Bottom up or top down: Bringing formal sector housing finance institutions into the low income market Richard Martin
Cities Alliance project • Assist existing mortgage bankers (members of the AUHF) to understand the market better, and expand lending to lower income groups • Assess housing finance needs of poor, especially residents of informal settlements • Methods – Surveys – Housing Finance Forums – Pilots
• Test appetite for commercially viable products in this market
Project process Quantitative surveys Identify and characterise market
Qualitative surveys Legislative and regulatory obstacles Bank
Define product and partners
Bank Bank
Market • No titles • Informal – Incremental – one room at a time
• Only lending by community based lenders at very high rates • Real market especially in terms of rental
Diversity • Swaziland
Diversity • Swaziland – – – – – – – –
Middle income country Low densities Strong community organisation Semi-legalised Single housing finance institution Highly regulated History of innovation Experienced building society which has been trying to expand its market into lower income groups with limited success
Diversity • Tanzania
Diversity • Tanzania – Very high percentage of urban growth informal – World Bank funded upgrading programme improving infrastructure – Intermediate land security (occupation licences) being provided – No formal sector housing finance institution, but banks beginning to be interested – Many very active micro-lenders, mainly using group lending
Diversity • Ghana
Diversity • Ghana – – – –
Wide variety of settlements from old to new Rapid peri-urban growth High rate of employment but low incomes Very poor sanitary conditions and high level of overcrowding – Housing finance institutions lending to upper income group, but innovative HFC/CHF project, and HFC informal sector project are innovative and effective – Micro-lenders very active – Multi-dimensional problems with land and titling
Diversity • South Africa
Diversity • South Africa – Extensive unemployment – Very rapid urbanisation – Government housing programme offers very high standards – shack mentality a consequence – Banks committed to participate in the low income market – Commercial (not NGO) micro-lenders very active and profitable
South Africa: Micro-lenders • Wholesale funds from National Housing Finance Corporation and others • Model typically relies on payroll deductions • Trade unions used to force employer to cooperate • Loans of 36 months, typically repaid early • Loan used for house improvement/additions • No cash or little cash paid out – loan paid through building materials suppliers
Diversity • Morocco
Morocco • Scale of micro-finance – over 1 million borrowers • Micro-finance kick-started by USAID guarantees • Reliance on community-based assessments • Co-operation with commercial banks • Micro-finance to raise deposit for formal sector housing
Informal Settlements in Dar es Salaam • 70-80% of the 3.5 million city residents live in informal settlements (different social and economic status) • Upgrading has been the policy since 1972 • Permanent incrementally-built houses as a result of perceived secure land tenure • Modest infrastructure upgrading through individual initiatives, sometimes in collaboration with local authorities • Property registration and issuance of residential licence (2004); infrastructure upgrading and regularization to follow
Findings: Households Demonstrated Capacity to Finance Housing 1. 2.
3.
4. 5.
Land for housing was bought: 97% of all house owners bought land for building Houses were permanent: 85% of all the houses were built of sand-cement blocks, 90% of them with sandcement floor and 97% roofed with corrugated iron sheets Houses had basic facilities: a private or shared cooking space, toilet, bathroom, electricity and connection to clean water (14%), from vendors or neighbours(68%), wells (12%) 87% of house construction financed by savings Savings financed also available infrastructure
Households had Capacity to Finance Housing (cont…) 6. Informal and formal employment activities were the sources of income for 35% - 65% of households respectively regardless of tenure status 7. Average declared household income was $105 while expenditure was $160 8. The feeling of security was the cornerstone of the demonstrated capacity to finance housing 9. This was most likely the outcome of the Government policy in support of informal settlements over the last 35 years 10. There is a huge unexploited potential for housing finance in connection with these households
Findings 11. To supplement income/savings, particularly for housing finance, households borrowed money from friends, relatives and to some extent employers. 12. Borrowing from formal financial institutions, particularly banks was insignificant. However, if loans were to be available, 46% of willing borrowers would borrow up to $4,000; 24% $8,000; and the rest up to $20,000.
Findings 13. Households saved (about 70%), primarily for emergency purposes (41%). Others saved to build a house including buying land (17%); to establish income source (15%), for school fees (7%) and others (18%) 14. Saving in form of building materials did not count as part of household savings, yet it was a common practice among the house builders to accumulate building materials.
Stated Capacity for Upfront Payment Amount
%
$10 – 40
32.7
$41 - $80
18.1
$81 - $160
16.4
$161 – $400
11.9
$401 – $800
9.2
Amount Households Willing to Pay Monthly to Service a Housing Loan Monthly repayment Up to $12
% 28.0
$13 to 40
53.3
$41 to $80
11.5
$80+
3.7
Accra
A city of enterprise
Incomes and Employment • Mean household incomes vary from $26 $180 per month • Salaried people have slightly higher incomes • Non-earned income (family, rent etc) add significant amount (over 30% in many cases) • 81% are in informal employment, though in some settlements, it is as low as 54%
Acquisition of houses • 49.3% reported inheriting their houses • 23.1% built with their own funds and • 14.2% bought from original owners. Settlement name
N
Self built %
Self built with funds %
Contractor built %
5.5
50.9
14.5
Sodom and Gomorrah
55
Nima
14
28.6
-
Kotobabi
20
10
James Town
13
Adedenkpo
Bought from Inherited Owner % %
29.1
-
-
14.3
57.1
15
-
5
70
7.7
-
-
-
92.3
22
-
-
-
-
100
Korle Dudor
10
-
-
-
-
100
Total
134
7.5
23.1
6.0
14.2
49.3
Building costs and values • 54% built houses from savings • Houses cost between $1 and $8,500 • Current market values estimated at between $25 and $90,000.
Home Improvements • 13.7% wished to improve the state of their rooms • 10.7% wanted to add toilets, • 3.3% wanted to build extra rooms for rent.
Savings • 30.4% have savings accounts • 42.4% belong to mutual savings clubs (susus) • 41.6% save daily • 52.8% of saving is for the unexpected • 8% are saving for housing • 2.8% are saving to buy plot • 8.3% have never withdrawn savings
Borrowing •82.9% of respondents had never taken a loan •Of 51 who had taken loans - 18 took them from banks - 1 from a susu vendor - 15 from friends - 5 from family sources, and - 8 from employers
Loans • Reason – 7.8% to buy land for building – 9.8% for house construction/improvement – 19.6% school fees
• Amount – Lowest $50, highest $1,500 – Majority between $100 and $500
Overall Findings and conclusions • Affordability and demand • Role of NGOs • Borrowing and lending – bridging the gap
Affordability and demand • Surveys show that there are many people with the means to repay housing loans – a major market exists • The demand is typically for incremental improvements and additions, not large sums • Affordability varies substantially with family size • Building for rent mitigates or eliminates the risk
Borrower’s attitudes • Appetite for long-term debt is closely related to future employment/income prospects and income • Fear of using house as security for debt • Interest rate is assessed in terms of choices – Community based loan sharks charge very high rates – Interest rates are less important than availability
Role of formal financial sector • Small percentage have bank accounts, usually savings accounts • Currently the formal financial sector plays no role • There is a lack of understanding by banks of the market • There is a fear of the formal sector by low income groups
NGOs • Many savings and credit unions exist • Generally charge around 1% per month • Problems of – Rate of financial return (money loosing value in high interest environment) – Inability to raise sufficient capital from member savings – Poor financial management
NGOs • Formalised NGOs can work well, but – Require substantial support (e.g. PRIDE, Tanzania, Sinapi, Ghana) – Work better with small short-term loans for business – Group-based lending is unsuitable for some clients, and has been abused
Characteristics of product as seen by borrowers • Short term loans • Small amounts at a time to reduce risk of default by borrower • Available without complex procedures • Loan applications through peer group
Characteristics of the product as seen by the lender • Community involvement to verify information and obtain support • Comparatively high interest rates to cover administrative and transaction costs • Security demonstrated by savings behaviour • Guarantees optional extra
Adding value • Corporate social investment • Life style – Health, Education
• Financial Management – Saving and borrowing – Saving in kind (Cemex case) – Terms and interest – Security
• Technical assistance
Lessons learned • Importance of savings • Relationship between borrower and lender • Value of intermediary – To reduce fear factor on both sides – As safeguard
• Potential for more use of financial securities (pension funds etc) • Need for good information about cost of development
Tanzania Pilot • Pilot project being developed Private banks
Community
Local government
Roles of the parties • Banks – Providing funds, and make longer term loans as required – Establishing proper systems
• NGOs – Women’s NGO to collaborate – Intermediate with the community and manage nonhousing loans
• Local Government – To simplify approvals
Unfinished business
Unfinished business
Recommended Structure Bank
Possible bank Syndication
Bank
Bank
Direct with banks using SACCOS as agents and banks providing training and support
Local SACCOS
Local SACCOS
Local SACCOS
48
General structure • Based on strong relationship with community, preferably through Savings and Credit Cooperative Society (SACCOS) • Build on three Financial instruments – Six Month Savings Requirement as Security Deposit – Community Guarantee Fund – Loan Loss Provision Fund
Saving for deposit • • • • • •
Six month’s savings used as deposit Builds saving history and discipline Interest earning Kept as security and not used for building Initial Cover 15% on five year loan Source of appropriate funding
Community Guarantee Fund • A surcharge of 5% on monthly repayment is suggested • Communal Fund using peer pressure • Requires total transparency • Initial cover 1.4% • Interest bearing • Refundable • Source of funding
Loan Loss Provision Fund • Based on assumed irrecoverable losses of 3% p.a. of total portfolio exposure • Results in annual surcharge to cover portfolio • Not interest bearing • Additional cover 3 % of portfolio p.a. • Source of appropriate funding • Suggest portion of balance after write-off repaid to individuals at end of loan period as incentive for responsible credit behaviour
Suggested ownership of instruments • Community Guarantee Fund – SACCOS
• Individual deposit – Individual, ceded to bank
• Loan loss provision – Bank
Impact on bank risk
54
Bank Exposure
55
Cash generated
56
Impact on the individual • Security should lead to lower credit premiums • Individual will effectively pay approximately 11% surcharge on base bank rate including insurance premiums • As an example, on one set of assumptions, the monthly instalment will be approximately $60 on a loan of $2,000 • If no defaults at end borrower will receive 16% of initial loan amount plus deposit released
Return for the bank
58