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  • 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

  • Copyright ShoreBank International Ltd. 2010 3

    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

  • Copyright ShoreBank International Ltd. 2010 4

    Housing Microfinance at FMFB-A

    I

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

  • Copyright ShoreBank International Ltd. 2010 5

    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

  • Copyright ShoreBank International Ltd. 2010 6

    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

  • Copyright ShoreBank International Ltd. 2010 7

    Housing Finance Product Evolution at an MFI

  • Copyright ShoreBank International Ltd. 2010 8

    HMF Product Development

    Idea Generation

    Market Research

    PrototypeDesign

    Pilot TestPilot ReviewRoll out

  • Copyright ShoreBank International Ltd. 2010 9

    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 upgrade50% wanted new construction58% who had done some upgrade

    spent about $4,500

    First MicroFinanceBank Afghanistan

    Home Improvement LoanComplete a houseDig a well Build a cellarRenovate the home

    Pilot launched 2008Rolled out to 12+ branchesOver 2,400 active clients

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

  • Copyright ShoreBank International Ltd. 2010 10

    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

  • Copyright ShoreBank International Ltd. 2010 11

    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

  • Copyright ShoreBank International Ltd. 2010 12

    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

  • Copyright ShoreBank International Ltd. 2010 13

    The Loan Process

    Marketing

    Disbursement

    Approval

    - Monitoring- Repayment

    RepaymentCapacity

    Willingness toPay

    CollateralValuation

    TechnicalAppraisal

    - Loan Default- EXIT

    - Good Repayment- Repeat Loan

    RequestField

    Verification

    Appraisal

  • Copyright ShoreBank International Ltd. 2010 14

    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

  • Copyright ShoreBank International Ltd. 2010 15

    HIL Use of Funds -- Afghanistan

    Refurbishment 80%

    Adding a room 10%

    Roof works 4%

    Wall works 3%

    Other repairs 3%

  • Copyright ShoreBank International Ltd. 2010 16

    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

  • Copyright ShoreBank International Ltd. 2010 17

    Computation of Repayment Capacity

    Business Sales less Purchases = Gross ProfitGross Profit less Expenses = Net ProfitRepayment 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 clients monthly income is twice the monthly installment

  • Copyright ShoreBank International Ltd. 2010 18

    TECHNICAL APPRAISAL

    Components of Technical Appraisal:

    Determining proposed improvements

    Providing technical advice

    Sketching proposed improvements

    Verifying project cost

  • Copyright ShoreBank International Ltd. 2010 19

    Field Verification

    Field verification is done by the appropriate manager

    Visit to clients 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 guarantors business.

  • Copyright ShoreBank International Ltd. 2010 20

    HMF Risks and Mitigants

    Risks

    Cost overruns

    Seasonality

    Overindebtness

    Migitants

    Pre-loan analysisMonitoring

    Inside improvements in cold months

    Limit borrowing per customer

  • Copyright ShoreBank International Ltd. 2010 21

    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

  • Copyright ShoreBank International Ltd. 2010 22

    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

  • Copyright ShoreBank International Ltd. 2010 23

    For More Information

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

    Ms. Lauren Moser Counts, Vice PresidentHousing Finance Practice Headlmoser@sbksbi.comwww.shorebankinternational.com

    mailto:lmoser@sbksbi.com

    HOUSING MICROFINANCE TOOLKIT Guidelines for Product development and Operations Housing Microfinance Toolkit Intended UsersHousing Market Segments (Mexico)Housing Microfinance at FMFB-AHMF Toolkit -- ContentsHMF Industry Key Issues for Market EntryHousing Finance Product Evolution at an MFIHMF Product DevelopmentHousing Microfinance in AfghanistanCore HMF ProductsSlide Number 11Slide Number 12The Loan Process Marketing StrategyHIL Use of Funds -- AfghanistanHMF Risk FactorsComputation of Repayment CapacityTECHNICAL APPRAISAL Field VerificationHMF Risks and MitigantsHMF Toolkit Forms and DocumentsChallenges to growing the industryFor More Information

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