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