the role of micro finance in meeting sa’s housing challenge

THE ROLE OF MICRO FINANCE IN MEETING SA’s HOUSING CHALLENGE

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1. Introduction

Access to Finance key to debate since 1994

The 1994 RoU between Banks and Government:

Delivered R10bn+ new mortgage loans under MIF cover;

Proved unsustainable as underlying risks prevailed

Less than 5% of 1.9m Government subsidized units since 1994 linked to

home loans

Underlying reasons for 1994 Banks/ Government RoU prevail:

Vanilla mortgage lending proved unsustainable

Most township areas remain under or un-serviced

Underlying risk profile of under-serviced areas improved little

New Government projects remain under-serviced

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Alternative (intermediated) tenure/finance options in subsidized

segment:

Made limited impact (numbers)

Few if any so far proven sustainable/scalable

Remain dependent on soft funding

Secondary housing markets underperforming in:

Majority of township markets;

Areas of high transition

New Government subsidized projects:

Slowed down considerably by policy choices/ capacity

constraints;

Remain under-serviced with private finance

1. Introduction

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2. The Financial Sector Charter

The FSC is a landmark for change:

Sector committed to sustainable transformation

Broad range of tenure/finance approaches envisaged

Commercial sustainability as foundation

Long term partnership between sector and Government possible

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The FSC should result in:

Financial product innovation

Customer service transformation and innovation

Clear risk allocation between the private sector and Government

Multi facetted approach to delivery

Investment in new capacity especially at the intermediary level

Standardization and transparency

Recognition of incremental housing as a cornerstone of delivery

under the FSC

2. The Financial Sector Charter

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3. Role of Micro Finance

1.9 million families during the past 10 years obtained:

Freehold title;

A starter housing unit

Starter units largely not suitable as mortgageable security due to:

Housing standards

Concentration of the poor

Environmental conditions impact on values

Distortive impact of capital subsidy on market values

Financial profile of beneficiary mix

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Families on these projects left 3 choices:

Be content with what they got;

Incrementally improve the units with cash when available

Gain access to non-mortgage finance and incrementally

improve their properties

Is cash savings a realistic solution?

Marginal incomes mean low or no savings

Saving term doesn’t match timing of need

Significant lump sum amounts needed

Cash route not a realistic route


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What are the alternatives available?

Fully guaranteed loans (pension backed)

Unsecured personal loans

Can these alternatives be accessed?

3 million people are regularly accessing unsecured loans

Many pension schemes allow borrowing for housing

So are there problems?

Yes and no


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Wide access to unsecured finance is already achieved

Loan size/ product choices are restricted by by law and

affordability

Pricing is high due to regulatory uncertainty, costs, risk and

inadequate competition

Delivery of finance and housing subsidy not linked

Delivery of finance and home improvements inadequately linked

FGL low priced (Prime -)

Substantial leakage

Erodes retirement provisions/ increases dependency on state –

questions as to whether it should be allowed


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Despite all of this an estimated R2 –3 billion per annum flows into

incremental housing

People are doing it for themselves while policy debates and

conferences to solve the “problem” are abundant

We need to recognise and support what people on the ground are

already doing for themselves


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Do the economics of micro finance work for the borrower? – a

real life example:

Ms X a teacher in Kimberley takes a R25 000 20 year mortgage

@ 15% pa on average with a R330 p.m installment from a big 4

bank in 1992 to build a house (assuming she could get it).

She elects to pay R380 pm to pay the loan off faster/ save

interest

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By 1999 she has:

Paid back R9 951.35 in capital (still owes R15 048 or 60% of

loan)

Paid interest in the amount of R21 968.65(87.9% of the loan

amount)

Paid an installment of 29% (R380) of her R1316 take home pay in

1992

The house was contractor built and we assume equated to the

market value at the time of delivery

She still has to repay every month and cannot borrow any new

money to improve the house


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The same Ms X takes 5 18 month unsecured payroll deducted loans

of R5000 each @ 40% pa NACM during the same period (1992 –

1999)

During this time she:

Repaid the full R25 000 capital (she owes nothing on the

house)

Paid a cumulative total of R6920 in interest (31.5% of the R21

968 she would have paid on the R25 000 bond and only 27.7%

cumulatively on the R25 000 capital she borrowed)

Paid the same installment of 29% (R380) of her R1316 take

home pay in 1992


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Today she owns a bond free house and continues to improve it

every year, taking small amounts.

She did the construction work with the help of her son and spent

capital on materials and specialists such as an electrician and a

plumber.

Her house today is 20% bigger than what she could have built for

R25 000 in 1992 through a contractor.


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Ms X made a rational economic decision in 1992

She escaped the indignity of living in a shack by helping herself

Her house is debt free today

She has more house for much less money today

She paid the “horrifying” interest rate of 40% pa or 2.67 times the

mortgage rate (15%) on her unsecured loans; yet

She paid much less (in nominal rands) than on a mortgage

She didn't have the need to ask Government for a handout

She remains a valued and profitable customer for her financier


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4. Where to from here?

Present price control in the Usury Act and the limitations and legal

uncertainty under the Exemption Notice

Inhibit innovation, investment and competition

Encourage inappropriate lending and borrowing

Has divided the market in two distinct segments:

• Low (regulated) priced, wide variety of choices for the haves

• High priced, limited choices for the have-nots (Exempt)

By regulation largely precluded low income borrowers from

access to:

• Overdrafts

• Revolving credit lines

• Credit cards

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A new National Credit Bill (2004) (replacing the existing laws)

proposes:

Price control across the market

Limitations on marketing conduct

Regulatory prescribed affordability requirements

Substantially increased cost of compliance

Massive penalties for credit providers

Weakening of credit provider contract enforcement capability:

• Prescribed delays in legal process

• 14+ new defenses debtors can raise in court under default

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Bill still under consultation before being submitted to parliament

The present Bill likely to exacerbate the ills of the present laws i.e.:

Reduced legal access to credit in formally employed sector

Limited prospects for legal access in informally employed sector

Substantially reduced competition in this market due to:

• Increased compliance cost of provision

• Increased compliance risk for providers

• Increased collection risk

• Regulatory limits on recovering such cost and risk

Large increase in illegal credit provision to fill gap

A downward revision of housing finance targets under the FSC

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Pre-occupation with the effective rate at which people borrow:

Defies economic logic

Kill innovation, investment and competition and therefore choice

Regulatory interference in creditability assessment/ contract

enforcement will result in:

Inhibited innovation and competition

Rigidity, arbitrary exclusion and moral hazard

Increased risk aversion from credit providers

Consumers and providers will make rational choices given:

Enough competitive options

Transparent comparable disclosure

Predictable and legally certain outcomes

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The FSC creates an opportunity for a new dispensation

Government subsidy policy and processes and private sector finance

and product delivery processes need to be aligned

Recent housing policy shifts bode well for such a dispensation

Progressive reform in the legislative environment for credit can make a

massive difference – the new Credit Bill needs serious revision

Regressive market interventions - especially government price control,

regulatory prescription in credit assessment and interference in contract

enforcement, can set the country back 15 years and frustrate the

achievement of the FSC finance goals in:

Housing

SME and Agriculture


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The largest micro finance bank in SA today, service 1.2 million

customers annually with unsecured loans

It owes its existence to public policy interventions through DFI’s such as

the IDT Finance Corporation and the NHFC during its formative years

Its success is directly attributable to:

The ability to flexibly price for risk and cost

The ability to effectively collect in the legal system

Attaining critical mass and a track record with initial DFI (public

policy) support

Being able to offer shareholders attractive risk adjusted RoE’s

Being a fully regulated banking institution

Having a credit rating enabling sustainable funding


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SA needs a number of such entities vigorously competing on:

Price

Product

Service

Government can start a new wave of capacity/ investment through:

Visionary legislative/ regulatory reform creating certainty and

stability in the credit environment

Recognizing and dealing with the causes of market failure (where it

is proven to exist) not the symptoms


THANK YOU

the role of micro finance in meeting sa’s housing challenge

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private finance

unsecured finance

housing subsidy

linkeddelivery of finance

finance key

government subsidized

nonmortgage finance

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