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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 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
© 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 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
© 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 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.
© 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 [email protected]