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Developments in Housing Microfinance James Hokans World Bank Presentation May 27, 2010 [email protected]

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Developments in HousingMicrofinance

James HokansWorld Bank Presentation

May 27, [email protected]

Developments in microfinance are good for housing microfinance

2

• Consolidation , downscaling and up-scaling and the benefits of supervision and regulation

• Improvements in core banking systems and MIS means greater potential of Branchless Banking

• Smarter use of subsidies to support capacity-building along with equity, e.g. Shorebank

• Specialized rating agencies reduce risk for domestic investors

• More focus on savings and not just lending

• BUT MFIs often are poor at understanding housing markets

In recent years the use of mortgage finance has grown in developing markets such as South Africa, Mexico and India…

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Philippines India Mexico South Africa EU USA

% M

ortg

age/

GD

P

Most recent

Prior year

But at present, mortgage finance in these countries reaches at most 20-30% of households

5% 12% 8% 54% 20%1%

Currently have and use Have access but do not use

Do not want a mortgage Do not qualify

Qualify but cannot physically access Too poor

Market enablement

zone

Market development

zone

Market redistribution

zone

Current market

Even in South Africa, only 5% of households currently hold mortgage bonds. A further 20%, considered the “market enablement zone” of those who either have access to mortgage instruments but do not use them, or do not currently want them. Source: Porteous 2010

South Africa: Limited mortgage penetration

5

HMF cannot meet all housing finance needs: convergence of mortgage and microfinance

Collateral

House Mortgage

Other

None Microloan

$500 $15,000

Loan size

“Product gap”

How to turn an fixed installment of $50-$160 pm into loan of $1,500 - $8000 over 4-8 years?

Housing microfinance can potentially meet the needs of several segments of low-income households

Beyond Microcredit: What is housing microfinance (HMF)?

“HMF is unsecured microcredit as well as

related financial services, such as savings

and remittances, organized to meet the

demand of low-income households to

repair or improve their existing homes or

build their own homes over time one loan

at a time, one lump sum at a time.”

Low-income households create “usefully large lump sums” and put them towards housing

Even the poorest households are mobilizing lump sums via:

• Group savings & “under the mattress”•Interest-free loans from families•A variety of consumer and other informal sector lenders

Housing is the second-largest use of lump sums (Collins et al. 2009)•Mainly financed by savings and incremental buying•Once people have housing and land, few want to use it as collateral

Housing microfinance could bring greater efficiency and scale to the sizable investments the poor are already making in their homes

99

Construction Facilitation

HH purchases expensive buildingmaterials & expertise

Better Credit HistoryImproved Asset, Shelter &

Home-based enterpriseStronger

Community & Economy

Land

Stockpiled Materials

Income & Remittances

Own skills

Budget & plans

Sweat equity

Social networkSavings

Fixed installmentMicro-loan

Credit Assessment

OUTPUTS

Monetary Social Capital

HOUSEHOLD INPUTS

“Co-Financing the Process”

Fixed installment Micro-loan

HH purchases expensive buildingmaterials & expertise

MFI Inputs

¤

Which intermediaries provide HMF?

• Formal providers:

– Some traditional MFIs (e.g. rural banks, large NGOs, coops)

– Consumer lenders (e.g. Financiera Independencia)

– MFIs becoming banks

• e.g. CARD, BASIX (KBS), Compartamos

– Banks “downscaling”

• e.g. HDFC and ICICI Bank in wholesale role, but also trying retail : Standard Bank Community Bank ; BPI-Globe BanKO

– Specialized housing financiers

• HMFIs e.g. Kuyasa Fund (South Africa)

• Building material suppliers e.g. Cemex/PH (Mexico)

• Housing NGOs e.g. Habitat for Humanity (Global)

• All relatively small (<$500m total loan books) and new (1990s ) but MFI category now growing fast

What is the extent of MIVs in housing microfinance? Where is it most prevalent?

35%

43%

10%

5%4%

1%

2%LAC

E. Europe, Central Asia

South Asia

Sub-saharan Africa

East Asia & the Pacific

Middle East and North Africa

Conservative estimate of the amount of foreign capital currently “leaking” from microenterprise

loans into funding for incremental housing(=$10b total foreign capital X 20% leakage rate)

$2.0 billion

Sources: Ferguson (2009), CGAP (2009)

Most MIV investment going to LAC and East Europe/ Central Asia:

Developments in Housing Microfinance:

MexicoIndia

The Philippines

Steadily rising incomes and economic growth across the three emerging markets

Low-to-middle income countries with high levels of declared home ownership, commitment to financial inclusion and “head room”

Philippines India MexicoDemographicsPopulation (millions) 90.3 1,139 106.4Urban Population Share 65% 30% 77%Urban population growth, annual % 3.0% 2.3% 1.4%GDP per capita PPP (costant intl. $) 3,200 2,700 13,400Human Development Ranking (2009, n=182) 105 134 53Transparency International Rank (2009, n= 180) 139 84 89Declared Homeownership Rate 80% 87% 78%

Three large, developing countries…

India is majority rural…

Mexico is upper- middle income…

All have high declared homeownership rates

Maturing microfinance sectors, while Mexico and India also have expanding mortgage sectors

Microfinance and Housing Philippines India MexicoMicrofinance Business Environment World Rank (2009) 3 4 21

Aggregate MFI Portfolio as Percent of GDP 0.3% 0.2% 0.2%

Active borrowers as % of population 4.3% 2.2% 5.6%Size of Loan Amount Relative to Average Income 9% 19% 8%Return on Assets -1% 0% -1%Financial Services SectorOutstanding Mortgage Debt as a Percent of GDP <1% >7% 13%Banked Population (GSMA) 26% 48% 25%Mobile phone penetration rate (among adults) 70% 34% 66%

The Economist gave high marks to each country’s microfinance business environment in 2009

India Mexico Philippines

Overall Rank 4 21 3

Regulatory Framework

13 19 1

Investment Climate

14 7 17

Institutional Development

3 20 6

Source: Economist Intelligence Unit Microscope (out of 55 countries)

In the Philippines, the poor are not yet using loans and microloans to finance homebuilding in large numbers

•Only 7% of adult Filipinos have taken any type of loan for housing in the last year

4% from government loans or projects2% from the national housing provident fund (Pag-IBIG)1% from friends and familyVery few from commercial banks or microlenders (Mercy Corps 2009)

• A far greater share utilize own-savings to finance incremental construction

• Few MFIs are making housing-specific loans•Among a broad, national cross-section of 30 MFIs (rural banks, coops, NGOs):

•6 are making housing-specific loans•Several more with general purpose loans applicable to housing•But no supply-side support

• Rural banks seem to be the most likely to expand HMF in the future•2010 central bank approval of new HMF product

In Mexico, innovation with both micro-mortgages and housing microfinance lending

Innovative housing finance products:

•SHF role: innovative mortgage products for low income & uninsured

• $22.4 million in HILs outstanding, across 11 MFIs (Nov. 2009)

•Promoting auto-construction loans with “social developers” e.g Mexvi

•Wholesale funding for MFIs, for home improvement loans as small as $500

•SHF financed roughly 95,000 home improvement loans to end-users in 2008

•Subsidies of up to $4,200 for self-build, home improvements, and new home construction or purchase of existing homes

•Building materials suppliers active, but CEMEX PH outreach decreasing

But continued roadblocks in Mexico:•Difficulty sourcing new working capital for most MFIs; Government preferred pension crowding-out private lending

MFI’s difficulty with individual lending has complicated HMF lending in India

India’s expanding microfinance sector still has several bottlenecks toward the growth of housing microfinance portfolios:

•Continued focus on group lending, especially in rural areas•Few recognized “success stories” from monoline housing microfinance providers•Difficulty of smaller MFIs outside the Tier I cluster in attracting new capital, which has limited innovation•Limited capacity of MIS for tracking individual loans or by product lines

On the other hand:•NHB promoting its own HMF product•Emergence of dedicated housing funds such as the Sorenson Fund•New technical assistance approaches pioneered by Habitat for Humanity•Emergence of new financiers (e.g. Micro Housing Finance Companies•New housing developers

India’s National Housing Bank

•Huge role in supporting the growth of Housing Finance Companies

•Small but growing HMF loan portfolio of $25 million

•Demonstrates that the existence of supply can stimulate demand

•Still, MFIs in India are struggling to use individual lending products

•The market for micro-mortgages in India is growing

• The convergence of HMF and micro-mortgages is underway

Financial Institution

Type of Institution

# of HIL in 2009

Millions MXP Date Interest Rate CommissionPayment

Frequency

Max Length of

creditInsurance

Financiera Independencia

SOFOM 29,782 $370 3Q09

3.6% - 5.8% (monthly) flat

based on client credit score

10%Weekly,

biweekly or monthly

24 mosCredit life &

unemployment

Te Creemos SOFIPO 3,045 $96 Nov-09Up to 6%

(monthly) flat5%

Weekly, biweekly or

monthly24 mos Not Applicable

En Confianza SOFOM 1,633 $5 Nov-09Up to 4%

(monthly) flat3%

Weekly or biweekly

24 mos Not Applicable

Fin Común SOFIPO 993 $11 Nov-09

5.3% - 7.8% (monthly) flat

based on client credit score

<$14,999.99: $117 fixed;

$15,000-$35,000:

$148 fixed

Biweekly or monthly

24 mos Not Applicable

Compartamos BANK 0 $905 Jan-0069.3% annual

effectiveNone

Biweekly or monthly

6 - 24 mos

Not Applicable

Sample HMF product terms at 6 MFIs in Mexico:

Effective annual interest rates for home improvement loans at the same institutions:

0%

20%

40%

60%

80%

100%

120%

140%

Fin Independecia Compartamos Te Creemos En Confianza Fin Común

Annual Effective Interest Rate

---- Average Effective Interest Rate across 11 institutions: 87%

Some tentative predictions

MNOs and banks have the potential to expand housing microfinance portfolios: savings led and through agents

Mobile banking platforms may be

reaching scale:

In addition, handhelds are in use for door-to-door savings collection:•Banca Azteca (Mexico): handhelds have lowered transaction costs for customers to save and have allowed bank to mobilize deposits equivalent to 2X its loan book•Rural banks (Philippines): credit officers have begun piloting their usage for remote savings collection & experimenting with building suppliers as agents•Microbanks (India): mobile phone technology used by KBS (Basix) to transact in the field

MNO Users Relevant services

Philippines Globe, Smart & BanKO

3 million combined

Bill payP2P

Kenya M-Pesa and Equity Bank

7 million Same

1. Strong regulatory framework

2. Supply-side government housing finance institutions

Are crucial in the development of…

Housing microfinance &

mortgage markets

Market makers are essential growth of housing finance: state institutions will get support

Supply Matters: A comparison on wholesale lending products for housing microfinance

Institution Country Product Interest rate

Max term Portfolio

Mexico Home improvement loans

3.6%-5.8% (to end-users)

24 months (to end-users)

$1.4b MXP

Land Bank Philippines General loans to MFIs via PCFC

10.5% or 91 day T-bill + 4% (higher of)

5 Years NA

National Housing Bank

India Wholesalefinancing

$25 million

Philippines: good regulation cannot overcome supply-side bottlenecks

Lack of funding from government housing finance institutions has limited the

impact of HMF

Despite holding the #1 microfinance regulatory

environment ranking (2009)…

The Philippines: Rapid growth of HMF lending at four rural banks…another 6 underway

14.4

2.6 2.1

9.6

0.1

450

136

39

272

3-

50

100

150

200

250

300

350

400

450

500

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

TOTAL CANTILAN GM GREEN KABAYAN

# of

Loa

ns

Mill

ions

of

Peso

s

Cumulative HMF Loans Disbursed by Value and Number: Sept. 2009

Value disbursed # of Loans disbursed

But, by volume, portfolios remain small:< 1,000 loans from 4 HMF pilots, but > 3,000 in 6 months

Convergence of HMF and mortgage finance to serve both informal and formal sectors will continue

• Savings led: from mandatory to voluntary

• Will tend to occur in strong emerging markets first

• Branchless banking technologies will facilitate scale