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Housing Microfinance:
Introduction and
Best Practice Overview
Franck Daphnis
June 2016
Development Innovations Group
www.developinnovations.com
[email protected]
+1 (301) 664 9644
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Housing Microfinance:
Introduction and
Best Practice Overview
HOUSING MICROFINANCE
Purpose:
Provide an overview of emerging approaches,
products, and issues for housing microfinance
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Housing Microfinance:
Introduction and
Best Practice Overview
Why Is HMF Important?
From a Microfinance Perspective:
1.
2.
3.
4.
Reports of microenterprise loans used for
housing;
An increasingly important part of financial
operations for major MFIs
Obvious extension of the finance in
microfinance
Enough experience that best practices can
begin to be documented
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Housing Microfinance:
Introduction and
Best Practice Overview
Why Is HMF Important?
From a Housing Finance Perspective:
Points to an innovative approach to solving the
Housing Finance Problem:
“The Need to reconcile three partially conflicting objectives:
affordability for the households, viability for the financial
institutions, and resource mobilization for the expansion of
the sector and the national economy.” (Renaud, 1984)
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Housing Microfinance:
Introduction and
Best Practice Overview
Why Is HMF Important?
From a Development Perspective
Applications in the fields of:
 Microfinance
 Housing Finance
 Urban finance (slum upgrading, urban
sanitation)
 Land tenure regularization
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Housing Microfinance:
Introduction and
Best Practice Overview
DEFINITION:
A subset of microfinance, encompassing initiatives
that:
- Target the habitat needs of the poor or the very poor
- Extend Relatively small loan amounts based on estimated
repayment capacity
- Carry a Short repayment period
- Are usually not collateralized
- Are priced to ensure long term financial viability of the
provider
- Incorporate systematic due-diligence and follow up procedures
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Housing Microfinance:
Introduction and
Best Practice Overview
Housing Finance
Housing
Microfinance
Microfinance
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Housing Microfinance:
Introduction and
Best Practice Overview
DEFINITIONS
Who Are the Clients?
1.
2.
Existing MFI Clientele (economically active
poor working in the “informal” economy)
In general, low income earning and poor
households that do not enjoy access to
traditional housing finance
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Housing Microfinance:
Introduction and
Best Practice Overview
DEFINITIONS
Who Are the Providers?
1.
2.
3.
4.
MFIs
Home Lenders
NGOs
Regulated Financial Institutions (banks)
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Housing Microfinance:
Introduction and
Best Practice Overview
BANK CONSUMER LENDING AND
HOUSINGMICROFINANCE: A COMPARISON
Loan Origination
Loan Application Process
Due Diligence of
Application
Loan Security
Post-Loan Follow Up
Daphnis; DIG 2016
Consumer Lending
Through
Commercial Bank
Usually through
advertising, mail marketing,
or walk in from client
Typically the responsibility
of clients
Reliance on credit bureaus,
documented financial
information, tax documents
Housing Microfinance
Though MFI
Through intense presence
from loan officers in
communities
Often involves the
assistance of loan officers
Often based on character
references and on loan
officer’s reconstruction of
client’s financial profile
Tied to personal assets,
Often unsecured other than
collateralized (property lien, by co-signers
salary transfer, personal
guarantors)
Bank’s legal department
Loan Officer who
originated the loan does the
follow up
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Housing Microfinance:
Introduction and
Best Practice Overview
MICROENTERPRISE LENDING and HOUSING MICROFINANCE:
A COMPARISON
Typical Microenterprise Loans
Housing Microfinace
Impacts borrower’s income
May or may not be “fungible”
Impacts borrower’s assets base
and may impact income
Relatively larger incremental loan
amounts
May or may not be.
Can be individual or group loans
Usually individual loans
Repayment capacity based on
generation of future income
Repayment capacity based on
borrower’s current income
May offer very small loan amounts
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Housing Microfinance:
Introduction and
Best Practice Overview
Indicators for Organizations with HMF Programs
Organization
Banco Sol
Los Andes
MiBanco
Grameen
Total OutstandingHousing
Portfolio
Portfolio
$140m
$30m
$155m
$12.18m
$200m
$30m
$420m
$4.1m
Avg. Loan
Size
Portfolio
Repayment Periodat Risk
$1,0003 years
< 3%
$2,2003 years
< 2.7%
$8001.5 Years (Ave)
< 3%
$100-$600Up to 10 Years
N/A
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Housing Microfinance:
Introduction and
Best Practice Overview
Two Families of Products:
 A Word on Mortgages
 Linked Housing Microfinance
 Stand Alone Housing Microfinance
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Housing Microfinance:
Introduction and
Best Practice Overview
STAND ALONE MORTGAGE
Definition



Lien on asset (house as collateral)
Long repayment period
Typically finances complete housing solution
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Housing Microfinance:
Introduction and
Best Practice Overview
A WORD ON STAND ALONE
MORTGAGE
Why Are We Discussing it?




Desirable from client’s standpoint;
Desirable from “housing as social good”
perspective;
May be relevant in some countries;
Relevant to commercial institutions who already
offer mortgages to higher income earning clientele.
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Housing Microfinance:
Introduction and
Best Practice Overview
STAND ALONE MORTGAGE
Conditions for Success


Long term sources of capital
- Securitization or other “bundling” of loans
- Institutional investors
Legal Framework
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Housing Microfinance:
Introduction and
Best Practice Overview
STAND ALONE MORTGAGE:
Conditions for Success
Long Term Sources of Capital:
Why:
Correspondence between clients’ repayment horizon and
Institution’s funding repayment constraints
Issue: Sustainable MFIs finance lending through client deposits
and commercial loans. Repayment horizon not in sync with
10-30 year loans.
Subsidized MFIs also receive soft loans and donor funds;
however, opportunity cost of earmarking funds for long
repayment periods can be to high.
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Housing Microfinance:
Introduction and
Best Practice Overview
STAND ALONE MORTGAGE:
Conditions for Success
Securitization or Other forms of Private “Bundling”
What: Loans are aggregated into securities or otherwise packaged and
sold to investors. Secondary mortgage markets allow mortgage
lending to flourish in the US and other countries with capital markets
by finding investors with horizons that match borrowers’.
Issues: Mostly relevant to commercial Institutions
- In countries where microfinance flourishes secondary mortgage
markets typically do not exist
- Private investors have yet to see “bundled” housing loans for low
income families as attractive
- With no investors to purchase discounted housing loans,
mortgages (especially to the poor) is typically not an option
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Housing Microfinance:
Introduction and
Best Practice Overview
STAND ALONE MORTGAGE:
Conditions for Success
Institutional Investors
What:
Governments, public agencies and pooled investment funds
(pension, social security or other mandatory savings
systems) provide long term housing loans for families.
Issues: Loans tend to be provided post-construction and require the
presence of a developer with bridge financing
Programs tend to be bureaucratic and are not necessarily
models of efficiency and fairness
Loans are subsidized (from the standpoint of interest rate)
and long term availability of programs seems tenuous
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Housing Microfinance:
Introduction and
Best Practice Overview
STAND ALONE MORTGAGE:
Conditions for Success
Legal Framework



Laws must allow MFI to secure a lien against the asset
financed
Asset should be be transferable
- Land tenure
- Eviction laws
Court system must be reliable enough that mortgage contract
can be enforced in case of default
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Housing Microfinance:
Introduction and
Best Practice Overview
As Part of Linked Steps in Financing of
Micro-entrepreneur
Why Are we Discussing it?



Relevant to institutions already involved in microfinance:
Meets the “Are MFIS Currently Doing it?” Test
Even when MFIs are not consciously doing it, there is strong
anecdotal (and some documented) evidence that loans are
diverted towards housing purposes
Microfinance leaders, including Grameen, BancoSol, SEWA,
MiBanco have developed products
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Housing Microfinance:
Introduction and
Best Practice Overview
As Linked to Other Products Offered by MFI
Why:
-
What: -
Fits mindset that micro-financing is incremental with
income generation loans as steps towards asset building
Can be a powerful tool for client retention
Client’s history with MFI (through loans or savings) offers
good proxy for capacity to pay analysis
Provides housing loan as part of a “graduation”
process after client has established a lending or savings
history with the MFI
Can be a longer term loan financing a complete core
house or a home improvement loan;
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Housing Microfinance:
Introduction and
Best Practice Overview
As Linked to Other Products Offered by MFI
Table 2. Housing Microfinance As Part of Sequential Step in financing of Microentrepreneurs
Organization
Average
Loan Size
Maximum
Repayment
Period
120 months
Grameen Bank
$100$600
SEWA Bank
$532
60 months
CARD
$359
12 months
Security/
Collateral
5 co-signers
+Center
guarantee
One year
savings as lien;
2 cosigners
Five co-signers
Required
time with
Program
Two years
minimum
Savings
Required
Solution
Type
TA to
Clients
Yes
No
One year
minimum
Yes
Fixed
(incl.
Latrine)
Variable
One and a
half year
Yes
($39)
Variable
No
No
Source: Housing Microfinance Initiatives. USAID/DAI, June 2000
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Housing Microfinance:
Introduction and
Best Practice Overview
As Stand Alone Incremental Product
What: - Provides housing loan based on generally accepted
microfinance principles(short repayment period, relatively
small amount, based on repayment capacity, market rate)
and independently of prior history with MFI
Why: - Works within a vision of housing as one of many products
MFIs can offer the poor alongside more established
products
- Can be a tool for diversification (and retention) of clientele
- Can help with risk management by diversifying product line
Issues:- Client qualification must be rigorous as there is no prior
history with MFI
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Housing Microfinance:
Introduction and
Best Practice Overview
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Housing Microfinance:
Introduction and
Best Practice Overview
As Stand Alone Incremental Product:
KEY CHARACTERISTICS:
- Purpose: Typically Improve condition of existing
structure
- Repayment Capacity: Periodic payment no more
than 25% of income, total debt service no more than
40%
- Repayment Period: Generally one to three years
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Housing Microfinance:
Introduction and
Best Practice Overview
As Stand Alone Incremental Product:
KEY CHARACTERISTICS:
- Loan Amount: Based on cost, repayment capacity,
repayment period, market interest rate ($250-$4,000);
- Security: Secured through collateral substitutes (mostly cosigners) or actual collateral for larger loans; no “mortgages”.
- Product Design: Basically an individual loan product.
- Savings. If capacity to pay is borderline for stand alone
product, a savings requirement could be introduced.
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Housing Microfinance:
Introduction and
Best Practice Overview
MFL: COMME PRODUIT AUTONOME
Table 3. Housing Microfinance As Incremental “Stand Alone ” Product
Organization
Average
Loan Size
Maximum
Repayment
Period
6-36 months
Security/
Collateral
Mi Banco
$200-1500
EMKAN
$3,000
18 months
Loan is
collateralized
2 co-signers
TAMEER
$3,500
36 months
2 co-signers
Required
time with
Program
None
Savings
Required
Solution
Type
TA to
Clients
No
Variable
No
None
No
Variable
No
None
No
Variable
Yes
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Housing Microfinance:
Introduction and
Best Practice Overview
As Stand Alone Incremental Product:
Table 3. Housing Microfinance As Incremental “Stand Alone ” Product
Organization
Average
Loan Size
Maximum
Repayment
Period
6-36 months
Security/
Collateral
Mi Banco
$200-1500
EMKAN
$3,000
18 months
Loan is
collateralized
2 co-signers
TAMEER
$3,500
36 months
2 co-signers
Required
time with
Program
None
Savings
Required
Solution
Type
TA to
Clients
No
Variable
No
None
No
Variable
No
None
No
Variable
Yes
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Housing Microfinance:
Introduction and
Best Practice Overview
Key Concepts: Affordability
Loan terms

Repayment period
- One to three year for stand-alone product
- Longer term for linked product

“Market” Interest Rate
- Priced to include administrative expenses (AE), Loan Losses (LL), Cost
of Funds (CF), Desired Capitalization Rate (K) and investment income (II).
R = [(AE+LL+CF+K)/(1-LL)] – II †; or priced using the Microfin Loan
Projection Model

†
Other Factors (commission, etc,)
Rosenberg. CGAP, 1998
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Housing Microfinance:
Introduction and
Best Practice Overview
Incremental Housing Microfinance Products
When compared to mortgages,
- Based on how targeted clientele build;
- More in line with target clientele’s cash flow;
- Better correlation with banks’ traditional
sources of financing;
- Can be implemented parallel to existing
consumer product line.
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Housing Microfinance:
Introduction and
Best Practice Overview
KEY SIMILARITIES WITH MICROENTERPRISE
LENDING PRODUCT:
- Similar clientele;
- Small loan amount: affordability a function of
borrower’s capacity to pay, loan terms and cost;
- Relatively Short repayment period;
- Similar financial viability considerations.
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Housing Microfinance:
Introduction and
Best Practice Overview
DIFFERENCES WITH MICROENTERPRISE
LENDING PRODUCT:
- Client selection based on current cash flow;
- May require additional technical assistance
to borrower;
- Impacts borrower’s asset base rather than
her/his income;
- Basically an individual loan product.
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Housing Microfinance:
Introduction and
Best Practice Overview
ASSESSMENT OF POTENTIAL DEMAND
Documented Need
for Home
Improvements
Capacity to
Pay
Documented
Willingness to
Borrow
Cost of Home
Improvement
Affordability
Estimated
Demand
Loan Terms
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Housing Microfinance:
Introduction and
Best Practice Overview
POTENTIAL DEMAND ASSESSMENT:
Affordability
Capacity to Pay:
 Defined as the ability to meet periodic (usually
monthly) loan payment
 Housing payment no more than 25% of monthly income
 Debt burden no more than 40% of monthly income
 If income is $100 and debt is $25, capacity to pay is $15
a month
 If capacity to pay is borderline for stand alone product,
a savings requirement could be introduced.
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Housing Microfinance:
Introduction and
Best Practice Overview
POTENTIAL DEMAND ASSESSMENT:
Affordability
Loan terms

Repayment period
- One to three year for stand-alone product
- Longer Term for “Linked” product

“Market” Interest Rate
- Priced to include administrative expenses (AE), Loan Losses (LL), Cost
of Funds (CF), Desired Capitalization Rate (K) and investment income (II).
R = [(AE+LL+CF+K)/(1-LL)] – II †; or priced using the Microfin Loan
Projection Model

†
Other Factors (commission, etc,)
Rosenberg. CGAP, 1998
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Housing Microfinance:
Introduction and
Best Practice Overview
Individual Lending: Product Design
Interest Rate:
R = (AE+LL+CF+K) – II
(1-LL)
Example:36.73%= (18% + 2% + 8% + 8%) - 0
(1- 2%)
All variables expressed as percentage of portfolio outstanding ($1m)
Administrative Expenses (AE = $180K), Loan Losses (LL= $20K), Cost of
Funds (CF = $80K), Desired Capitalization Rate (K = $80K) and investment
income (II = $0).
†
Rosenberg. CGAP, 1998
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Housing Microfinance:
Introduction and
Best Practice Overview
Table 5. Examples of Improvements
Minor Improvements
Major Improvements
I.
Finishing work: carpentry, plastering
and painting, and installation of
doors, windows and security bars.
II. Major renovation or addition of
bathrooms, kitchens and living
space.
III.
Energy efficiency improvements:
installing insulation and double
paned glass.
IV. Retrofitting homes with hurricane
resistant technology.
V.
Water, sewer, and electric
connections.
VI. Major repairs or replacement of walls,
floors, roofs and sanitary fixtures.
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Housing Microfinance:
Introduction and
Best Practice Overview
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Daphnis; DIG 2016
Housing Microfinance:
Introduction and
Best Practice Overview
PRODUCT DESIGN: Summary






Target Clientele: Working poor
Affordability: capacity to pay; loan terms; cost
Maturity: 1-5 Years (3 is recommended maximum for stand alone product; More if
housing product can be sequentially linked to other products)
Security
- For linked product: accumulated savings as collateral, or group members, or at
least two co-signers; no collateral required
- For stand alone product: at least two co-signers; collateral on high-end
loans; do not take house as collateral
Sustainability: Product should always be priced so that MFI is financially viable in
the long run
Non-financial Assistance: Depends on perspective; should bring real value added;
could be offered as option
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Housing Microfinance:
Introduction and
Best Practice Overview
PRODUCT DESIGN: NON-FINANCIAL
ASSISTANCE TO CLIENTS
In addition to credit analysis, housing microfinance
products may require construction assistance.
This assistance can 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.
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Housing Microfinance:
Introduction and
Best Practice Overview
PRODUCT DESIGN: LAND ISSUES
Land Security vs. Land Tenure
If formal title 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
Based on local laws, years on the property qualifying as de facto
ownership
Accepted tax payments on property
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Housing Microfinance:
Introduction and
Best Practice Overview
CHALLENGES






Opportunity Cost: Is this the best use for the provider’s funds?
Liquidity: Will longer term loans create a liquidity crunch?
Construction Services (TA) to Clients: 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
Pricing: Will the new Product siphon clients away from existing
product line if loan terms are more attractive ?
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Housing Microfinance:
Introduction and
Best Practice Overview
CONCLUSION





Do not rush: Understand the clientele and what its demands are
before introducing a new product
Design the product well so that it is financially viable on its own
and works within the offerings of the organization
Ensure that the appropriate managerial, operational and technical
structure and systems are designed to support the product
Monitor and evaluate product performance and be ready to adjust
terms to meet clients’ demands
If “finance” in microfinance means providing for a range of the
financing needs of the poor, microfinancing housing is a very
logical next step.
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