evaluation of u-trustâ€™s low cost housing loan product

EVALUATION OF U-TRUST’S LOW COST HOUSING LOAN PRODUCT FINAL REPORT

June, 2006

This publication was produced for review by the United States Agency for International Development. It was prepared by Helen Dunlap a Consultant for Chemonics International Inc.

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development for the United States Government. Rural SPEED A USAID funded project Contract No. PCE-I-00-99-00003-00, TO 826 This report submitted by Chemonics International Inc. / June, 2006

EVALUATION OF U-TRUST’S LOW COST HOUSING LOAN PRODUCT FINAL REPORT

F I N A L R E P OR T - E V A L U A T I O N O F U - T R U S T ’ S L O W C O S T H O U S IN G L O A N P R O D U C T

Table of Contents Executive Summary ............................................................................................................................... i Background ........................................................................................................................................... 1

Introduction........................................................................................................................................... 2

Technical Approach and Process......................................................................................................... 3

Activity Summary ................................................................................................................................. 5

Overview ................................................................................................................................................ 6

Findings and Observations................................................................................................................... 7

Consultant Recommendations ........................................................................................................... 11

Appendix A List of individuals met during the low cost housing review............................................. 13

Appendix B Overview of the Housing Finance Sector –Slide Presentation ......................................... 14

Appendix C Product Outline Sample – For illustrative Purposes Only................................................ 26

Appendix D Documents reviewed in Preparation for the Consultancy ................................................ 30


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EXECUTIVE SUMMARY

In the summer of 2005, the Uganda Finance Trust (U Trust) began pilot testing a new low cost housing loan product at the Mukono Branch. U Trust projected achieving a portfolio of 800 loans with 18 months and roll out to most of their branches. The new product incorporated both the development and construction of soil soluble brick home and a two year loan for acquisition. While initial borrower interest appeared favorable, no loans had been made after 6 months and several borrowers were complaining about the product and process. U Trust requested assistance from Rural SPEED to assess and if necessary redesign the product. This report prepared on behalf of Rural SPEED outlines the assessment process, findings and recommendations prepared by Helen Dunlap, Housing Consultant in February –April 2006 and a summary of U Trust’s response to the preliminary report. U Trust sought not only to provide low cost financing to current and future borrowers seeking to be homeowners but also to offer a low cost energy friendly housing product which would have been built for each homeowner. In addition to meeting the financing and housing need the Trust priced the product so as to be financially sustainable quickly (within 2.5 years). To achieve these myriad of outcomes, this report suggest the Trust had to have effectively diagnosed the market demand for both the financing and the specific housing product. Additionally the product depended on a ready understanding of the process for permitting a home, systems for securing land title and staffing capable of not only lending but marketing and home buyer technical support during construction system wide. Finally, U Trust had to have the internal focus and staffing to adjust the product as it learned about specific market interests. This report suggests a strong interest in housing loans by the typical U Trust SME and higher income borrower. U Trust and the consultant held two focus groups and completed a survey which substantiates the market. This work however also suggested the typical borrower wanted to either finance their own home construction, purchase or complete an existing home and/or rental property. A fundamental barrier to the success of the U Trust product as proposed is it suggested that the borrower must purchase the low cost product which U Trust had initially identified. Secondarily, the loan pricing and term terms while workable are were competitive. The pricing was significantly higher than the product offered by UMU and the term which is 24 months is currently capped by the MDI authorizing statute. This report provides more specific and detailed suggestions about the design of a product which might work more effectively for this market based on the survey and market research. Finally institutional readiness is critical to achieving the volume required to make this product sustainable. Success of a new product and most particularly a product which demands the development of a new market requires senior staff commitment, capital at a cost and duration to match the product and well trained staff. U Trust Board and management commitment is undergoing a series of critical changes which have and will continue to influence readiness for any new initiative. Both U Trust and the Consultant made the determination that the initial product was not workable at this time. The Consultant further suggested that U Trust should focus on completing the organizational transformation which was on going, strengthening its basic systems, fill vacant management positions and focus on the successful launching of its new savings product.

U Trust concurred in these recommendations.


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Background

Consultant’s interpretation of the assignment A key aspect of the Rural SPEED strengthening work has been supporting the development and testing of new financial products. This particular consultancy has been directed technical support to the Uganda Finance Trust in the assessment and redesign of their low cost housing loan product. This work also provided technical assistance for other financial institutions including MDI and Commercial Banks desirous of meeting the increasing interest in financing homeownership including both acquisition and home building by the borrower.

Purpose: The purpose of this consultancy was to assess and then work with the Uganda Finance Trust to increase the utilization of the housing loan product launched in the October 2005. This product provided was intended to supply the borrower with a low cost environmentally friendly home and to provide the financing for the acquisition of that home.

Tasks: This consultancy included an on the ground assessment of the market, product acceptability, borrower interest (effective demand), U Trust capacity relevant and necessary to insure the successful delivery of this product and product integrity. Key components of the assessment included product design, market fit, the process including marketing, underwriting and borrower technical assistance, pricing, management and Board understanding and interest and product placement. Based on this assessment the consultant held three work sessions with U Trust staff including the Senior Management to explore the findings and recommendations and then to begin to frame possible changes or modifications in approach and to improve capacity to deliver a “market savvy” product. While the focus of this consultancy was specifically the current low cost housing loan product at U Trust, the consultancy also observed both market and MDI interest as well as meetings with the Central Bank and the public sector housing agencies. The consultancy also included a scan of the housing finance demand and capacity with particular focus on MDIs in peri urban markets which culminated in the delivery of a market overview presentation and recommendations for the key government, finance and housing sector.

Deliverables: Deliverables included a series of workshops for the client and materials prepared on site to facilitate U Trust staff and borrower engagement in a) understand why the housing loan product was or was not feasible, b) assist U Trust to test their own assumptions and to consider alternate approaches which might be more likely to serve the borrower and c) preparation of materials including a survey instrument to assist U Trust in assessing market interest in the current and alternate products. During the time in Uganda, the Consultant also conducted a workshop in housing finance for the financial and housing sectors and preparation of materials for that workshop and a final report summarizing the assessment and recommendations for the current low cost housing loan product.


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Introduction

In October 2005, the Uganda Finance Trust (U Trust) commenced the pilot of a low cost housing loan product at its Mukono Branch with a basic business plan and expectations that the product would become popular and thus profitable. The product was to be tested for approximately 6 months as a pilot and based on the success of this pilot effort, the product would be rolled out at the majority of the 21 branches in 2006. The cash flows anticipated 806 loans by January 2007. The product was intended to reach breakeven in 18 months from launch and to be profitable in Year 2 (2007/8) and to serve the consistent interest by borrowers in homeownership. As designed the expectation of U Trust management was that the low cost housing loan product (here in referred to as the housing loan) would serve the individual borrower in the urban and peri-urban branches as well as attract a new customer base. Before this product was developed U Trust did no formal housing lending and while an occasional micro loan might be used for a housing/real estate related improvement, this was not the norm. Only one MDI, UMU, is formally providing acquisition loans for housing. Additionally access to housing finance is very limited even by the commercial banks and the Housing Finance Company of Uganda (HFCU). Home improvement lending is available more readily but in all cases lending for housing development, acquisition or improvement is not a priority except by HFCU. A fully functioning housing system is dependent on: • Financing to assist potential owners to buy or build a home, • Borrowers/Buyers who can afford to acquire a home and want to be homeowners, • Homes (housing stock) which is readily available for purchase by interested qualified homebuyers

and/or the tools and conditions to support the owners oversight of the home building, • Services to support the homebuilding process including but not limited to ; municipal policies

which define the requirements and provide the necessary infrastructure such as roads, water, power, qualified builders, architects and engineers, readily available land and building materials,

• Legal process and laws for securing and retaining ownership(adequate security for the homeowner and for a lender if they financing the acquisition or construction of the home),

• Capital at terms and conditions which provide an attractive return to the investors, are available to the primary lender and provide for an affordable loan to the borrower.

At the time U Trust commenced lending they believed that the product would address many of these various factors. U Trust had three distinct categories for defining success.

Housing – o increasing the adequacy of housing choice by financing homes that assuredly

met local building codes and standards, o promoting and making available a home which was high value (size and

livability) at a lower cost than typical in the market through a unique brick making technology, and

o supporting the production of an environmentally friendly home Finance –

o offering a loan which would produce a sustainable volume to U Trust and pricing the loan to fit their anticipated borrower capacity to pay within the 2 year MDI limitations


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U Trust –

o a lending product which would be profitable within two years based on initial projections,

o used the existing branch system and skills coupled with a third party builder so that the branches would be able to continue to do what they do now, underwrite the borrower and monitor and collect,

o diversify U Trust products thus strengthening the organizations capacity to meet it overall financial targets,

o attract new borrowers of individual loan products, and o provide some efficiencies since the typical borrower could be underwritten by a SME

trained lender. The proposed loan product was of particular interest to U Trust because it coupled not only the required housing finance by U Trust but the construction of a home which was both affordable and met minimum housing standards to be provided in partnership with Turn Key Consult (U) Ltd. The home was to be both low cost and environmentally friendly because it employed the use of Soil Stabilized Blocks and a new interlocking building technique and local labor. Thus as conceived the product had the potential to provide for many of the prerequisites of a suggested adequate housing system and to address a number of U Trusts organization goals. It is important to understand each stakeholders role in determining what worked and did not work in piloting this product. U Trust and other lenders and developers of affordable housing and housing finance can learn several important lessons by comparing anticipated and actual outcomes. This report will suggest some of those lessons. This assessment and the technical assistance work which is summarized in this report was intended to support U Trust and to work with them to improve their product so as to succeed as outlined in the initial plan. At the time they launched the product it was determined that the best time to provide the technical support would be after the product pilot had been operational for enough time to build some volume and to thus evaluate an ongoing product. Therefore, the work was intended to focus on how to refine and improve productivity and to then make recommendations to U Trust and Rural SPEED which would improve performance. For reasons which are further identified in this report, results were not as anticipated. No loans had closed as of 1st February 2006 when the on the ground assessment began. The pipeline of viable applications was very small and the builder partner had only one borrower who was interested in the proposed product. This was not indicative of the interest in owning a home or even the readiness of borrowers to borrower but a poor fit of the product with the market demand.

Technical Approach and Process

This report has been prepared by Helen Dunlap, Consultant to U Trust and Rural SPEED. Helen spent two weeks in Uganda, proceeded by a series of telephone conference calls with Rural SPEED and the U Trust staff prior to arriving to be prepared to immediately begin the field assessment, document review and then followed by the preparation of materials designed to enable U Trust to begin to explore alternate products/approaches to housing lending.

Activities in Uganda included the following:

o On-site interviews with a series of stakeholders within U Trust including all the senior managers, branch staff at the Mukono and Central Kampala Branch and those loan officers who were actually attempting to make the product viable,

o A meeting with Dr. Eng. Musaazi of Turn-Key Consult (U) LTD, U Trust Builder

Partner as well as evaluation of the partnership documents between Turn-Key and U Trust,


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o A phone conversation with the Gatsby Trust representative to determine the specific relationship with Turn-Key,

o Two site visits to separate locations where Turn-Key was building homes similar to those proposed in for the program including one site where the site owner (a nonprofit organization) and Turn-Key worked together with the Mukono Branch staff for some time but it was decided to proceed independent of the loan,

o Discussions with Turn-Key staff and their partner Architect, o Interviews with representatives of the planner responsible for building and planning

including the building permit process for the Mukono District, o Interviews with others industry representatives interested in the housing sector, o Meetings with others supporting capacity building for the MDIs and the development

finance sector, o Meeting with representatives responsible for MDI over site at the Central Bank of

Uganda, o Meetings with financial sector competitors and potential partners such as Commerce

Bank, HFCU and other MDIs, and; o Review of related products offered by other builders and developers such as Akright

and funders such as the Private Sector Foundation offering specialized financing for research into renewable energy like Solar Technology.

o Active participation in two borrower focus groups, one attended by approximately 20 individuals who are customers of the Central Kampala Branch and the second in Mukono with 4 borrowers, including the only pending applicant for a loan,

o Managed three work sessions with a myriad of U Trust staff focused first on key observations and findings, the second on choices going forward and the third specifically designed to begin the exercise of product redesign; each exchange was for the purpose of encouraging U Trust to explore how to improve the situation and or to approach housing lending differently,

o Review of marketing materials, files and basic U Trust operating information, o One on one interviews with the U-Trust Board Chair, Ida Wanendaya the CEO, Peter

Okaulo, and the Deputy CEO/Operations Manager, Harriet Mulyanti. o Consultation with Rural SPEED staff.

A list of individuals met during the consultancy and documents reviewed may be found in Appendices A and D. While not directly related the Consultant also designed and conducted a housing finance workshop in Kampala for a variety of housing interests. This workshop served to deepen the environmental and market understanding of the Consultant. Additionally, the Consultant has been engaged in Uganda over the past 24 months in other housing finance related work which also informed the market assessment and environmental context.


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Activity Summary

Client Goals and Expectations –Yesterday and Tomorrow

During the course of this engagement U Trust and their clients, expectations changed. Initially as noted above the objective was to assist to improve an ongoing product at the end of the pilot. The client goals have changed as the housing loan product’s viability became more in doubt and borrower and branch frustration increased. This is a result both of the product not working as conceived and as a result of Rural SPEED and the Consultant’s intervention at a point in the process where U Trust was seeking to understand why the product was not meeting expectations. As an aside this situation is an excellent example of why piloting new products is critical to managing risk. In the context of the grant agreement between Rural SPEED and U-Trust, it was agreed that Rural SPEED would contract a consultant to review the product as part of the overall product development process. The recommendations of this review would assist determine U-Trust’s future strategy and the level of further intervention if any by Rural SPEED. When the product was initially being developed there was a sense that a consultant was not necessary and even during the introductory meetings with staff, the desire of key staff was advice on how to fix the existing housing loan product so as to be successful. This was a very reasonable expectation given the perceived value to both the borrower and U Trust outlined in the introduction. During the course of the visit, there was a discernable shift from how to fix the current product to a desire to explore designing a different product which might be more likely to meet the key goals. Specific expectations and energy for a new product varied amongst the senior staff with enthusiasm by some, most especially at the branch level and concern with how to address the current partner expectations and other competing priorities amongst some senior staff. A key concern by all was to make sure that any changes or future product would be successful. It should be noted that at the time of the consultancy, U Trust was in the process of both a change in staff at the Operations Manager level and a transformation where focus is a core principle. There are other competing product goals which are important to the organization’s sustainability so an evaluation of whether to be in the housing lending business if, as suggested here in, the current product should no longer be offered to borrowers, is a separate and critical decision. To summarize, the client and consultant expectations were focused initially on the challenge of “how to make an ongoing housing loan product meet expectations”. Over the course of the consultancy it was suggested by the consultant that the current product is not viable except with significant changes. Therefore, at the last work session, the Consultant suggested U Trust consider the development of a new set of products and provided U Trust staff with some introduction to the process for defining a workable housing loan product. A preliminary market analysis has been completed by selected branches to determine at a very preliminary level whether there is borrower interest and capacity. Upon review and discussion of this report, it is suggested that U Trust address the following questions in the order outlined:

1. Is this report accurate in its basic (not necessarily detail) assessment of the current product? 2. If yes, should U Trust continue this product or suspend further marketing as was suggested in

mid February? 3. If the current product is no longer offered, does the Senior Staff, CEO and the Board of U

Trust believe that the best use of staff capacity and resources is spent on the design and testing of a new housing loan product or is this time and resources best spent on other critical aspects of MDI transformation at this time?

4. If it is decided independent of the prior product problems to develop a housing product because this is best for U Trust at this time, then the development of a product would require beginning based on the learnings of the last several months, the first of which is the need to define product goals and expectations which are realistic.


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The basic steps in the new product design would begin with an internal assessment of the lessons learned, an analysis of the recent market survey, appointing a team to work on the design which includes experienced branch and lending staff, evaluation of the economic requirements of a product to be competitive, identification of capital which can be used for such a product, evaluate the requirements of the Central Bank of Uganda for any new product and any other external requirements and then set new goals for a possible product. Based on a realistic assessment of goals and market, the assigned team would develop a proposed loan product including answering the questions in the template (Appendix C) provided by the consultant in mid February. Thus, the decision to stop offering a non workable product is a separate and distinct evaluation from the decision to then launch into a new housing product. To launch a new product means to a) decide this is a priority for U Trust and b) design the next product in a manner which reflects both the current environment and lessons learned.

Overview

The Market/Environment

As context for more specific observations in the next section, it is important to note that as MDI and Commercial Bank customers become more affluent, their desire to invest in their home is increasing and this is true at any income level where there is enough economic capacity to address the desire. Over 80 % of Ugandan’s are homeowners but in the majority of cases in rural areas, the homes do not meet acceptable standards. The percentage drops as one moves from the very rural to the peri urban where workers must currently rent or live in housing which is not suitable from their perspective. These are the markets where U Trust and others are doing the majority of their individual and SME lending. While the specific percentage of homeownership for the Mukono Region is not known, the demand for homeownership particularly by current small business owners and entry level professionals and most salaried individuals appears to be very high. While demand appears to increase, the barriers to ownership are many including

o a lack of financing for home purchase except for the highest income Ugandans and ironically the higher the income the more flexible both access to credit and terms/cost of credit,

o a scarcity of loan products to build except using consumer loans to do incremental building,

o challenges to securing clear title often required to borrow including the cost of securing title on owned land (estimated to be as much as 2 million Ushs to process and perfect title), time and timing such as waiting for a District Council sign off and even in some cases not being possible at all(for example ultimate ownership in the Buganda Kingdom is subject to permission by the Buganda Land Board)

o scarcity of attractive and affordable homes especially in the peri urban markets; completed homes is primarily limited to the urban centers or higher price stock, and

o skilled builders and building materials may be missing or slow depending on location. It is these basic challenges which were the motivation of U Trust desire to couple financing and construction together. However to be successful in most cases the product has to be built on specification and then sold to the buyer or custom built to fit the buyers interests. A few firms such as Akright have designed a system which allows the buyer and builder to work in tandem and a lender to finance. However the minimum price is 10 M Ushs plus land. This eliminates most U Trust borrowers. A copy of the consultant slide presentation which is relevant to understanding the more global market issues may be found in Appendix B.


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The Loan Product(s) The U Trust low cost housing loan product as initially marketed had the following basic structure and characteristics:

o Uses of Loan Proceeds - Loan could only be used to acquire a home built by Turn-Key and related soft costs

o Borrower Eligibility – Individual Borrower; Standard Borrower Evaluation o Loan Amount -- Range between 4M and 16M depending on the cost of the home. o Term – Up to 24 months with up to 1 month grace period o Interest Rate and Fees – 4.5 % per month on a declining balance o Application Fee of 5000 ushs and a 2% commission on the loan amount o Collateral Requirements -The house constructed shall be collateral for the loan. Additional

collateral where available shall be required. o Verifiable ownership satisfactory to Local District Council. Recordation was not required. o Other - The property must be insured comprehensively with AIG. o No property tax requirements

Findings and Observations

Housing Product Design Principles

o As suggested in the introduction, key components of a fully function housing system would include supply/housing stock, demand/interested and financially viable customers, capital/finance, enabling environment/legal framework and the system which enables each to work effectively.

o While a lender cannot control other aspects of the system, they need to be understood for a loan product to be successful. Each component should be evaluated when designing/developing a new loan product. While the best product is often very simple the context can be very complex.

o Location matters greatly in defining the rules of ownership, market value and cost and buyer interest and price. These may vary from product to product.

Overarching Observation

o The U Trust housing loan product was designed so as to address many of the factors critical to success – the stock, the financing and the enabling environment. The difficulty was that as designed, the product did not fit key expectations such as pricing and the majority of borrowers were not interested in the proposed house.

o In general, simple products which allow the borrowers to make their own choices tend to be more successful especially in a market where the conditions and challenges are high.

Demand/Customers

o The real and perceived interest of Ugandans in owning their own home was evident from borrowers and staff; and is verified by prior market research. The lack of a loan product to serve this demand is also quickly verifiable.

o U Trust, like other MDIs, is facilitating housing improvement within the context of current consumption lending.

o U Trust perceived this demand and saw it as profitable. The Board and Senior Leadership launched a product to serve the demand which they believed would be affordable, environmentally friendly and meet the desire for a standard product.

o Affordability can be interpreted differently by borrower and lender. Additionally borrowers typically like affordable products but not to be defined as necessarily lower income.

o While initially the borrowers were expected to be urban, the belief was that the product would quickly be available in the rural and upcountry branches.


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o Housing is a source of wealth and status for all income groups and they want their home to reflect this status.

o Controlling one’s personal environment is a source of satisfaction and family stability world wide. To illustrate, children do better in school if they live in a safe and healthy home.

o While the desire to own is substantial the readiness of U Trust for a finished new home was untested. The exact size of this market and credit worthiness of the borrowers is still to be determined.

Supply/Housing Stock

Borrower Fit

o U Trust believed that their borrower would benefit from and would accept a newly built technologically unique product. For a host of reasons this has proven not to be true.

o These include a) the product does not fit the niche of borrowers who have expressed interest in owning, b) Turn-Key’s capacity to deliver the product at the suggested cost and in a timely manner has been infeasible to date and c) the municipal process was poorly understood by both Turn-Key and U Trust. Each expected the other to address these various challenges.

o As is customary, potential borrowers (homeowners) have personal preferences and expectations when they invest in one of the most expensive purchase of their lives. The process of learning about the tradeoffs between what a borrower can afford and what they want is fraught with tension. A lender who gets in the middle of this will potentially be labeled the villain.

o Even if the product was perfect, Incremental building is the norm in the society for all but the very poor and the rich. The product designers believed they could over come this history but have been proven wrong to date. Additionally households are not used to borrowing and paying for the entire cost of the house at one time. There are a few stages where being able to pay for the whole phase is critical when building incrementally. To illustrate, the land purchase and the roof.

o The incremental approach to borrowing fits the MDI and MFI customer as has been proven by UMU formally and the others through consumption lending.

Housing Product Fit

o The Turn-Key product is currently a customized product. The costs have not been documented and appear to be high, especially given initial marketing and borrower perception

o The finished house did not seem to meet the customer’s sense of value for their money. (Only a shell was provided at the stated cost yet the customers interviewed expressed a desire for a fully functional house).

o The product can only be produced cost effectively at scale and there is a mismatch between this and the current buyer interest. The contract between U Trust and Turn-Key needs to be evaluated to understand this better.

o The loaded price for the product is not transparent and the information differs from one document to the next as to the cost of the housing product.

The Legal and Regulatory Environment

o The current legal and regulatory framework for housing lending is underdeveloped and there are very limited models or products to use as comparisons. This of course is changing some but not quickly.

o The lack of a simple system means volume and thus impact and profitability are hampered. This means any lender expecting to make money at this work must price to fit these risks.

o For U Trust, key systems constraints are that this product must be delivered within the context of the MDI Act. This means a maximum of a 2 year term which is extremely


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constraining on the amount most borrowers can borrow. It also encourages incremental lending.

o Clear ownership and recordable documentation is at best slow and expensive and at worst non existent. This means that loans are often not mortgages.

o Foreclosure is almost a non existent concept. This is not to say that the legal authority is not present but it is not the primary solution. The borrower may rent the property and move in some other place to complete the payment of the loan in lieu of foreclosure.

o The MDI Act requires Central Bank approval of new product offerings by the MDIs. The Bank of Uganda is hesitant about housing lending by MDIs presently and the impact an extension to the 2 year lending limit would have on the newly registered MDIs.

o Any new sector such as housing lending may be doubted by regulators and slow down any governmental approvals.

o Ownership and registry are nascent industries. To the extent U Trust or anyone wants to offer mortgages, there needs to be energy for change. The level of interest in the financial sector is increasing but slowly.

o There is currently no liquidity in the market which increases lender risk however there appears to be a healthy rental market in the peri urban and urban areas. The loan payment is typically two to three times higher than current market rent levels.

o Partnering or linked relationships are not encouraged. o Valuation and resale is essentially also non existent for the most part for the typical MDI

borrower’s home. o There is a single borrower limit of 1% of core capital which constrains acquisition of

existing stock by the borrower with some means. (U-Trust’s core capital is UGX 800million, in which case the maximum amount that could be provided to any one lender is UGX 8million).

Delivery System and Capacity

U Trust o U Trust developed a complicated product and one that they and the builder and probably

the market, were not ready for. The desire to meet many goals with one product is often a key indicator of risk and feasibility challenges.

o There is a need to define simple quantifiable outcomes and to stay within the lending business especially with a new product type. U Trust took on the role of builder, planner, owner and lender. If loans had been made all the other parties would have held U Trust responsible for the quality and sustainability as well as the legal positioning of the house.

o The difference between real estate, small business and consumption lending processing and underwriting was not evident in U Trust policies or procedures. The loans are being evaluated as though they are consumer loans and not housing loans

o U Trust sought a builder using a competitive process. When no one bid they sought a more informal partnership. While the motives were noble by both U Trust and Turn-Key, there is a reason no one bid. The concept was not profitable as designed.

o Profitability, product pricing and product volume projections as prepared in October 05 were not based on thorough market research.

o U Trust did not factor in the implication of competitors in pricing which again limited market appetite for the product.

o The underwriting criteria developed by U Trust did not reflect standard home lending risk mitigations such as Loan to Value and Debt to Income ratios used by other lenders in and out of Uganda for a housing product.

o U Trust has unknowingly put itself in the product liability chain; and the materials would all suggest that they are the builder’s representative (as opposed to the client’s financier).


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Turn-Key Builder/Developer o Builder/ Developer is an engineer, professor and consultant but not an experienced builder

developer. o They were recruited by U Trust by RFP. U Trust tried a number of other entities such as

Habitat and the National Housing Construction Company prior to opting for Turn-Key. o Dr. Musaazi of Turn-Key like U Trust does not know what he needs to know to be in this

business. Turn-Key was counting on U Trust to have the expertise and vice versa. o Dr. Musaazi of Turn-Key appears to be committed to the product and would like to be able

to serve and go to scale. The difficulty is, he has at best a customized house building capacity at this point.

o The numbers are not clear and the match between cost, scale of delivery and borrower expectations is completely out of alignment.

o While the Soil Stabilizations Blocks with the interlocking system for building has been used on a very limited scale in Uganda it has actually been replicated, and used on a larger scale, in many other parts of the world. Turn- Key knew this but did not offer any learning and created the perception that this was a unique product. This is relevant because U Trust could have inquired further had they been aware of the number of times and places in Uganda which have used this product successfully and on what scale or unsuccessfully (and for what reasons).

o Normally a contractor would build some demonstration homes in an area (e.g. pilot area of Mukono) to garner client interest. Considering that SSB blocks were being used, this would have been a perfect opportunity to demonstrate the technology’s application and training to a number of potential clients. Unfortunately only a few clients were transported to Mubende to view a school built using the SSB technology.

o Product consistency appears to be an important consideration if the product is to meet the life expectancy of a typical buyer.

o The roles of others such as architect, the municipality are being learned as one proceeds and in front of the borrower. The cost of third parties such as the architect and the building permits are also not in the house cost estimate.


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Consultant Recommendations

Initial Low Cost Housing Loan Product

The Board of Directors and Senior Leadership of U Trust are at a critical decision point with regards to its housing loan product. Based on the lack of interest in the low cost housing loan product since the launch in October 2005 coupled with the Consultant’s assessment of product viability, it is recommended that U Trust terminate the current loan product. It is further recommended that the U Trust spend no additional time trying to modify this product since the product is fundamentally flawed unless it is decoupled from the Turn Key housing product. To reduce further negative borrower perception or misunderstanding U Trust should remove all marketing materials for this product from the branches immediately. Any borrower who applied for a loan or who expressed interest in the product and all borrowers who participated in the various surveys and marketing meetings should be informed in writing that a) the product is no longer available, b) U Trust very much appreciates and thanks them for their patience and c) if it is decided to explore another housing product how or in the immediate future, the borrower will be informed about it immediately and offered expedited review and processing of a loan under any subsequent offering if eligible and interested. If the borrowers are interested in Turn Key’s building services, U Trust should make the information available about how to contact Turn Key directly (Wellsprings, a Christian NGO has already done so in Mbalala, Mukono). Finally any third party services which were ordered by U Trust should be halted e.g. the MOU with Turn-Key. While expensive given the desire to retain loyal customers and the lack of any binding obligation on the part of Turn Key to pay for any third party costs such as the architect, U Trust will need to absorb these expenses. U Trust may also wish to conduct an after action review (debriefing) which should be facilitated by a third party. The Mukono Branch staff working with the program and the product team would meet and identify lessons learned from each person’s perspective. The after action review should also inventory actions which might be critical in designing future products based on this experience. The minutes of this meeting should be prepared and circulated to all project product teams and the lessons learned might also be discussed at a staff meeting. The goal is to make sure the remedies become part of any future product design and implementation. The CFO should also review and report to whomever is appropriate any changes to the 06/07 financial forecast resulting from the elimination of this product. U Trust has an MOU with Turn Key which can simply be terminated with the appropriate notice. This should be done to avoid any confusion. A senior manager should meet with Mr. Musaazi and review the decision regarding the relationship. The goal of this meeting would be clarification and not evaluation. The senior manager may also choose to suggest that Mr. Musaazi seek business services advice as a prerequisite to obtaining capital to build and sell homes without needing to ask the borrower or lender to prepay prior to construction. U Trust has no obligation to provide this business advice and should do so only if they believe this type of feed back to a partner is warranted and helpful. The CEO and his Senior Leadership Team should also complete an evaluation of whether it is in the best interest of U Trust to develop and launch a new housing product or not. In assessing this choice, the reasons to proceed through design and testing would include:

o Market appetitive for a real estate product in selected peri urban and urban sites is good given initial survey work,

o Borrower interest as evidenced in two focus groups and the recent survey,


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o Branch Manager expectation that the product would be good for business and the current customer base can afford such a product,

o Demonstrate to borrower group that U Trust can learn and adapt to market especially in Mukono Region,

o Staff interest in a similar product o Diversification of product o Potential to build customer base and to provide leadership in a critical development

finance arena.

In assessing the basic risk, U Trust must determine whether this is a good use of critical staff time and capacity given the transformation goals. If this product is counter to the internal business strategy, this would be a good time to stop further discussions for some specific time period such as 12 -18 months. Other reasons for being cautious and/or deciding not to proceed at this time may include

o Current competition will require a more competitive pricing than offered last time, o This is not a product which would serve all borrowers or branches, o Branch staff would need training in the basics of underwriting housing loans, o U Trust would need to be comfortable in allowing borrowers to make the choices about

where the home is and what they want their home to look like (while minimum standards can and should be part of any product design given the cost and incremental nature of the market), in some cases the home may not meet perceived health and safety standards

o Security will not be a perfected mortgage or deed of trust in some cases given the market, borrower and cost.

There are a number of unknowns which would need to be further evaluated before proceeding including

o Cost and availability of capital o Staff capacity in the targeted branches o Is the lending volume sufficient for the product to be sustainable and accessible in a

reasonable time frame? If U Trust does decide it is interested in developing a loan product, Senior Leadership needs to be committed to a more comprehensive product design process than previously. In addition to those items already mentioned the new Product Team would need some monies for both a comprehensive market assessment including a competitor comparison. Secondly it would be critical to clarify whether and how the Bank of Uganda review might be required (or desired). Any new Product Team must include a representative at the Branch and direct lender level. Other important design work should include the need to more rigorously define collateral requirements, construction and or home improvement standards, underwriting criteria, new pricing and cash flow evaluation and a system for loan disbursements which ensures that loan proceeds are used as intended by the lender. Other important questions would be how does U Trust want to evaluate investment or rental property ( a frequent request during the focus groups), how will U Trust develop and deliver good real estate training, should U Trust begin to learn about collateral valuation (appraisals). A sample design outline was the subject of the last workshop with the consultant and may be found in Appendix C. This document was intended as an illustration of the type of work which will be required. If U Trust does not have the available staff with time and expertise as well as interest to essentially learn the basics of housing finance and then to serve as the in house experts for U Trust then the Trust should wait until it has absorbed the saving products which were in design. If on the other hand U Trust has the will, resources, capital, interest and Branch commitment to the work of redesign then the first step would be to form a new Product Team and to prepare a basic plan for product development for Senior Staff review. If approved planning could begin.


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Appendix A List of individuals met during the low cost housing review

Mukono U-Trust Staff 1 Manager – U-Trust Mukono 2 Financial Services Officer – U-Trust Mukono Mukono Clients interviewed 3 Muwonge Eva 4 Nalubwama Barbara 5 Nalugonda Mary 6 Talidda Juliet Mukono Town Council 7 Mukono Town Council Planner 8 Kampala U-Trust Staff 9 Head Office 10 Chairperson – UFT Board 11 Chief Executive Officer 12 Deputy CEO/Operations Manager 13 Manager Finance 14 Manager – Risk Management 15 Manager – MIS 16 Marketing Officer 17 Head of Credit/Asst Operations Manager 18 Chairperson – UFT Board Central Branch Staff 19 Manager – UFT Central branch 20 Financial Services Officer – Central Branch 21 Financial Services Officer – Central Branch 22 Financial Services Officer – Central Branch Uganda Microfinance Limited 23 Executive Director Bank of Uganda – Supervision Department 24 Deputy Director - Supervision 25 Senior Supervisor 26 Supervisor – Mortgage Lending Institutions U.S. Treasury - Office of Technical Assistance 27 Assigned to BOU Developers Turn Key Construction Limited – (Contractor) 28 Managing Director 29 Works Engineer Development Partners USAID 30 Cognizant Technical Officer Financial Sector Deepening Uganda (FSDU) 31 Investment Manager


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Appendix B Overview of the Housing Finance Sector –Slide Presentation Please refer to the link below which will direct you to the slide presentation on the USAID Rural SPEED project website. The following PowerPoint presentation and associated workshop discussion summary can be found at: http://www.speeduganda.org/index.php?option=displaypage&Itemid=57&op=page

HOUSING FINANCE:A Vehicle for Economic

Development

Ugandan Financial Institutions Can Benefit from Successful Experiences in other Emerging Economies.


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2

Today’s Goals

Share a simple framework for visualizing the housing continuum in many emerging countries around the world Share examples from other emerging markets which may suggest new approaches to finance Focus on the “informal sector”

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Agenda

The Basic Building Blocks of a Housing SystemWhy Housing Finance?Illustration of the Housing Continuum –How might you use it to suggest roles/strategies/customersShare Illustrations, Lessons LearnedLanguage Matters—Define Terms


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4

Key Components of the System

FinanceHousing StockPolicy/Legal EnvironmentCapitalInfrastructure (Organizations/Capacity/Availability)

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The Homeownership Continuum Profile Ulaanbaator

Value $8,000--25,000Value $8,000--25,000Value $2,000-10,000 Value: 0

Possible insurance or guarantee as prices rise for low end of the income band

Land UseRegulatory relief to help Lender Create system for building and planning/land use plan

Government supports infrastructure and could offer risk mitigation to lenders

Role of Government:Supports infrastructure

-property as collateral is available-No need for a lien (psychological value of collateral)-Loans are used for improvement which may enhance micro/small business

Home Loans with proper security

Housing Loan secured by the property (mortgage)

Micro Loans by MFI/BankUse of Funding:Group Lending for Slum Upgrading

1M MNT or moreMNT 300,000 --1M MNT 50,000 --300,000 MNT 30,000- 50,000 ($15-25 per month)

SME Owner Minimal Income

Senior ManagementEmployed/Entrepreneur Family/individual

Steady very modest income Employment/Income Source:Intermittent Work

NeighborhoodsNeighborhoodsGer Settlement AreasLocation:Ger Settlement Areas

New ApartmentExisting ApartmentsKhashaa/FrameHouse

Khashaa


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One Possible View of the Ugandan Housing Landscape

Leasehold; Mailoland; occasionally land is registered or can be.Short term borrowing at high rates

Commercial Lenders;MFI;

Business income including rental.Senior government employees; multiple wage earns and multiple jobs; savingsRemittances

Business location; semi urban and urbanScattered through the country

Modest housing; incremental completion; Rental property as source of income; occasionally in multistory

Management established business ownersCivil Servants

Emerging middle income –5-15%

Same as aboveSame as above but less access, more down payment

Salaried loans income savings inheritance multiple income household; Extra business income

Hills of Kampala and Peri urban markets

Build to order Existing Stock Rental Prop

Senior & Upper Middle Mgmt; Critical Technical

Upper/Middle income emerging middle income 1-10%

Mortgage LTV of 70% less Registered Property

HFCUDFCUOther Commercial Banks

Equity from prior properties, savings, employment or business profits, Diaspora, inheritance

Hills of Kampala; new suburbs new homes

High end stock build to order buy best standard rental prop

High: CEO/Board/MPs/Senior Managers/Large business owners/Professionals

Top 1-5%

CollateralSources of financing

Income/Sources of Repayment

LocationType of Housing stock

OccupationsIncome Category

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One Possible View of the Ugandan Housing Landscape -continued

NoneASCAs and other informal structures

Farming, day labor, hawking in cities

Rural Villages,Urban Slums

Self built mud and stick in rural areas, crowded space in slums in urban areas

Less than 20,000 UshPer month

39% living in poverty

Home may be collateral in some cases 86% are owners in rural areas and 30% are owners in the urban areas according to 2002 Census

MDIs and MFIs

Minimal if any

Rural UrbanSlums

Self-built;Unfinished

0 – 40,000 Ush per month or less

85% +/- of Ugandans


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HypothesisIf the objective is

to improve access to capital by institutions to increase lending borrowers and to generate interest in the housing system, one must have several points of engagement simultaneously to provoke change and build a system.

Different institutions serve different customers with various products.Interest/action by any one component of the system can support the growth of other parts of the systemThe potential customer basis, while tiny in comparison to all of Uganda is nonetheless substantial when viewed from the perspective of tools and resources to meet the demand.

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Why Housing Finance ?

Engine of equitable economic growthKey for investment, households wealth, savings, consumption, labor markets, fiscal returns, retirement system

Meet a growing house demand (urbanization, demographics)Prevent slum proliferation (cities built the way they are financed)


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Why Housing Finance ?

Reduce poverty (asset building, retirement, empowerment, community strengthening, improved living conditions)Provides numerous opportunities for a diverse financial services sectorStabilizes families and communities (a stable healthy living environment improves family health, child performance in school, civic engagement and a host of benefits to community planning)

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Exploring Lessons from Other Places

XacBankGoal - Serve Current Customer, Be a market Leader; Use current capital creativelyProduct -10 year; fixed rate loans at 18% Approach;

Stuck to lending as the vehicle for building the marketBuilt upon employee loan program experienceAccepted title and environmental constraintsPriced to be attractiveReengineered as they lent.


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XacBank - continuedResult-

530 loans in 5 months for an aver of $6,600Typical borrower had an income of $133 to $900 per monthMore popular than their SME businessProcessing more laborious than they originally thoughtOver subscribed and had to shut the door quietly-due to long term risk

LearnedCould price for risk and would still be popularAttracted new customers/Opportunity to cross sellWord of mouth was the most effective marketingGood training for SME lenders

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Republic of GeorgiaGoal- increase development lending; profitability; serve existing customersProduct- 18-22% for 3-4 years; LTV at 50% of valueApproach- Banks marketed to existing customer base focused particularly on SME borrowers;

Focused on existing stock and in urban marketsPerfected title and initiated the first appraisals

ever in the market by lendersFocused on hands on monitoring


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Georgia experience-continuedResults

Lent $3.1 million in 18 months with an average loan amount of $12,000 and less than .5% delinquenciesRepayment was 100% by end of termInstitutions continue with product after initial capital was repaid

Learned (18 months)How to value real property?Learned that underwriting the SME and housing borrower are very similar/learned how to evaluate informal incomeLearned that the tax system discouraged borrowers from participating fully or insuring their property for real valueMonitoring was critical; foreclosure was not a choiceSignificant prepayments

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Domini Credit- Romania

Goal- Establish a mortgage company that would serve emerging middle class and be self sustainingProduct- direct lending for acquisition and rehab; urban focused; start up


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Domini Credit - continuedResults-

Ready to expand territory within 18 months Very low delinquencies/valued monitoringMortgage Lender sought and received investment capital by the end of year 2 and is now a fully self sustaining mortgage company resulting in secondary market interestAs before the borrowers are typically modest income families and self employee

Learned-How to establish a system which would attract capital investment in the company by focusing on standardization from day one.

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TUHF and Alex Township-South Africa

Goal- to make rental loans to entrepreneurs Micro and SME Borrowers; to transfer incremental concept to rental housing Product- loans to rental and to owner occupied rental properties for acquisition, financed unit additions and rehabilitation


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South AfricaResults-

Established stable books of business where the borrowers are renting to very low income people in very difficult areasDemonstrate the success of property as a business with cash flow based lendingOne in with very small loans and the other at significant scale.

Learned-Indigenous ownership of rental property can improve neighborhood, serve renters and be a good businessKnow your borrower and your market

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Lessons and OpportunitiesDemand is typically substantial. Key is to select the right approach, capital source, product and delivery channel to fit the customer.Don’t mistake need for demand and capacity to pay. currently. Designing a product which provides the borrower with choice and insures that the money goes into the house is tricky but feasible.Understand the collateral and the limitations and compensate for the weaknesses but don’t be afraid to lend simply because registered title is not available.


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Lessons and OpportunitiesDepending on the country there are a host of items which arise worth considering ahead of time…property taxes, insurance, municipal requirements, contractor capacity to name a few. Borrowers are smart about their money so if you have two different products that have a cost differential, they will seek to use the cheapest for multiple uses. To illustrate housing loans are longer term borrowers may use them to finance their business.Housing loan collateral is often secured by employee pension funds and/or direct pay from salaries. These entities can become a partner to the lender.

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Lessons and OpportunitiesEvaluating housing loans where the payment is cash flow based can be very similar to SME Loans. It is however different in that it requires evaluation of an asset especially for longer terms and at high loan amountsChanging the system such as the land title challenge is critical but if one waits tell it is fixed to start lending, you may never make a loan Starting an employee based housing loan for your institution has proven to be a good training ground and market builder


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Summary –Benefits of Finance System

Key Benefits to getting started…..Getting into the sector will build both the institution and the systems capacity.More players means more interest and energy to address the liquidity, land title and other systems development challenges.A housing finance system will improve the quality of housing, lending and community planning.Owning a home builds wealth.


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Appendix C Product Outline Sample – For illustrative Purposes Only Housing Loan Product - Outline

Brief Product Description – U Trust intends to offer loans for the sole purpose of acquiring or completing a home. The Housing Loan will be available initially through the Mukono and Kampala Branches. Other areas will be selected after the product is fully implemented (most probably 6-9 months after any initial lending). (Add up to 3 more sentences).

Objectives

• To enable our borrowers to acquire better housing including completing a home which is already started or to acquire a completed home.

• To provide access to capital to improve and or construct rental property and thus both serve the rental needs of lower income Ugandans and increase the income potential of U Trust borrowers

• To assist borrowers in building assets (wealth) while improving the livability for them and the community.

• To improve the standards of the current housing stock in Uganda.

Borrower Eligibility

Minimum – • The borrower must have sufficient verifiable income to support the loan amount at a 50%

Debt to Income Ratio. The debt to income ratio may include rental payments by the borrower if the rent will cease with 30 days of the disbursement of the loan.

• The ratio must include all other regular loan payments. (see underwriting guidelines) • The borrower must borrower as an individual. (does this include organizations) • The borrower must currently reside in ……. • The borrower must have a demonstrated track record as a successful borrower and if currently

a borrower, the payments are current. • The borrower must be legally eligible to own land in Uganda. • The borrower must have a savings account at U Trust. No minimum balance required except

if there is an equity requirement on the loan. Desired

• The borrower is a current or former customer of U Trust. • The borrower has a minimum monthly income of 300,000 Ushs.

Property Eligibility

• The property to be improved must be legally owned by the borrower and in the name of the borrower at the time of loan closing. The loan can only be made to the legal owner of the property and if that ownership includes more than one related party they all must execute the loan documentation

• The borrower will be responsible for obtain City or District Council approval of any and all plans and specification prior to disbursing any funds. Hence forth the plans, specifications and budget will be referred to as the Property Improvement documentation. (may wish to provide for some amount to be disbursed prior to approval to facilitate getting the approval but if this is done then it will be critical to be able to control disbursements until approvals are obtained and to collect on loan if the borrower does not proceed past this phase)

• The borrower must have proof of ownership which is acceptable to the local CC and any other third party who may regulate the improvements.

• If the borrower intends to borrow more than ……., the borrower must agree to complete the process of registration of ownership prior to disbursement of any amounts over …..

• Property taxes up to date???? Lease hold payments are current.


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Loan Parameters

• Minimum Amount–1M Ushs • Maximum–16 M Ushs • Rate –3 % per month with level payments • Term –Up to 24 months • Grace Period – One month at the discretion of the loan officer • The loan amount may not exceed 50% Debt to Income and 70% of value after improvements

are completed.

Use of Funds

• Monies may only be used to pay for acquisition and improvements of real property and costs directly associated with either obtaining the loan or construction.

• Eligible costs will include hard costs which are typically labor and materials (based on a budget and plans submitted by the borrower) and soft costs (depending on the borrowers ability to pay and loan to value evaluation) which may include the loan costs (e.g. monitoring, application fees and loan commission ), cost of securing proof of ownership, cost of plan preparation and approval, other professional fees such as architectural, engineering and legal, utility hook fees, property insurance for the term of the loan and …….

• U Trust may include a contingency to insure completion of construction of up to 20% of the construction cost at their discretion which would be used to cover changes in scope of work, cost overruns and or to finish the work if this becomes necessary. If these monies are not used then the loan amount will be reduced by this amount as a partial prepayment of the loan.

Underwriting Criteria

• Most of the criteria are listed above however it will be critical to pay particular attention to the borrower DTI, property valuation and the scope of construction. In evaluating the scope of construction U Trust is evaluating whether the work meets the standards set by the CC or DC, any U Trust standards, whether the budget is adequate for the proposed work and whether the plan for getting the work done (e.g. Time frames and skills of the proposed contractor) are adequate. Both valuation and evaluation of construction are technical skill sets which may not be known to all loan officers. U Trust may wish to have an individual in each branch where this is sufficient volume that does the construction review and evaluation and then monitoring after the loan is completed.

• Underwriting and loan approvals will be consistent with current U Trust policies for approval authority.


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Overview for Loan Processing Processing Steps Borrower Responsibility U Trust Responsibility Other Intake • Initial inquiry and

prescreening.

• Completion of the Loan

Application (may want preapp).

• Initial assessment and

determination of potential loan amount and requirements for the loan.

Borrower contacts branch based on marketing materials or word of mouth or loan officer suggestion. Borrower submits completed application Borrower submits additional materials if asked.

Loan officer answers questions and does prescreening. Do not encourage borrowers who are not eligible to apply. Loan officer receives application and notifies borrower whether the application is complete or items are missing. Loan officer does an initial assessment and then meets with borrower to inform borrower of the amount of loan which is possible and other requirements.

Preparation of the Property Improvement Plans and Documents • Initial budget and

plans prepared and submitted

• Review and comment

• Determine whether CC approval is required.

Obtain CC Approval if required.


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Underwriting

• Collateral Assessment and Valuation

• Borrower Income Assessment and Verification

• Property plan assessment

Loan Approval –Internal Loan Closing Disbursement

Monitoring during Construction

Work Completion Monitoring and Problem Solving during Loan Term

Time Frame – Outline Anticipated Time for Each Step Staffing – Roles and Job Descriptions, Compensation, Performance Expectations – a key item is that the staff is experienced in this type of lending and performance is measured on not only originations but loan performance. Additional Options for Product Variation.....

• Rental property • Acquisition of a completed structure? • Financing a builder to build on behalf of potential borrower? • Employee borrower


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Appendix D Documents reviewed in Preparation for the Consultancy

• The U-Trust Implementation Plan for the Low Cost Housing Loan Product. • The Low Cost Housing Loan Projections. • Written inventory of concerns and questions prepared by U Trust Mokono Branch staff. • The proposal and agreement between U Trust and Turn- Key LTD. • The Micro-Deposit Taking Institutions Act 2003. • Market and environmental materials prepared by ShoreBank Advisory Services for Housing

Finance Company of Uganda in 2004. • Recent reports on the housing sector prepared for the Privatization Office of the Ministry of

Finance and assorted web pages for entities such as Gatsby, Akright, DFCU and the various government agencies working in housing.

• The 2002 Uganda Population and Housing Census.