housing microfinance toolkit guidelines for product...

HOUSING MICROFINANCE TOOLKIT Guidelines for Product development and Operations

Global Housing Finance Conference

May 2010

First MicroFinanceBank AfghanistanIFC Advisory Services in MENA

Developed by:

© Copyright ShoreBank International Ltd. 2010 2

Housing Microfinance Toolkit – Intended Users

Commercial Banks

Non-bank Finance Cos

Microfinance Institutions

The HMF Toolkit is targeted to financial institutions seeking to launch a HMF Product in a variety of markets


Housing Market Segments (Mexico)

19% (+$1080 per mo.)

14% ($720-$1080 per mo.)

32% ($360-720 per mo.)

35% (0-$360 per mo.)

Banks

NBFIs

MFIs

Banks are moving down market into lower income segments, while MFIs are moving into mortgages in some markets


Housing Microfinance at FMFB-A

I

HMF Toolkit developed over course of 12 month technical assistance program in Afghanistan


HMF Toolkit -- Contents

• HMF industry evolution• Housing finance product comparisons• FI considerations for entering HMF sector, including Sharia

compliance

HMF Market Context and Overview

• Market mapping• Focus groups• Product profiles

HMF Product Development

• Overview of the lending process• Forms and documents, file building• Underwriting, approvals and disbursals• Portfolio monitoring and risk management

HMF Operations Manual


HMF Industry – Key Issues for Market Entry

• Is there demand for home improvement loans?

• Do clients already make home improvements using MFI funds?

Demand

• Competitive factors amongst FIs• Government programsSupply

• Has the FI engaged in individual lending?• Has it made longer term loans?• Does it have a source of longer-term funding?

Readiness

• Are there interest rate caps?• Prohibitions on lending for housingRegulatory


Housing Finance Product Evolution at an MFI


HMF Product Development

Idea Generation

Market Research

PrototypeDesign

Pilot TestPilot ReviewRoll out


Housing Microfinance in Afghanistan

Formal microfinance industry in Afghanistan started about 7 years ago.

There is limited supply of housing microfinance products in the country

According to the survey done in 2007*, –38% wanted house upgrade–50% wanted new construction–58% who had done some upgrade

spent about $4,500

First MicroFinanceBank Afghanistan

•Home Improvement Loan•Complete a house•Dig a well •Build a cellar•Renovate the home

•Pilot launched 2008•Rolled out to 12+ branches•Over 2,400 active clients

*Banyan Global: Proposal for HMF Product for FMFB and AKTC. Jan 2008


Core HMF Products

• Basic home improvements for existing house• Ave loan size• Term: 3 – 12 months

Home Improvement

Loan

• Completion of house under construction• Larger loan• Term: 12-36 months

Home Completion

Loan

• Full construction of new house• Largest loan• Term: up to 3-5 years• Highest risk profile

Home Build Loan


Loan Amount = USD 200 – USD 4,000

Initial Loan = Max. USD 2,200 and based on project cost

Service Charge = 25% per annum on declining balance

Loan Processing Fee = 1% of total loan per disbursement

Loan Duration = 6 - 24 months

Mode of Payment = Monthly Installments

Collateral = Title Deed and Guarantor

Savings = Voluntary ongoing savings (min 5%)

Home Improvement Loan Product Features


Alternative collateral mechanisms is a defining distinction between housing microfinance and traditional mortgage loans

Housing Microfinance Collateral Requirements

Mandatory savingsFixed assetsDepositsPension guaranteePersonal guarantee

Group guaranteeEmployer guaranteeCosigner(s)Microenterpriseloan history


The Loan Process

Marketing

Disbursement

Approval

- Monitoring- Repayment

RepaymentCapacity

Willingness toPay

CollateralValuation

TechnicalAppraisal

- Loan Default- EXIT

- Good Repayment- Repeat Loan

RequestField

Verification

Appraisal


Marketing Strategy

Community sensitization was also done through Heads of Shura (village leaders)

Know what you sell: Only 20% of staff pre-roll out could explain housing product features

Branch that printed and distributed leaflets achieved 112% of projected disbursements

Word-of-mouth market by field staff to existing clients and local business people; leaflets


HIL Use of Funds -- Afghanistan

Refurbishment – 80%

Adding a room – 10%

Roof works – 4%

Wall works – 3%

Other repairs – 3%


HMF Risk Factors

Inadequately analyzing income

Construction cost overruns and delays

Building seasonality in cold climates (Afghanistan March –September )

Poor use and storage of building materials

Borrowers with multiple loans (both enterprise and housing) –In Afghanistan 21% of borrowers with arrears had both business and housing loans

Life changes for borrower

Security of land tenure


Computation of Repayment Capacity

•Business Sales less Purchases = Gross Profit•Gross Profit less Expenses = Net Profit•Repayment Capacity is the financial ability of a client to

repay a loan. It compares monthly Net Profit or Net Income with monthly loan installment

Net Monthly Income

Total Monthly Installment

Repayment Capacity

A repayment capacity of 2.0 indicates that a client’s monthly income is twice the monthly installment


TECHNICAL APPRAISAL

Components of Technical Appraisal:

•Determining proposed improvements

•Providing technical advice

•Sketching proposed improvements

•Verifying project cost


Field Verification

•Field verification is done by the appropriate manager

•Visit to client’s business is mandatory

•The purpose is to verify main information in the loan appraisal done by loan officer, i.e.- existence of business- capacity of customer and business- accuracy of financial information

•For clients with non-permanent businesses (“free business”) the manager must visit the guarantor’s business.


HMF Risks and Mitigants

Risks

Cost overruns

Seasonality

Overindebtness

Migitants

Pre-loan analysisMonitoring

Inside improvements in cold months

Limit borrowing per customer


HMF Toolkit Forms and Documents

Loan Request (application) Financial Information Form Loan Appraisal Form Collateral Form Guarantor Agreement Shura Leader Verification Employer Confirmation Power of Attorney Loan Agreement Demand Note Monitoring Form


Challenges to growing the industry

HMF – traditionally viewed as “non-productive use” by MFIs –resistance by IFIs/funders

Initial resistance of MFIs to take on housing lending

Human resource capacity building: longer term loans, construction aspect

Enforcement of loan agreements to liquidate collateral in case of default can be difficult

Aligning loan officer incentives with volume and quality

Dealing with seasonal nature of home building


For More Information

1200 G Street NW, Suite 401Washington, DC 20005 USA202-822-9100

Ms. Lauren Moser Counts, Vice PresidentHousing Finance Practice [email protected]

mailto:[email protected]�