short and consistent waiting periods

Clearly define waiting period

Legal conditions

Recommendations for managing the implementation of CSS in emerging economies

Sound liquidity management in view

of volatile inflation rates

Duration of savings period

Require a reserve fund to meet future loan demand

Introduce regulatory body

Legal conditions

Recommendations for managing the implementation of CSS in emerging economies

Flexible contract management

Social housing programmes

Government support for housing construction financing

Objective: support development of private market (start-up effects) and improvement of the nation’s social goals

The role of subsidies

Recommendations for managing the implementation of CSS in emerging economies

Recommendations: design of a subsidy scheme

• Provide realistic estimate of housing demand.

• Continue to focus on macroeconomic and housing reforms.

• Helping to overcome the liquidity constraint of borrowers.

• Consider specific target groups to assist those in need of a subsidy.

• Link subsidies to the use of funds for housing purposes.

Implementation of CSS in emerging economies - examples

Central and eastern Europe• Slovakia.• Czech Republic.• Hungary.• Croatia.• Envisaged in Romania.

Asia:• India (BHW in joint venture with Birla Home Finance).• China (Schwäbisch Hall in joint venture with China

Construction Bank).

Bausparen in the Czech Republic

Bausparen has existed since 1993

Funds are used for renovation/modernisation (39%),

construction (17%), the purchase of a home (39%) and miscellaneous

building activities (10%).

Every second house under construction is financed through bauspar-funds.

About 4.5 mio. Czechs have concluded a bauspar-contract.

Housing expenditures = 18% - 19% of income

0

5000

10000

15000

20000

25000

30000

1995 1996 1997 1998 1999 2000

Dw

elli

ng

s co

mp

lete

d

0

2

4

6

8

10

12

14

16

18

20

bau

spar

-lo

ans

in C

ZK

bil

lio

n

Dwellings: constructioncompleted per year

Volume of bauspar-loansper year (in billion Koruna)

Czech Republic: correlation between granted bauspar-loans and construction activities

• Since 1995, the number of dwellings built has doubled.• In 2000, the government spent CZK 5 billion on subsidies. Bausparkassen granted loans for CZK 17.4 billion.

Bausparen in Slovakia

Bausparen has existed since 1992

1.5 mio. Slovakian citizens have concluded a bauspar

contract (every fourth person)

About 60 % of the Bauspar customers

conclude a new contract after completion

of the previous contract

Funds are used for renovation/modernisation (37%), construction (23%) and purchase of home (40%)

Slovakia: development of number of flats being started and finished

0

3000

6000

9000

12000

15000

18000

1994 1995 1996 1997 1998 1999 2000 2001

Started

Finished

Linear(Finished)

Slovakia: correlation between public spending and granted bauspar-loans

• In 2001, the subsidies have lead to a financing volume of the bauspar industry of € 381.9 Mio. • Since 1997, the subsidy amount has been reduced by 34 %. However, the volume of bauspar-loans has risen by 87 %.

0

50

100

150

200

250

300

1994 1995 1996 1997 1998 1999 2000

Pu

blic s

pen

din

g in

Mio

. E

UR

0

100

200

300

400

500

600

Bau

sp

ar

loan

s in

Mio

. E

UR

Granted bausparloans per year

Public spendingon bausparsubsidy per year

Conclusion: a sound and functioning housing finance system

Own funds stabilise financing structure

Better access to credit

Buffer in case of difficulties

Capacity and willingness to repay loan increases

Housing affordability rise

CSS helps to develop housing finance system by supplementing other Models