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So,You Want To Do Housing Microfinance? A Guide to Incorporating a Home Improvement Loan Program into a Microfinance Institution

So,You Want To Do Housing Microfinance? · 2018-12-04 · So, You Want To Do Housing Microfinance A Guide to Incorporating a Home Improvement Loan Program into a Microfinance Institution

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Page 1: So,You Want To Do Housing Microfinance? · 2018-12-04 · So, You Want To Do Housing Microfinance A Guide to Incorporating a Home Improvement Loan Program into a Microfinance Institution

So,You Want To Do Housing Microfinance?

A Guide to Incorporating a Home Improvement Loan Program into a Microfinance Institution

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So, You Want To Do Housing Microfinance

A Guide to Incorporating a Home Improvement

Loan Program into a Microfinance Institution

CHF International, ©2001

Second Printing, 2005

So, You Want to Do Housing Microfinance?

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CHF International

Copyright © 2005, Cooperative Housing Foundation. This guide waswritten and produced by CHF International, a nonprofit internationaldevelopment organization. The Organization serves as a catalyst forsustainable positive change in low- and moderate- income communitiesaround the world, helping families improve their habitat, economiccircumstances, and environment. We have been providing technicalexpertise and leadership in international and domestic developmentsince 1952.

For more information, contact:CHF International headquarters8601 Georgia Avenue, Suite 800Silver Spring, MD 20910 USAPhone (301) 587-4700Fax (301) [email protected]

ISBN 0-9708872-2-1: So, You want to do Housing Microfinance? – Second Printing

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AcknowledgmentsCHF International would like to express its appreciation to the SmallEnterprise Education and Promotion (SEEP) Network and the CiticorpFoundation and its Partnership Award for Capacity Building, whichhelped to finance this document. Special thanks go to Mr. BernardDebrauer, Director of the Association pour la Coopération avec la MicroEntreprise (Association for Coopération with Micro Enterprise —(CME) in Haiti, who helped test an earlier version of the Guide forCHF International.

We would also like to thank the many contributors who assisted with thecreation of this Guide. They include the following CHF Internationalstaff members: Sasha Muench, Program Officer; Tamara Arsenault,Senior Program Development Officer; Carol Jenkins, Program Officer;Glenn Moller, Program Officer; Lopa Kolluri, Program Officer;Michel Holsten, Senior Program Manager; Mayada Baydas, Ph.D.,Program Director of our microfinance program in Lebanon; Alix Lamarre,Director of Finance and Administration in Haiti; and Judith A.Hermanson, Ph.D., Vice President. Thanks also to Heather L. Bowen,Communication Specialist, for her assistance with the publication ofthis document. Finally, we would like to acknowledge the efforts ofCHF International field staff, who helped lay the foundation of thismethodology through more than 20 years of fieldwork in homeimprovement lending.

This guide was co-authored by Franck Daphnis, Jr., Director of FieldProgram Management, and Kimberly Tilock, Credit Manager.

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ii CHF International

Acronyms & AbbreviationsCHF CHF International

ACME Association pour la Coopération avec la Micro Enterprise(Association for Cooperation with Microenterprise)

CD Certificate of Deposit

HILP Home Improvement Loan Program

MFI Microfinance Institution

MIS Management Information Systems

SEEP Small Enterprise Education and Promotion Network

TA Technical Assistance

Definitions and NotesWithin the context of this Guide, “product” refers to a financialinstrument (the loan in the case of an HILP) and to its basiccharacteristics, including interest rate, repayment period and securityrequirements. “Methodology” encompasses the principles, rules andprocesses that define the manner in which the product can bedelivered. “Program” is a unifying term describing the actions resultingfrom applying human, technical and financial resources in support of a methodology.

A note on the pronunciation: HILP is pronounced by sounding out eachletter, “H.I.L.P.”

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Table of Contents

Acknowledgments ..............................................................................................iAcronyms and Abbreviations ............................................................................iiDefinitions and Notes ........................................................................................iiIntroduction ......................................................................................................1

A. Purpose ................................................................................................1B. Context ................................................................................................2C. Organization ........................................................................................4

I. Defining Home Improvement Loan Programs (HILPs) ............................................................................5

II. Why Provide Home Improvement Loans? ................................................7

III. Comparing Home Improvement Lending to Other Microfinance Products ....................................................................8

IV. HILP Attributes ......................................................................................10A. Repayment Capacity ..........................................................................10B. Loan Purpose ....................................................................................11C. Loan Maturity....................................................................................12D. Loan Amounts ..................................................................................13E. Loan Security ....................................................................................14F. Technical Assistance and Supervision ................................................16G. Land Security ....................................................................................18

V. The HILP Feasibility Assessment ..........................................................19A. Rationale for the Assessment ............................................................19B. Potential Market Demand..................................................................20C. The Microfinance Institution (MFI) ................................................30D. External Factors ................................................................................42

VI. Conclusion................................................................................................45

VII. Feasibility Assessment Tools ....................................................................47A. Sample Client Survey ........................................................................49B. Cost Estimation Form........................................................................53C. Institutional Information Checklist ..................................................56D. Sample Affordability Analysis............................................................64E. HILP Feasibility Assessment Report Outline ..................................67

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Tables and Charts

Table 1 Comparison of Microenterprise & Home Improvement Lending ......9

Table 2 Typical Home Improvements ............................................................11

Table 3 Sample CHF International HILP Loans ..........................................13

Table 4 Feasibility Assessment Steps ..............................................................20

Table 5 Sensitivity Analysis for Affordability ................................................29

Chart 1 Potential Demand ..............................................................................21

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Introduction

A. Purpose

So, You Want To Do Housing Microfinance? A Guide to Incorporating aHome Improvement Loan Program into a Microfinance Institution providesa systematic approach to understanding the issues a microfinanceinstitution (MFI) must consider before adding a home improvementloan program (HILP) to its product line. Specifically, CHFInternational designed this Guide to help MFIs assess the feasibility ofincorporating an HILP within their existing operations. CHFInternational believes that interested MFIs can acquire a betterunderstanding of the operational and technical requirements for theHILP and will be able to determine whether or not to proceed withthe HILP by working through the process outlined within thisdocument.

The Guide is not intended to assist in the design and implementationof a home improvement loan program. Rather, it should be seen as the initial step an MFI must go through to assess its readiness for implementation.

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B. ContextThe Guide is based on CHF International’s nearly 50 years ofdeveloping financial systems and community and housing initiativesaround the world. CHF International pioneered home improvementlending in the early 1980s and has designed and implemented homeimprovement lending programs in Latin America, the Caribbean, theMiddle East, Eastern Europe and Asia. CHF International’s HILPhas evolved and undergone systematic refinements through years ofimplementation and the HILP loan described in this Guide fits aspecific niche within the microfinance product spectrum: it is ahousing microfinance product. While other organizations may use theterm “HILP” to describe a variety of loan schemes, this Guide onlyaddresses CHF International’s own vision for a home improvementloan program.

CHF International’s use of microfinance as a mechanism to deliveraffordable housing grew out of its search for alternatives to traditionalsupply-driven housing approaches and for an expanded impact ofavailable financial resources. Under the CHF International homeimprovement lending methodology, credit traditionally has been usedas a means to an end—the provision of habitat improvements—ratherthan as an end unto itself. CHF International, nevertheless, hasdesigned this Guide with the explicit understanding that MFIs maynot be interested in housing, per se, but rather in a financial productthat allows them to respond to the evolving needs of their clients.

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CHF International sees its HILP model (and housing microfinance ingeneral) as bridging an important gap between housing finance andmicrofinance. HILPs are designed to address the habitat needs of theeconomically active poor in a manner that is incremental, demand-driven, financially viable in the long run, and does not rely onsubstantial collateralization. CHF International’s HILP loan isdesigned to reach a wide spectrum of the economically active poor:people who already build incrementally, have the required capacity topay and who do not enjoy widespread access to formal sources offinancing for their habitat needs. The targeted clientele thus includes,but is not necessarily limited to, microentrepreneurs.

The Guide also incorporates the experiences of a number of MFIs thatCHF International has assisted in developing a basic framework forassessing the feasibility of incorporating an HILP within their existingoperations. Further, the Guide incorporates inputs by ACME, a smallmicrofinance institution in Haiti that tested an earlier version of thefeasibility assessment. The results of that assessment were used to helprefine the assessment process outlined within this document.

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C. OrganizationThe Guide has been designed to take the reader through the process ofassessing both the potential demand for an HILP and the capacity ofan MFI to implement such a program. Section I defines the HomeImprovement Loan Program. Section II discusses the rationale forproviding home improvement lending programs. Section III compareshome improvement loans with other microfinance products. SectionIV defines the characteristics of HILPs and of home improvementloans. Section V contains the HILP self-assessment guide and outlinessteps that a microfinance organization should take to complete theassessment. Section VI provides a brief conclusion and suggested nextsteps. Finally, Section VII provides a toolbox of sample forms that canbe used to carry out the self-assessment.

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I. Defining Home Improvement Loan Programs (HILPs)

The home improvement loan as described in this Guide is amicrofinance product. The loans are for small amounts, carry arelatively short repayment period and allow borrowers to build theirhomes incrementally, in accordance with their needs and financialcapabilities. The loans also are structured to enable the implementingmicrofinance institution to achieve operational and financialsustainability. While called “home improvement” loans, the loans canfinance a range of habitat improvements that includes home additions,sewer and water hookups, sanitation solutions and hurricane resistantmodifications.

CHF International’s HILP approach is rooted in the observation thatthe working poor in developing countries build and improve theirhomes incrementally. As mortgages are typically not available, low- andmoderate-income earning individuals rely on their disposable incomeand savings or borrow money from informal sources to finance theirhome improvements. Traditionally they begin with a basic core houseand gradually improve the structure by increasing its size and addingamenities such as sanitation connections as funding becomes available.The HILP provides access to credit based on how people build, theirbuilding needs and what they can afford.

The loan described in this Guide is designed to be a “stand-alone”product to be delivered in addition to other microfinance products oron its own. As such, the HILP does not rely on clients’ prior credithistory with the MFI as a proxy for capacity to pay. The eligibilitycriteria, loan terms and loan uses are designed to qualify potentialborrowers on the merits of their current financial profile andestablished habitat needs, independently of their existing relationshipwith the MFI.

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Alternatively, an MFI may offer home improvement loans as a productthat is sequentially linked to its existing microfinance loans and not asa “stand-alone” product. For example, the MFI may choose to offerhome improvement loans only to clients who have successfullycompleted at least two loan cycles and have made all their payments ontime.1 This approach makes sense if demand for home improvementloans exists, but liquidity constraints, negative opportunity costs orother considerations limit the amount of capital available for an HILP.In such situations, the MFI has to be selective as to which clients canreceive housing loans.

The focus of this document is on the development of an HILP as a stand-alone product.

1 The housing loans offered by the Grameen Bank, for example, are part of such asequence of linked loans.

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II. Why Provide Home Improvement Loans?The working poor consider the physical improvement of their homes ahigh priority. CHF International and many MFIs it has worked withhave observed that as microenterprise loans are often the only type of -affordable credit available to the working poor, the poor will use theseloans to meet their housing needs. CHF International’s homeimprovement loan is designed to meet the habitat financing needs ofmicrofinance clients—particularly in terms of loan amount, repaymentperiod and underwriting criteria. HILPs allow the working poor toimprove their homes under more appropriate financing terms.

An improved home has a direct and positive impact on the health,security and self-esteem of the homeowners and their families. It alsoenhances the working poor’s asset base and may, in the case of home-based businesses, increase their income.2 For home-based businesses,the house is a productive asset. Improving the roof, for example, cansave an entrepreneur’s inventory. Adding an additional room can allowthe business to expand.

The HILP offers several benefits to the microfinance institution. It canhelp an MFI to meet the changing needs of its clients, improve clientsatisfaction and increase its client retention rate. It also can help theMFI to expand its client base to non-microentrepreneurs and improveits stability through the diversification of its loan portfolio.

7

2 For more information on the linkages between housing and microenterprise, see“Building Linkages Between the Microenterprise and Shelter Sectors: An IssuePaper,” by Priscilla M. Phelps, GEMNI Project, USAID, September 1995.

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III. Comparing Home ImprovementLending to Other Microfinance Products

The HILP lending methodology shares key similarities with themethodology for other microfinance products. An HILP providessmall, short-term loans to its clientele. Loan amounts, interest rates,and repayment periods are set to ensure client affordability and thelong-term financial viability of the MFI. Clients are motivated to repaythe loan by the possibility of subsequent loans.

HILPs present notable differences to other microfinance programsgeared towards enterprise development in client qualification andtechnical supervision. Table 1 (on the following page) provides acomparison between important features of typical microenterpriseloans and those of home improvement loans.

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9So, You Want to Do Housing Microfinance?

Typical Microenterprise Loans Home Improvement Loans

Loans affect borrower’s income.Loans affect borrower’s asset base and may impact income (home based business).

Loans are for small to very small amounts.

Loans are for relatively larger amounts(loan amount covers a complete homeimprovement).

Follow up to track use of loans typicallynot conducted.

Technical assistance to clients may beused to ensure loans are used for theintended improvement.

Lending methodology can be individualor group loans.

Lending methodology is usuallyindividual loans.

Repayment capacity often based ongeneration of future income.

Repayment capacity based onborrower’s current income.

Target clients are working poor entrepreneurs. Target clients are the working poor.

Table 1Comparison of Microenterprise and Home Improvement Lending

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IV. HILP Attributes The design of the HILP will depend on the location, target population,physical housing condition, local infrastructure and socio-economicsupport systems, in addition to the organization delivering the service.The following section outlines features common to all HILPs.

A. Repayment Capacity

Home improvement loans, unlike many other types of microfinanceloans, are designed to increase the client’s asset base, rather than toincrease his or her income. The exception is home-based businesses inwhich the home improvement is used as a business resource.

In this case, improving the condition of the home can result inincreased business productivity and yield additional income. Because ahome improvement loan is an asset-building loan, and not necessarilyan income-generating loan, the analysis of a client repayment capacityis based on the client’s current income rather than on projectedincome. In CHF International’s experience, the periodic loan paymentshould not exceed 25% of the client’s household total monthly income, todecrease the likelihood of default.

As clients often apply for home improvement loans in addition to other informal and microfinance loans, it is important to ensure that the home improvement loan does not overburden the client.CHF International recommends that the total debt burden for the family,including the home improvement loan, should not exceed 40% of thehousehold’s total monthly income.

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B. Loan Purpose

Generally, home improvement loans are used to improve the conditionof an existing structure. Within that context, CHF International’sHILP allows for a great deal of flexibility in the types of improvementspossible. Typically, the loans are used for non-movable improvements,and generally they cannot cover the purchase of household appliances.Home improvements can usually be grouped into major and minorimprovements, depending on the scale of the improvement. Anillustrative list of typical home improvements in each category isprovided in Table 2.

11So, You Want to Do Housing Microfinance?

Table 2Typical Home Improvements

Minor Improvements Major Improvements

Finishing work: carpentry, plastering andpainting, and installation of doors,windows and security bars.

Major renovation or addition ofbathrooms, kitchens and living space.

Energy efficiency improvements. Strengthening or “retrofitting” homeswith hurricane-resistant technology.

Water, sewer, and electric connections. Major repairs or replacement of walls,floors, roofs and sanitary fixtures.

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C. Loan Maturity

The loan maturity or repayment period for home improvement loans isa function of the cost of the improvement, the borrower’s repaymentcapacity, and the interest rate of the program. It is not tied to the timeit takes to complete the improvement. CHF International’s experiencestrongly suggests that the appropriate repayment period for homeimprovement loans typically ranges from six months to three years. As therepayment capacity is based on the client’s current income, graceperiods should not be necessary.

The repayment period is kept short for a variety of reasons. Theseinclude the following:

• Conventional wisdom and CHF International’s experience stronglysuggest that the longer the repayment period, the higher the riskthat a borrower will default on his or her loan.

• In addition to payment fatigue, borrowers whose income does notrise with inflation during the repayment period may experience a significant decrease in their purchasing power, and may be tempted to allocate amounts earmarked for repayment to moreimmediate needs.

• In the case of an HILP, a client may not have a prior repaymenthistory with the program. Shorter loan terms allow a program tohelp develop a credit history with the client.

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D. Loan Amounts

HILP loan amounts are based on the cost of the improvement and onthe client’s repayment capacity, given the recommended maximum loanmaturity of three years. As low-income earning individuals often willperform their own construction to reduce costs, it is common for homeimprovement loans to cover only construction materials and anynecessary skilled labor.

Table 3 (below) provides characteristics for some of CHFInternational’s home improvement programs.

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CountryType of Average Monthly Client’s MonthlyImprovement Loan Term Payment* Income(Loan Use) Size

Ecuador Minor US $250 24 mo. US $16 US $64

Honduras

Minor: repairing roof,repairing exterior walls,or adding concrete US $400 24 mo. US $20 US $120 - $133

Major:sanitation hookup& bathroom addition US $700 36 mo. US $26 US $133

Gaza

Minor:tiling floor or replacing windows US $3,000 24 mo. US $137 US $548

Major:1-room addition US $5,000 36 mo. US $159 US $636

Mexico Major:1-room addition US $1,500 18 mo. US $85 US $427

Table 3Sample CHF International HILP Loans

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E. Loan Security

Continued access to HILP loans provides a powerful repaymentincentive, as borrowers often aspire to secure subsequent loans tocomplete their homes. Nevertheless, CHF International recommendsthat home improvement loans be secured because the loan sizes arerelatively larger than typical microfinance loans.

The type of security used should help to ensure prompt and full loanrepayment with minimal administrative effort and cost. Promptrepayment and minimization of administrative costs are critical due tothe loan size and high cost of technical supervision associated withsuccessful home improvement lending. Based on CHF International’sexperience, co-signers provide the greatest security at the lowest cost.Typically one to two co-signers are required to guarantee repayment of the full amount of the loan. Co-signers should be held to the samescrutiny as the borrowers in terms of repayment capacity and total debt burden.

Collateral, other than a house, can be an option especially with relativelylarge loan amounts. The value of the pledged asset should equal thevalue of the loan. The challenge of using collateral is securing the asset,ensuring the right to seize it should the borrower default, and liquid-ating the asset to repay the remaining loan balance. Many countries donot have the legal system that supports the use of collateral to secure aloan. The lack of legal regulations can make it difficult to secure andseize collateral offered.

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The HILP does not require borrowers to pledge their houses as collateralto secure a loan. Placing a lien or deed of trust on a home and, in thecase of default, foreclosing on the house can be a costly and lengthyprocess. Additionally, the challenges raised in the paragraph above aregreater when it comes to using a house as collateral. Placing a lien on ahome for a minimal loan amount also would over-collateralize the loanand under-utilize the borrower’s financial asset, thereby putting anundue burden on the borrower.

CHF International does not recommend a group lending methodologyfor home improvement loans, in place of collateral. HILP loans haverelatively longer repayment periods and involve relatively largeramounts than typical group solidarity loans. If a group lendingapproach is to be used, the MFI must ensure that the group is able topay off the loan for any group member who is in default.

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F. Technical Assistance and Supervision

The provision of non-financial services to clients, or “technicalassistance,” is an integral component of the HILP methodology asdeveloped and implemented by CHF International. However, CHFInternational recognizes that not all housing microfinance programsneed to include this component to be successful. Technical assistancemakes the most sense in contexts where the actual completion of theimprovement is a main program objective, and where no dependableoutside systems (such as a reliable construction permit process) exist toverify the quality of the improvement. CHF International believes thatthe cost of the technical assistance should be factored into the pricingof the loan product. This implies that any technical assistance must beof sufficient value to the client that she or he would be willing to payfor it as part of the loan. This also implies that the cost of providingtechnical assistance must be affordable within the loan terms.

Technical assistance that can be provided with an HILP includesassistance in the improvement’s design and budgeting, and in theconstruction supervision of improvement activities to ensure that theloan funds are being used for the intended purpose. Specifically,technical assistance can be used in four main ways to accomplish the following:

• Help determine what materials are required for the proposedimprovement, the cost for these materials, and whether theimprovement can be completed with the requested loan amount,within the allowable repayment period;

• Provide oversight and risk management through regular clientcontact, thus increasing the likelihood that the loan will be repaid;

• Ensure that the specific improvement can be completed in atechnically sound manner; and,

• Certify that the construction is executed as proposed.

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The assistance is provided through pre-loan meetings with the clientand supervisory visits to the construction site.

If the MFI decides to include a technical assistance component, CHFInternational strongly recommends that at least one HILP staffmember have formal training as an engineer and/or architect. All othertechnical staff should have a practical understanding of localconstruction practices. The specific duties of the technical assistancestaff include:

• Visiting prospective loan applicants to review the proposed homeimprovements;

• Evaluating the technical feasibility of proposed home improvements;

• Preparing cost estimates, lists of required construction materials andtimetables for proposed home improvements;

• Verifying cost estimates with the approved loan amount;

• Verifying the land title (or land security status) of the applicant;

• Providing technical assistance as needed in home improvementdesign and construction;

• Monitoring and supervising the construction and authorizing anyfurther loan disbursements; and,

• Providing oversight to ensure the appropriate use of the loan funds.

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G. Land Security

Land security is a critical concern in the provision of financing forhome improvements. CHF International defines land security as theright to use a property, the assurance that the user will not be forced tovacate the property, and evidence that this assurance is supported byusual and customary local practices. Having the rights to the propertyallows the client to retain the improved asset and reap the associatedbenefits.

The preferred form of land security is when the borrower owns theland on which the improvement is to take place and has documentedproof of ownership. The reality is that HILPs tend to be implementedin places where land ownership is not always documented. In suchcases, the minimum threshold should still be that borrowers have someform of land security. This may be determined by:

• A written agreement between the buyer and seller of the land;

• A long-term rental agreement between the homeowner andgovernment for use of public lands;

• The number of years during which a family has inhabited a propertywithout paying rent and without due notice from the rightful owner; or,

• Payment by the homeowner of taxes to the government.

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V. The HILP Feasibility Assessment A. Rationale for the Assessment

The feasibility assessment is intended to help microfinance institutionsassess their capacity to incorporate a home improvement loan programwithin their operations and assess the organizational implications ofadding this type of loan product. It is essential to assess the feasibilityof adding an HILP before disbursing home improvement loans, as theHILP requires specific technical and supervisory mechanisms that maynot conform to the MFI’s operational methodology. Further, as homeimprovement loans can involve relatively larger loan amounts andlonger terms when compared to other microfinance products, loandefaults can have a greater impact both on the borrower and on thelending institution.

Table 4 lists the steps involved in conducting an HILP feasibilityassessment. The assessment is divided into three components. The firstcomponent assesses market demand, the second evaluates the MFIitself, and the third reviews external factors that can impact the HILP.All three components have an impact on the feasibility of starting asuccessful HILP. An MFI should advance to the design phase ofdeveloping an HILP only if the assessment of all three componentsindicates that the environment is conducive to operating the program.

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B. Potential Market Demand

HILPs are demand-driven. A market assessment is necessary toidentify the potential demand and any existing suppliers in theparticular region where the program will operate. If the potentialdemand for home improvement loans is not sufficient, or if theproduct is not competitively priced, the program will not succeed.

Potential demand for an HILP can be deemed to exist if the followingcriteria are met:

• There is a need for habitat improvements in the communities wherethe targeted population lives;

• The potential borrowers demonstrate the willingness to borrow tocomplete these improvements; and,

• The potential borrowers can afford the loan. This is often referred toas affordability.

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Table 4Feasibility Assessment Steps

Market Demand The MFI External Factors

1. Identify potentialclientele

1. Analyze administrativeimplications of the HILP

1. Evaluate potentialcompetition

2. Gather informationand conduct surveys

2. Assess financial impactof the HILP

2. Evaluate potentialcollaboration

3. Determine effectivedemand for homeimprovement loans

3. Assess impact of theHILP methodology onMFI lending operations

3. Evaluate other externalinfluences

4. Determine size ofpotential market.

4. Assess the impact ofthe HILP on MFImanagement structure

COMPONENTS

STEP

S

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All of the criteria described on the previous page must be met beforepotential demand for home improvement loans can be hypothesized toexist with a reasonable chance for success. (Effective demand onlymanifests itself when clients actually apply and qualify for the loans).The existence of one or two of these criteria does not necessarily implythat an HILP is feasible. For instance, the need for home improvementsmay be observed through an informed inspection of the existinghousing stock. Yet, there may not be sufficient demand for homeimprovement loans, or potential borrowers may not be able to affordthe loan given the loan fees, interest rate and repayment period.

Chart 1 (above) illustrates the minimum factors that determinepotential demand.

21So, You Want to Do Housing Microfinance?

Chart 1Potential Demand

Documented need for home improvements

Documented willingness to borrow

PotentialDemand

AffordabilityCost of homeimprovement

Capacity to pay

Loan terms

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Establishing potential demand for home improvement loans is a three-step process.

Market Assessment Step 1: Identify Potential Clientele

The preliminary step to establishing potential demand is to identifythe potential or target clientele. Potential clientele may be based ongeographic area, membership, participation in past/existing programs,specific gender, and/or income level.

Market Assessment Step 2: Gather Information

The information required to establish potential demand for an HILPcan be assembled from case studies, focus groups, and sample surveys.The following is an overview of the assessments and surveys CHFInternational believes are critical in helping MFIs determine thefeasibility of implementing an HILP.

Housing Stock Assessment (Recommended).

The goal of this assessment is to determine, independently ofborrowers’ preferences, which habitat improvements appear to beneeded and how often these “needs” occur. For example, 40% of housessurveyed may need new roofs, 10% may require improved or newlatrines, and 75% may need sanitary floors. This assessment requires a technically competent person to visit the targeted communities andsystematically inspect the existing housing stock. Information gatheredthrough assessments is used to determine the physical need for home improvements.

22 CHF International

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Potential Client Baseline Survey (Required).

The goal of this survey is to obtain baseline data on the targetedpopulation. A sufficiently large sample should be considered to providerepresentative data. The survey should identify income levels andexpenditure, current and past use of alternative formal and informalfinancial services, savings, debt obligation levels, and housingimprovement needs. The Sample Client Survey provided in SectionVII can be used to help develop this survey.

When assessing potential demand for new financial services, it isadvisable to offer various carefully designed “what-if?” scenarios togauge client preferences, as clients may not understand interest ratesand different methods of repayment. Information gathered throughthis survey will be used to determine the need for home improvements,potential client willingness to borrow and affordability.

Improvement Cost Estimation (Required).

The goal of this estimation is to determine the costs of completing thedifferent home improvement activities identified in the housing stockassessment and target client baseline survey. It may be informative tointerview individuals with local construction experience to determinethe costs of materials and labor for the proposed improvement projects.Information gathered through this appraisal will be used to determineaffordability.

The interpretation of data (especially client baseline survey data) is notnecessarily straightforward. People do not always accurately discloseinformation on their income, expenses and savings, particularly if theyare aware of the purpose of the survey. In CHF International’sexperience, people tend to understate their income and overstate theirexpenses. In addition, people’s perception of how much they need toborrow does not necessarily correspond with how much they thinkthey can afford for a monthly payment. The survey should therefore beseen as a starting point. In particular, when it comes to analyzing

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borrower repayment capacity, it may be necessary to use multiplesources of information. For example, disposable income could beestimated through a combination of direct client feedback, employerpayroll statistics (when available), assessment of expenses and savings,or existing clients’ loan applications for other programs. CHFInternational also recommends that people familiar with thepopulation group surveyed, such as the MFI’s loan officers, thepromoter for a community-based -organization, or a local builder, beconsulted to confirm the accuracy of uncorroborated information.

Market Assessment Step 3: Estimating Demand

Once the information has been assembled, it must be evaluated to ensurethat the three criteria for HILP potential demand have been met.

Estimate Need for Home Improvements.

From information gathered in the Housing Stock Assessment and thePotential Client Baseline Survey, two fundamental questions must beanswered in order to understand the need for home improvements:

• Do the potential borrowers want to improve their homes? From theClient Baseline Survey, the MFI should be able to extrapolate theestimated percentage of potential clients who consider homeimprovement as a priority. This information will be necessary toestimate the size of the market demand.

• What types of improvements do borrowers need? From the HousingStock Assessment and the Client Baseline Survey, the MFI shouldbe able to establish a list of the most common types of homeimprovements the target market wants.

24 CHF International

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Estimate Willingness to Borrow.

From information gathered in the Client Baseline Survey, twofundamental questions must be answered in order to establish thatclients are willing to take a loan for home improvements.

• Is the potential clientele willing to borrow to finance homeimprovements? While a client may want to improve her home shemay not be willing to go into debt to finance the improvement.

• Under what terms and conditions is the target clientele willing toborrow? This will be used to inform decisions on interest rate andfees, repayment period, loan procedure, and security requirements.

Estimate Affordability.

From information gathered in the Client Baseline Survey, the MFIshould be able to determine what types of improvements the targetclientele can afford. The outcome of the affordability analysis can besummarized in the form of a table segmenting the targeted populationby income brackets and showing for each bracket what improvementscan be carried out.

Affordability is a function of the cost of the home improvements, thepotential client’s repayment capacity, and the conditions for the loan(i.e., fees, interest rate and repayment period). The SampleAffordability Analysis in Section VII provides guidelines on whatcriteria to include in calculating client affordability.

• What is the cost of the home improvement? Based on the identifiedimprovements, the MFI should determine the associated constructioncosts from the improvement cost estimation. The Cost EstimationForm included in Section VII provides a format for calculatingimprovement costs.

• What is the client’s capacity to pay? Clients’ repayment capacity willdepend on their household income and cash flow. Determining thecapacity to pay is perhaps the most difficult aspect of the entire

25So, You Want to Do Housing Microfinance?

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demand survey process. This exercise attempts to answer onefundamental question, “How much can the potential clients afford topay per payment period?”

It is recommended that the following factors be assessed to get acomplete picture of the repayment capacity of the target clientele:

• Average monthly household income;

• Average monthly household expenditures;

• Average monthly household savings;

• Average monthly total debt obligation;

• How much potential borrowers believe they can borrow; and,

• How much potential borrowers believe they can repay every month.

• What will the loan terms be? Loan terms, which include interestrates, fees, repayment period and repayment frequency, should bedesigned such that the MFI reaches operational and financialsustainability. The HILP should strive to strike a balance betweenpricing loans competitively and ensuring that all sustainability goalscan be achieved under the proposed loan terms.

26 CHF International

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Determine Loan Amounts.

From the cost of home improvements, clients’ capacity to pay, and loanterms, the MFI should be able to determine what types ofimprovements the borrower can afford. To calculate affordability, theMFI should conduct the following two-step process.

• Conduct a sensitivity analysis for each improvement solving for themonthly loan amount with the repayment period as variable. Anadditional sensitivity analysis can be conducted with the interest rateas a variable if the MFI wants to assess the marginal costs ofincluding technical assistance.

• Compare the different monthly loan payment amounts with the targetclient’s estimated capacity to repay. From this analysis, the MFI will beable to determine, for each improvement, the percentage of potentialclients who will be able to afford a loan, and under what terms. Asstated earlier in this Guide, CHF International recommends that themonthly home improvement loan payment should not exceed 25%of the household monthly income and that the total monthlyhousehold debt burden, including the home improvement loan,should not exceed 40% of the monthly household income.

For example, assume that 37% (calculated on a declining basis) is thesustainability interest rate with full technical assistance, 34% is thesustainability interest rate with minimal technical assistance, and32% is the sustainability interest rate without technical assistance.For this example, the average debt burden is assumed to be 18% ofmonthly income. The allowable average monthly payment can beestimated to be 22% of monthly income (40%–18%). Table 5 showsa sensitivity analysis for the affordability of a variety of improvements.

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The Sensitivity Analysis for Affordabilty (Table 5, on the followingpage) can help the MFI estimate income thresholds for the anticipatedhome improvements. The MFI should then be able to match thisestimation of affordability levels to the income information collectedthrough the client survey. The results of that analysis should yield abasic estimate of potential demand for various loan sizes.

If the proposed improvements are not affordable to the majority ofclients, it may be necessary to divide a home improvement into smallerprojects in order to increase client affordability. In addition, the MFImay want to provide smaller shorter-term loans to first time borrowersuntil the borrower establishes a credit history.

Size of the Market

In addition to determining potential demand, the MFI must establishthat there is sufficient demand for the program to be sustainable. If themarket for an HILP is small, the program will have to determine howit will reach sustainability. From the survey sample and using officialpopulation, income and business statistics, the MFI should be able toextrapolate an estimate of total potential client demand.

28 CHF International

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29So, You Want to Do Housing Microfinance?

Table 5Sensitivity Analysis for Affordability3

(Interest rates simplified for purpose of example)

Cost

ofIm

prov

e-m

ent

Inte

rest

Mon

thly

Paym

ent

18 Mon

ths

Min

imum

Inco

me

Mon

thly

Paym

ent

24 Mon

ths

Min

imum

Inco

me

Mon

thly

Paym

ent

36 mon

ths

Min

imum

Inco

me

Roof

Latr

ine

Sani

tary

Floo

rRo

omAd

ditio

nN

ewCo

reHo

me

$200

$120

$150

$400

$850

30%

30%

30%

30%

30%

$13.

93$8

.36

$10.

45$2

7.87

$59.

22

$63.

34$3

8.00

$47.

50$1

26.6

7$2

68.1

8

$11.

18$6

.71

$8.3

9$2

2.37

$47.

53

$50.

83$3

0.50

$38.

12$1

01.6

6$2

16.0

3

$8.4

9$5

.09

$6.3

7$1

6.98

$36.

08

$38.

59$2

3.16

$28.

94$7

7.18

$164

.02

HIL

PW

ith

No

Tech

nica

lAss

ista

nce

Cost

ofIm

prov

e-m

ent

Inte

rest

Mon

thly

Paym

ent

18 Mon

ths

Min

imum

Inco

me

Mon

thly

Paym

ent

24 Mon

ths

Min

imum

Inco

me

Mon

thly

Paym

ent

36 mon

ths

Min

imum

Inco

me

Roof

Latr

ine

Sani

tary

Floo

rRo

omAd

ditio

nN

ewCo

reHo

me

$200

$120

$150

$400

$850

34%

34%

34%

34%

34%

$14.

34$8

.60

$10.

75$2

8.68

$60.

93

$65.

17$3

9.10

$48.

88$1

30.3

4$2

76.9

8

$11.

60$6

.96

$8.7

0$2

3.20

$49.

29

$52.

72$3

1.63

$39.

54$1

05.4

4$2

24.0

6

$8.9

3$5

.36

$6.7

0$1

7.87

$37.

97

$40.

61$2

4.37

$30.

46$8

1.22

$172

.60

HIL

PW

ith

No

Tech

nica

lAss

ista

nce

Cost

ofIm

prov

e-m

ent

Inte

rest

Mon

thly

Paym

ent

18 Mon

ths

Min

imum

Inco

me

Mon

thly

Paym

ent

24 Mon

ths

Min

imum

Inco

me

Mon

thly

Paym

ent

36 mon

ths

Min

imum

Inco

me

Roof

Latr

ine

Sani

tary

Floo

rRo

omAd

ditio

nN

ewCo

reHo

me

$200

$120

$150

$400

$850

38%

38%

38%

38%

38%

$14.

75$8

.85

$11.

06$2

9.49

$62.

68

$67.

03$4

0.22

$50.

28$1

34.7

0$2

84.8

9

$12.

02$7

.21

$90.

02$2

4.05

$51.

10

$54.

65$3

2.79

$40.

99$1

09.3

0$2

32.2

5

$9.3

9$5

.63

$7.0

4$1

8.78

$39.

91

$42.

68$2

5.61

$32.

01$8

5.36

$181

.40

HIL

PW

ith

No

Tech

nica

lAss

ista

nce

3 From notes by Franck Daphnis, CHF International; Housing Microfinance course, EconomicInstitute, University of Colorado, Boulder, July 2000.

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C. The Microfinance Institution (MFI)

This section outlines the key institutional issues that MFIs, ororganizations that are considering partnering with an MFI to managean HILP, should assess when considering implementing an HILP. Theinformation gathered during this component of the assessment willhelp determine whether the MFI has the institutional capability andresolve to operate an HILP. Even if potential demand can beestablished, some MFIs may decide that the organizational changesrequired in implementing an HILP may not be prudent or worthwhile,depending on the MFI’s mission, implementation methodology, and/oravailable operational and financial resources. The InstitutionalChecklist in Section VII of this Guide provides a list of questions thatthe MFI can use in determining the impact and the OrganizationalAssessment Guide (also in Section VII) provides a suggested outlinefor the final assessment.

An MFI does not have to be fully financially sustainable before addingan HILP. CHF International recommends, however, that the MFIdevelop a business plan that outlines its goals for achieving financialviability. Further, the MFI should have the following systems in placebefore considering adding a home improvement loan program to itsproduct line:

• High performance loan program model(s) with well-definedmethodologies;

• Strong management, financial, monitoring and support systems;and,

• Mechanisms for cost recovery and cost management.

30 CHF International

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MFI Assessment Step 1: Consider Impact of the HILP onthe MFI’s Mission

Because of the differences between the HILP and other microfinanceprograms, the MFI should assess the impact of the HILP on itsexisting mission and operational philosophy. The MFI should assesstwo fundamental questions:

Is an HILP consistent with the MFI’s mission? If the MFI’s missionstatement is narrowly defined—for instance if it promotes women-owned businesses or it clearly excludes lending for habitat—the MFImay want to conduct a self-assessment of its mandate, goals andobjectives. It is CHF International’s position that if the MFI’s missionis to provide access to credit for the poor, then an HILP is a naturalextension of that mission. If the MFI decides to implement an HILPit should ensure that its Board of Directors and staff understand theconnections between the MFI’s mission (and resulting activities) andthe HILP.

Is an HILP something on which the MFI wants to act? There areopportunity costs to operating an HILP. In the face of limited financialand operational resources, there may be a better complement to theMFI’s current service offerings than an HILP. There may also be aservice more closely aligned with the MFI’s core competencies, even ifan HILP is consistent with the organization’s mission. Further, anHILP could dilute the MFI’s brand name. If the MFI has establishedits reputation as a provider of business development credit, an HILPcould weaken the public’s association of the MFI with that service.The MFI should fully understand its rationale for- -implementing anHILP and carry over that understanding into its marketing strategy.

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MFI Assessment Step 2: Consider Impact of the HILP onthe MFI’s Lending Methodology

The HILP has a distinct methodology, which may or may not becompatible with the MFI’s existing lending methodology or clientbase. Specifically, the MFI will need to assess whether the HILP exertsthe following impacts on its overall lending operations.

Is an HILP compatible with the MFI’s existing lending methodology?Areas in which the HILP lending methodology may differ from othermicrofinance lending methodologies include:

• Client Qualification Criteria and Process. Eligibility is based oncurrent income and debt levels, land security, and proposed loan use.

• Individual Loans. Loans are typically disbursed on individual basis asopposed to groups.

• Technical Assistance. Technical assistance may be necessary to helpdetermine loan amount, monitor loan use and provide constructionoversight.

• Disbursement Process. Under certain circumstances, multipledisbursements are tied to technical compliance.

• Loan Security. Loans should be secured by guarantors or by collateral.

As a consequence, an HILP may require significant changes to theMFI’s current lending methodology. For example, a village bank orgroup loan program may have to develop internal systems andcapabilities to assess risk on a non-solidarity basis. The program alsomay have to create policies and procedures to link the technicalassistance component to the lending component. In addition, if theterms and/or loan amounts of the HILP are different from the existingloan products, the MFI will need to determine how it will preventclients from substituting one loan product for another.

32 CHF International

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How will the HILP affect the MFI’s client base? The HILP is designedto serve a broad spectrum of the working poor; HILP clients are notnecessarily microentrepreneurs. The clientele is a potentially broaderand/or different population than the MFI’s current client base. TheMFI should determine if it would offer home improvement loans to itsexisting clients or to an expanded clientele. If the MFI plans to offerthe service to an expanded clientele, it will need to assess the impact ofthe HILP on its existing client base and how it will manage that impact.

MFI Assessment Step 3: Determine the Impact of theHILP on the MFI’s Existing Management Structure

Even if the HILP is compatible with the MFI’s mission andmethodology, the MFI will need to determine if it has the capacity tomanage an HILP. Pertinent questions include:

How will the HILP be integrated into the MFI’s existing operations?The MFI will need to determine how it will offer the HILP. Will itintegrate the HILP as a retention mechanism for long-term clients orwill the service be open to its entire clientele on a stand-alone basis?This decision will affect staffing and operating costs as well as thesustainability of the program.

How will the MFI integrate and maintain a technical assistancecomponent into its lending operations? The MFI will need to determineif and how it will link the technical assistance component to its lendingoperations. Technical assistance can be provided at three main pointsin the loan process: during the application review, the disbursement,and the follow up to determine completion of the improvement. TheMFI can decide to provide this service itself or to contract the servicefrom an outside party.

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To determine whether it makes sense for the MFI to provide thetechnical assistance in-house or to subcontract it to an outside party,the MFI will need to assess:

• How the technical assistance will be delivered;

• How the MFI will monitor and evaluate the technical assistance; and,

• How the MFI will recover the cost of providing these services.

If the HILP is expected to contribute to a significant portion of the MFI’soutstanding loan portfolio (25% of more), or if the MFI is relativelyyoung, it may make sense to develop the capacity to -provide technicalassistance in-house. If the HILP will comprise a relatively small portionof the financial services provided or of the portfolio, or if the MFI’sestablished culture will make it difficult to graft a technical assistanceunit, contracting with an outside party may be the preferred option.

Are the current management structure and staff capabilities adequate tomanage the HILP? The MFI must determine the capability ofmanagement and staff to operate an HILP. Most likely, the MFI willneed to train staff on the home improvement lending methodology.Training should address analyzing repayment capacity, -assessingimprovement costs, constructing budgets, completing site visits, anddiscussing with clients their home improvement projects.

In addition, managers will have to oversee the technical assistancecomponent. They will need to determine how they will handletechnical noncompliance for borrowers who do not complete theirimprovements. Staff incentive programs may also need to be adjustedto -accommodate for the technical assistance component.

34 CHF International

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If the HILP will be integrated into the MFI’s current service offering,the MFI will need to determine whether the credit officers will begeneralists who can handle home improvement loans in addition toexisting loan products, or whether they will specialize in a specific loantype. As the role of credit officers in an HILP mirrors that of creditofficers for other microfinance products, the MFI does not necessarilyneed to have specialized HILP credit officers. The exception may bevillage banks and similar programs where the credit officers may nothave experience in assessing individual repayment capacity andevaluating collateral. In these cases, the differences between the HILPand existing loan service methodologies may be so great, that it may bemore efficient to have specialized HILP credit officers. Regardless ofwhether the MFI chooses to have generalists or specialists as HILPloan officers, the MFI should have specialized technical assistanceofficers with a background in construction if technical assistance isoffered in-house.

How will the HILP affect the MFI’s management information system,and accounting and reporting systems? The MFI’s portfoliomanagement information system (MIS) will need to be able to handledifferent loan services, including potentially different interest rates andloan terms. The MIS also may need to be able to distinguish amongthe different loan services to allow for better portfolio managementand to track technical assistance issues related to the HILP. CHFInternational’s experience suggests that the MFI should not need tointroduce large-scale changes to its MIS when implementing an HILP.A complementary database can be designed to track the number and type of improvements if necessary.

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With respect to financial accounting, the MIS will need to be able todistribute costs among the different loan services to ensure that theloan services are priced accurately and administered efficiently. Interms of impact reporting, the MFI may need to track the number ofcompleted improvements and the types of improvements financed.Again, this can be accomplished through a separate database shouldthe cost of overhauling the MFI’s existing MIS prove to be -prohibitive.

MFI Assessment Step 4: Determine the costs of the HILPand how those costs will affect the MFI

The MFI should determine the costs of operating the HILP and howthese costs will impact the MFI. When assessing costs, the MFIshould address the questions provided below.

What additional staff will need to be hired if an HILP is added to theMFI’s operations? The MFI may need to hire additional staff tooperate an HILP including loan officers, managers and technical staff.Technical staff may be hired on a contractual basis. For example, localconstruction workers could be contracted to carry out post-loansinspections.

How will the HILP affect operational expenses such as rent, furniture,equipment, phone, utilities, and copying? This will depend in part onhow the HILP is integrated into the existing lending operations. Ifadditional staff is hired for technical work, overhead and direct outlayswill increase proportionately.

36 CHF International

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What other costs will be associated with the HILP? Other costs that theMFI may incur in implementing an HILP include:

• Training Costs. The MFI’s management and staff will likely requiretraining on the home improvement lending methodology as well astraining on any new systems.

• Transportation. If technical assistance is provided in-house, thetransportation costs of an HILP may be higher than that of othermicrofinance services. The MFI should factor in an average of threetechnical assistance visits per loan (i.e., an initial visit to assess thehome, a follow-up visit during the construction, and a final visit toverify the completed improvement) in addition to the customarycredit visits.

• Marketing and Promotion. The MFI will need to develop a marketingcampaign to promote the HILP. The HILP promotional messagesshould be incorporated into existing marketing materials as well asinto program-specific materials. The marketing strategy may includegoing outside the MFI’s traditional distribution channels, as the HILPclient base may be different than that of the current service offering.

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MFI Assessment Step 5: Determine the HILP FinancialImpact on the MFI’s Operations

As with any other microfinance service, the MFI will need to assessthe impact of the HILP on its financial and operating sustainability.The HILP should cover all of its costs including the direct costs ofadministering the HILP and the indirect costs to the MFI formanaging the program. If the HILP is not expected to cover itsoperational and financial costs in the first few years, the MFI will need to determine how it will cover those costs. The basic financialconsiderations and benchmarks are the same for an HILP as for othermicrofinance programs.

An HILP financial analysis should include the following inputs:

Program Operating Costs

Personnel.

Personnel costs should include salaries and fringe benefits indexed toinflation and should provide for reasonable increases in salaries. Onekey difference between the HILP and typical microfinance loanprograms is accounting for technical assistance officers. CHFInternational’s rule of thumb is that for every loan officer working onthe HILP, a half-time equivalent of a technical assistance officer willbe required. The MFI should keep in mind that the number of staffpersons should not be fixed, but should change with service demand.Most sophisticated loan projection models account for this. If theprojection software does not automatically account for changes inpersonnel, these costs will have to be worked into the projections.

Furniture and Fixtures, Rent and Utilities.

The MFI will need to establish the marginal cost increase of adding anHILP to the current operations.

38 CHF International

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Loan Product

Interest Rate and Fees.

The loan product should be priced such that it meets establishedstandards for sustainability, including covering administrative costs,loan losses, cost of funds and capitalization requirements. In setting theloan price, the MFI should have a clear understanding of the effectiverate to the borrower.

Average Loan Amount.

The average loan amount should be based on the average borrower’sestimated capacity to pay, the program’s interest rate, the loanrepayment period and the borrower’s estimated average loan burden.

Average Repayment Period.

The repayment period for a stand-alone HILP should range from sixmonths to three years. The average repayment period will depend onthe affordability analysis conducted during the demand assessment.Absent a comprehensive sensitivity analysis on affordability, CHFInternational’s experience suggests the MFI should begin with anaverage repayment period of 18 months.

Grace Period.

Because the repayment capacity is based on the client’s current incomeand not on future revenues, CHF International recommends that nograce period be provided.

Repayment Rate.

Based on CHF International’s experience, the repayment rate forHILPs range from 97% to 100%. To be conservative, CHFInternational recommends estimating a 95% repayment rate.

Loan Loss Reserve.

The loan loss reserve should be based on the expected losses for theprogram. Historical loan loss rates may serve as a proxy until a betterunderstanding of the risk of this loan product is understood.

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Loan Write-Off Rate.

The write-off rate and frequency should be based on the MFI’sexisting write-off policy, as well as on bad debt estimates. Historicalwrite-off rates for the MFI’s existing products may serve as a proxyuntil a better understanding of the risk of the HILP is understood.

Loans Per Credit Officer.

CHF International’s experience suggests that for a stand-alone HILP,a loan officer should be able to manage 20 to 30 new clients a month.The MFI should keep in mind that this is an optimal target and that itmay take new loan officers time to perform at this level.

Loan Capital

Capitalization Level.

This will depend on whether it is given or if the MFI has to solve forthis variable. If the MFI knows the amount of capital available, it willneed to solve for the number of loans it can disburse, as well as theloan terms, most notably the interest rate, with the objective ofreaching operational and financial sustainability. If the available capitalis so low that sustainability projections require prohibitively high loanpricing, the MFI should consider increasing HILP capitalization orface the possibility that the HILP product may not be viable on itsown. If the MFI does not know the amount of capital available, theprojections will help determine the minimum capital required to reachtargeted sustainability levels.

Cost of Funds.

The MFI should include the “market rate” cost of funds in its loanprojections to ensure that the HILP will reach financial sustainabilityeven if it will use grant funds or concessionary loans (i.e., loans at lessthan the market rate) to capitalize the HILP. The MFI should have anidea of the current market rate cost of funds through its existing

40 CHF International

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operations. If the MFI does not know the market rate cost of funds, itmay use a proxy. Common proxies include the local inter-bank lendingrate stated in annualized terms or the local long-term CD rate statedin annualized terms.

Other Financial Factors

Inflation.

The inflation rate used for the financial analysis will depend on thecurrency in which the program will lend. If the program lends in orpegs to the loan payments in a currency other than the local currency,it should use the inflation rate of the country of the currency used or tothe currency the loans are pegged. If the program lends in the localcurrency it should use the local inflation rate.

Exchange Rate.

This is pertinent to programs that lend in one currency and borrowloan funds in another. It is difficult and not reliable to predict exchangerates with any accuracy; it is recommended that the program assumean exchange rate and make adjustments to the projection model overtime.

Financial projections can be calculated using spreadsheet software suchas Microsoft Excel or Corel Quattro Pro. Because of the level ofprogramming and financial understanding required to develop anaccurate financial projection model, CHF International recommendsthat the MFI purchase an off-the-shelf loan projection program suchas the Consultative Group to Assist the Poorest (CGAP) and Woman’sWorld Banking Business Planning and Financial Modeling system(Microfin), which is geared toward microfinance institutions.

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D. External FactorsIn addition to potential demand and the MFI’s internal capacity tomanage an HILP, the MFI should assess the key external factors—including the environment in which the HILP will be operating—which may affect its decision to incorporate an HILP into its productline. These factors include:

• Potential competition;

• Potential partnerships; and,

• Other external factors (listed below).

External Assessment Step 1: Evaluate PotentialCompetition

While home improvement lending is a relatively new development inthe microfinance field, the MFI may have numerous competitors. TheMFI should seek to identify potential competitors, their clientele, thespecifics of the loan programs, and the comparative advantages ofcompeting programs. This assessment, coupled with the demand andmarket size estimations, can help to determine potential market nichesfor the HILP.

In order to understand fully the extent of its potential competition, theMFI should seek to answer the following questions.

Are there other home improvement loan programs or similar initiativesin the area? If there are, can the HILP compete with the lending termsand conditions offered through these other programs? What is theclientele of competing programs; and if it is similar to that of the MFI,how will the MFI stimulate demand for its own product?

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Are there other microfinance programs in which the clientele may bediverting loan funds for home improvements? Many microfinanceclients “divert” their loan funds to meet their housing needs. As aconsequence, competing products may already exist in the marketplaceeven though no housing microfinance products are explicitly offered.The MFI should identify and analyze, to the extent possible, theconditions under which microfinance clients are diverting funds forhousing, and the terms under which clients find this alternative use ofloan funds to be cost effective.

Is there any housing subsidy or grant program in the area, particularlygovernment-run housing programs? These programs not only canaffect the demand for home improvement loans, they can also affectthe borrowers’ willingness to pay since clients may assume all homeimprovements should be subsidized or free. In areas where subsidyprograms are widespread and sustainable, an HILP may not becompetitive.

The existence of housing subsidy programs does not mean that a homeimprovement loan program should not be implemented. In many cases,subsidy programs are not widespread due to limited capital and poormanagement; as a result, there may be unmet demand for housingfinance services that the HILP could address. If a housing subsidyprogram exists, the MFI will need to educate the clients on thedifference between the HILP and the subsidy program to ensure thatclients understand their contractual obligations.

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External Assessment Step 2: Evaluate PotentialPartnerships with Other Institutions

In addition to evaluating the competition, the MFI should investigateopportunities for collaboration with other local institutions, includinggovernments, banks and local nonprofit organizations. The MFI, forinstance, could work with a municipal government to extend homeimprovement loans to connect houses to a newly installed sewer system.4

Banks also can be effective partners in implementing an HILP. Banks’involvement can range from allowing clients to make repayments atbank branches, to convincing the banks to contribute capital to theloan fund.

If the MFI determines that it wants to develop an HILP, but hasestablished that it is not cost effective to provide the required technicalassistance, it may want to subcontract with another organization toprovide technical assistance services. In such a case, the partner organizationshould have a strong background in construction oversight and havethe experience in working with the targeted clientele.

External Assessment Step 3: Evaluate Other External Factors

In addition to evaluating other institutions, the MFI should assessother factors that may impact the HILP such as political stability andmacroeconomic conditions. General macroeconomic conditions such ascurrency fluctuations, inflation, employment and economic growth canaffect the success of an HILP. Instability in any one of these areascould impact the repayment capacity of the borrower and the financialviability of the HILP.

44 CHF International

4 When partnering with the government, CHF International strongly recommendsthat the actual supervision of loan officers be vested in the MFI and not thegovernment entity.

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VI. ConclusionHousing microfinance can be a powerful tool to help MFIs respond tothe changing needs of their clients, improve client retention, broadenthe client base, and help diversify portfolio risk. CHF International’sexperience finds that strong demand exists for a wide range of housingproducts. This demand also is seen in the work by Grameen Bank inBangladesh, Sewa Bank in India, Calpia in El Salvador and ADEMIin the Dominican Republic. These MFIs observed that their clientswere diverting loan funds earmarked for enterprise developmenttowards home improvements.

CHF International’s HILP is a housing microfinance product designedto be offered on a “stand-alone” basis in addition to an MFI’s othermicrofinance products. As such, the home improvement loan does notrely on prior credit history with the MFI as a proxy for capacity to pay.The eligibility criteria, loan terms and loan uses are designed to qualifypotential borrowers on the merits of their current financial profile andestablished habitat needs, independently of their existing relationshipwith the MFI. The HILP differs from other microfinance products interms of technical assistance requirements, impact, and follow up.Because of these differences, an MFI should assess the impact of anHILP on its mission, methodology and available financial resources.

CHF International designed the preceding steps and related questions asa framework for an MFI to determine the viability of adding an HILPto its product line. With the framework and tools provided, an MFI willhave a basis for determining the feasibility of implementing an HILP.

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In completing the home improvement lending assessment the MFIwill accomplish the following:

• Understand the home improvement lending methodology and howit compares with other microfinance methodologies;

• Determine the potential demand for home improvement loans;

• Realize the institutional implications of incorporating an HILP;and,

• Assess the external factors that may affect the MFI in implementingan HILP.

This assessment is only the first step in implementing an HILP. If theMFI decides to proceed with a home improvement loan program, itwill need to design the loan service and develop operational andmarketing strategies. These steps include:

• Researching the technical norms and methods of home construction;

• Developing program goals and objectives;

• Developing and designing the home improvement loan service;

• Calculating financial projections;

• Developing an implementation strategy and work plan for theHILP;

• Identifying and securing program funding;

• Determining staffing requirements;

• Hiring and training staff;

• Establishing program policies and procedures; and,

• Creating and implementing a promotional strategy.

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IV. Feasibility Assessment Tools5

CHF International has developed several tools to assist in the HILPfeasibility -assessment. The tools, which are included in this section,can be divided into three categories:

1. Information gathering tools (the Sample Client Survey, InstitutionalChecklist, and Cost Estimation Form);

2. Analysis tools (Affordability Analysis); and

3. Reporting tools (Feasibility Assessment Report Outline).

CHF International designed these tools to be as flexible as possible tobe used in most settings. CHF International encourages individualMFIs to customize the tools to fit their programs and local conditions.

Tool A: Sample Client Survey (page 49)

This sample survey can be used to help determine the potential client’sdemand for home improvement loans, repayment capacity, and otherrelevant information. The questions in this survey should enable theuser to assess/calculate the following.

• Estimation of average household expenses.

• Estimation of average household savings.

• Estimation of household income. (Based on its experience, CHFInternational has found that adding expense and savings provides a less distortedestimation of household income than questions that ask forhousehold income. Clients tend to overstate or understate theirincome level based on whether they perceive the survey to lead to a loan or a subsidy program.)

• Source of income. (This is important if income is seasonal.)

47So, You Want to Do Housing Microfinance?

5 Preliminary versions of some of the tools included in this manual were initiallydeveloped during housing finance assessments CHF International conducted forPLAN International between 1997 and 1999.

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• Estimation of improvements desired and the condition of theexisting housing. (This will assist in the establishing program need.)

• Overview of household composition—both family size and how thehouse is constructed.

Tool B: Sample Cost Estimation Form for Home Improvements

(page 53)

This tool provides a format for determining the cost estimates forhome improvements. Information from this form will help indetermining the cost of improvements. An example of how to use theform is provided.

Tool C: Institutional Information Checklist (page 56)

This tool guides the user through the key issues that should beaddressed in the organizational assessment. Senior managers and creditofficers should be involved in the assessment. Information from thischecklist will help determine the organization’s capacity to implementan HILP.

Tool D: Sample Affordability Analysis (page 64)

This tool provides a guideline for calculating client loan affordability.

Tool E: HILP Feasibility Assessment Report Outline (page 67)

This tool provides a suggested outline for the final HILP feasibilityassessment report. The information for this report should come fromvarious sources including the housing stock assessment, the potentialclient baseline survey, improvement cost estimation, the institution check-list, and the external assessment of competition and other market factors.

48 CHF International

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Tool A: Sample Client Survey

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Sample Client Survey

Families in your house (Number)

Adults (Number) Children (Number) Total (Number)

Contributing to family income (Number)

Name Type of Work Employed Income/Period

nn Full Time nn Part Time /nn Full Time nn Part Time /nn Full Time nn Part Time /nn Full Time nn Part Time /nn Full Time nn Part Time /

Typical Family Spending? Example $5 / day

Food / Clothing /

Education / Transportation /

Health / Payments? /

Savings / Rent /

Electricity / Water /

Recreation / Other /

Additional major expenses in the last year?

nn Marriage $ nn Funeral $ nn Health $ nn Education $

nn Other (list) $

Average monthly savings $

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loan(s) from friend or relative nn No nn Yes

List terms

Other existing loans? nn No nn Yes

Monthly payments $

Down payment $

Organizations offering credit in your community

Habitable rooms in your house (Number – Do not count kitchen & bath)

House construction

Walls nn Block nn Mud nn Brick nn Wood

nn Other (List)

Roof nn GI Sheets nn Tile nn Straw nn Plastic

nn Other (List)

Floor nn Cement nn Tiles nn Mud nn Wood

nn Other (List)

Floor nn Latrine nn Toilet nn Septic tank nn None

Kitchen nn Inside house nn Outside/open nn Outside/closed nn Independent

nn Other

Water nn Inside house nn Public Line nn Common Faucet nn Well nn Nothing

Heat/cooking nn Wood stove nn Gas stove nn Electric

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What improvements have you made to you house in the last year?

nn Built new house $ nn Built Kitchen $ nn Repair/Replace Roof $

nn Paint/Plaster $ nn Built Latrine $ nn Repair/Replace Floor $

nn Room Addition $

nn Other (List) $

Money Spent From nn Savings nn Remittances nn Private credit

nn Bank credit nn Gift nn Friends/Family nn Other (List)

House improvements you would make to your house if you had $250,.**Average loan amount

nn Build new house nn New kitchen nn Repair roof nn Cement floor

nn Paint/Plaster nn Build a latrine nn Addition

nn Other (List)

Other forms of income?

Other Information

52 CHF International

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Tool B: Sample Cost Estimation Form for Home Improvements

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54 CHF International

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55So, You Want to Do Housing Microfinance?

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Tool C: Institutional Information Checklist

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57So, You Want to Do Housing Microfinance?

Institutional Information Yes No Other/In Progress

I. GOVERNANCE & MANAGEMENT

A. Mission Statement: Does the organization’smission statement allow for the provision ofmicrofinance services?

If yes, then the inclusion of an HILP should beconsistent with the interpretation of that mission.

If no, then the MFI may have to work with itsboard and staff and evaluate the mission, or theinterpretation of the mission, and/or clarify theconnection between microfinance and housing.

B. Governance: Does the board and seniormanagement have the capacity to lead, mobilizeresources and actively monitor operations of anHILP in addition to the organization’s currentoperations?

If no, this may impact the organization’s ability toachieve its goals and objectives for implementingan HILP

C. Board Composition: Does the board have amixture of skills and representation includingfinancial services, legal, fundraising, communitydevelopment and housing to support the directionthat the MFI wants to take?

If the HILP is to be a major component of the MFI,the board composition may have to change tosupport this program.

© 2001 CHF International

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58 CHF International

Institutional Information Yes No Other/In Progress

D. Business Plan: The organization has a businessplan that accounts for new product developmentin addition to establishing quantitative targets, afinancing plan for financial sustainability and astrategy for institutional strengthening.

If yes, is the addition of an HILP consistent withthe business plan?

If no, the organization should develop a plan thatdefines its long-term goals and its strategy toachieve those goals.

E. Operating Procedures: Operating proceduresare standardized, the organization has writtenpolicies and procedures and staff is familiar withthose policies and procedures.

If no, MFI should consider standardizing itscurrent policies and procedures in light of thedevelopment of potentially different product thatmay have its own policies and procedures toprevent staff confusion and more efficientoperations.

II. NEW PRODUCT DEVELOPMENT

A. Purpose of Pursuing an HILP:

1. Retain existing clients?

2. Diversify Risk?

3. Address need for housing finance?

This will have an impact on whether or not toprovide technical assistance and on programdesign. If the answer is number one, thentechnical assistance may not be as necessary.If the answer is number three, the provision oftechnical assistance may be more critical.

© 2001 CHF International

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59So, You Want to Do Housing Microfinance?

Institutional Information Yes No Other/In Progress

B. Program Constraints: What will be theconstraints on the proposed HILP, if any:

1. Number of clients?

2. Funding?

3. Other?

The constraints will have an impact on the size of the program and, in turn, its impact andsustainability. For example, if the program will only be eligible to existing long term clients this will have an impact on the number of clients served.

C. Current Demand: Demand for the currentproducts offered is high and the MFI able to meetthat demand.

If demand for the current products is high but theMFI is barely meeting that demand, does it makesense to introduce a new product and why?If there is high demand and the MFI is able to meet that demand, how will it manage anadditional product?

If there is limited demand for the current products,will the new product enhance current demand?

III. LENDING METHODOLOGY

A. Individual Lending Experience: Does the MFIhave experience providing individual loans?

If no, staff may need to be trained on individuallending methodologies, as well as new systems for qualifying borrowers and assessments on collateral.

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60 CHF International

Institutional Information Yes No Other/In Progress

B. Individual Lending Methodology: If the MFIhas experience in individual lending the followingfactors should be assessed:

1. Guarantees: What types of guarantees are used?Are the current guarantee mechanisms sufficientto cover relatively larger loan amounts?

If not, the MFI may need to assess how it willsafeguard against its increased exposure to risk.

2. Client Qualification Criteria: Is client repaymentcapacity based on current income?

If the current guarantees are not sufficient, theMFI will have to develop different clientqualification criteria which may have an impact onthe type of clients served.

3. Delinquency management is tightly enforced:There are set procedures for late payment follow-up; incentives and sanctions appear to beeffective; and late payments are minimal.

If not, these systems should be established andtested before adding a new loan product.

C. Non-Financial Services: Does the MFI providenon-financial services to its clientele?

If no, the MFI will need to determine how it willintegrate technical assistance into its HILP as wellas measuring the cost of that service into the costof the HILP loan.

If yes, the MFI will need to assess what changes,if any it will have to make to its current systems.

D. Evaluation and Compensation: Are work plansclear? Are performance standards, evaluationsystems and rewards operational and tied to thebusiness plan? Are they perceived as fair?

If not, this may have an impact on staff’s abilityand willingness to take on a new product.

© 2001 CHF International

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61So, You Want to Do Housing Microfinance?

Institutional Information Yes No Other/In Progress

D. Market Orientation: Is the MFI responsive toclient demand? Do changes in client demand lead to product innovation?

If no, how will the program ensure that it will be able to compete in an increasingly competitive market?

IV. HUMAN RESOURCES

A. Target Efficiency Level: Are loan officers at thetarget efficiency level (e.g., number of active loansper loan officer)?

If yes, the MFI may have to hire additional loanofficers to administer the new program.

If no, the MFI should investigate why its loan officershave not been able to reach the target efficiencylevel, whether they can handle the new loan and ifthey have the qualifications to be loan officers.

B. Loan Officer Flexibility: Do loan officers handleall loan products (versus specializing in differentloan products)?

This will have an impact on how the program isadministered and potentially on staff training needs

C. Staff Retention: Does the MFI have a good trackrecord in finding and retaining staff?

If no, this may have an impact on the MFI’s abilityto hire people to administer the HILP includingmore technical staff for the technical assistance.

D. Evaluation and Compensation: Are work plansclear? Are performance standards, evaluationsystems and rewards operational and tied to thebusiness plan? Are they perceived as fair?

If not, this may have an impact on staff’s abilityand willingness to take on a new product.

© 2001 CHF International

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62 CHF International

Institutional Information Yes No Other/In Progress

E. Core Staff: Have capable core staff beenrecruited and trained and are they fulfilling theirresponsibilities in the areas of operations, financialmanagement, management information systems,and marketing/product development?

If not, the transition of adding an HILP may be impeded.

V. MANAGEMENT SYSTEMS

A. Management of Information: Are managementinformation systems appropriate and adequate tooperations and are they in line with level ofcomplexity of lending methodology? Does the MISallow for the addition of new loan products?

B. Financial & Portfolio Management: Areaccounting, financial, cash and portfoliomanagement systems operational and do they result in tight financial control?

1. Are financial statements are produced and auditedat least annually?

2. Are cash flows projected, liquidity problemsavoided and idle cash minimal?

3. Are delinquency and default closely monitored andtightly managed; appropriate loan loss provisionand write-off policies are in place and properlyimplemented?

If not, adding a new loan product may make itmore difficult to maintain financial control of theMFI’s activities and may impede the smoothtransition of adding an HILP.

© 2001 CHF International

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63So, You Want to Do Housing Microfinance?

Institutional Information Yes No Other/In Progress

C. Financial and Program Planning: Is financialand program planning systematic and tied to thebusiness plan?

1. Is a three to five year financial forecasting model is in place and guides loan pricing andfund raising?

2. Is an annual budgeting process in place and isused to control expenses?

3. Are prices set to cover full operating and financialcosts over time? Do operating plan expressmeasurable, realistic goals that are incorporatedinto individual work plans?

D. Financial and Program Monitoring andEvaluation: Do monitoring and evaluationsystems result in timely and accurate review ofperformance and impact? Do results guidedecision-making of board and senior managementand performance evaluation of staff?

A. Loan Capital:

1. Are sufficient sources of loan capital in place tofund expected growth?

If not, what is the MFI’s strategy to raiseadditional funds? How will the MFI raise thefunds to finance the new product?

2. Are there restrictions on the use of the funds?

If yes, do those restrictions prevent the moneyfrom being used to support an HILP?

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Institutional Information Yes No Other/In Progress

B. What are the current sources of funds andthe cost of those funds?

(This information is necessary to complete thefinancial projections.)

C. What is market rate for cost of funds?

(This information is necessary to complete thefinancial projections.)

VII. COMPETITION & PARTNERSHIPS

A. What are the potential competitors for an HILP?

1. Government Housing Programs? If yes, list:

2. Formal financial sector? If yes, list:

3. Existing MFI’s? If yes, list:

4. Other? If yes, list:

B. What are the potential partners?

1. Government Housing Programs? If yes, list:

2. Formal financial sector? If yes, list:

3. Existing MFI’s? If yes, list:

4. Other? If yes, list:

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Tool D: Sample Affordability Analysis

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AFFORDABILTY ANALYSIS1. Calculate the monthly loan payment of an average loan size. Thebest way to complete the calculations is to use a spreadsheet so you canadjust the loan terms if the initial loan product is not affordable for thetarget population.

The size of the monthly loan payment will depend on:

• Loan size

• Loan maturity

• Payment frequency

• Interest rate

2. Calculate the average monthly income of the target population usingthe information provided in the client questionnaires.

3. Check the monthly income estimate with the average monthlyoutlay (expenses and savings) of the target population. Becausepeople tend to underestimate their monthly income, the averagemonthly outlay can be an estimate of the average monthly income.The average monthly outlay may also be more accurate than themonthly income estimate if the target population has irregularincome or an income based on cycles other than monthly.

4. Add up the total debt burden of the average potential client andthen calculate the total debt ratio, using the information provided inthe client questionnaires. The total debt monthly ratio should be nomore than 40% of the average client’s monthly income.

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Sample Affordability Analysis

Total Monthly Debt Burden:

Average monthly HILP loan payment $20

Any other monthly loan payments $15

+ Any monthly savings requirements $0

= Total Monthly Debt Burden $35

Debt Burden Ratio:

Total Monthly Debt Burden $35

÷ Average Monthly Income $98

= Debt Burden Ratio (no more than 40%) .36 or 36%

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Tool E: HILP Feasibility Assessment Report Outline

This tool provides a suggested outline for the final HILP feasibilityassessment report. The information for this report should come fromvarious sources including the housing stock assessment, the potentialclient baseline survey, improvement cost estimation, the institutionchecklist, and the external assessment of competition and other market factors.

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HILP Feasibility Assessment Report Outline

I. Executive Summary

A. Assessment Purpose and ActivitiesB. FindingsC. RecommendationsD. Next Steps

II. Purpose of Report and Overview of Methodology Used

III. Overview of Organization Evaluated

A. Organization nameB. AddressC. MissionD. Years in operationE. Management and staffingF. Annual budgetG. Sources of income and percentage of total budget by category

IV. Overview of Current Loan Activities

A. Current Financial Services1. Lending methodology and process2. Eligibility requirements3. Loan purpose, size, maturity, repayment frequency4. Guarantees 5. Interest rate, fees changed and how calculated and how

compare with other MFIs and financial institutions 6. Effective interest rate charged on loans

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B. Portfolio Quality1. Current number of active clients2. Current portfolio outstanding3. Average loan amount4. Repayment rate (including how repayment rate

is calculated)5. Number, value of arrears, aging of arrears6. Write off rate

C. Outreach 1. Client characteristics2. Total number loans disbursed and value of loans made 3. Growth in number of clients over a specified time periods4. Projected growth5. Marketing strategy

D. Savings Services 1. Description of savings program2. Description of savings client outreach 3. Uses of savings by the institution

E. Non-financial Services 1. Type of services provided (e.g., business, health,

literacy, etc.)2. Delivery system (Assess how the organization integrates

non-financial services into its loan activities.) 3. Monitoring and impact assessment 4. Progress towards self-sufficiency in non-financial services

a) Cost recovery mechanismsb) Percentages of services covered by income

and subsidy

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F. Sustainability 1. Percentage of operational and financial

self-sufficiency achieved2. Operational efficiency level3. Efforts made toward financial independence including

analysis of business plans and projections and the currentoperational capacities to achieve those goals

V. Governance and Management

A. Description of Current Management Structure1. Board composition 2. Management’s capacities to support the organization’s

goals including an HILP.

B. Summary of the Business Plan1. Utilization 2. Guidance provided

C. Management and Reporting Systems 1. Description of current accounting and management

information systems and their effectiveness2. Adaptability of those systems to adding new

products/services3. Assessment of changes required for systems to adapt

to new product 4. Current reporting requirements and systems5. Assessment of changes required for reporting systems

to adapt to new product

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VI. Findings from Housing Stock Assessment and Demand Survey

A. Overview of the Housing Stock1. Housing conditions 2. Types of housing construction used

B. Improvements Needed/Demanded C. Overview of Improvement Cost Estimations

1. Costs2. Materials involved3. Construction process or methods of the proposed

improvements

VII. Affordability Analysis

A. Summary of Results from the Client Baseline Survey 1. Average monthly income2. Total debt obligation3. Types of improvements needed

B. Results of the Affordability Analysis1. Loan use, amount and terms and explanations2. Number of estimated clients who can afford the different

improvements

C. Projected Market Size

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VIII. External Analysis

A. Potential Competitors B. Potential PartnersC. Competitiveness of Proposed Product

IX. Proposed Product Design and Discussion

A. Loan UseB. Loan AmountC. Loan Repayment Period and Interest RatesD. SecurityE. Eligibility Requirements

X. Proposed Implementation Plan

A. How to integrate an HILP into MFI’s operations B. Required Changes to the Existing Operations

1. Lending procedures2. Staffing/management3. Training4. MIS 5. Marketing plan6. Projections7. Funding

C. Proposed timeline for implementation

XI. Conclusions

A. Summary of FindingsB. Next Steps

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CHF International

8601 Georgia Avenue | Suite 800

Silver Spring, MD 20910 | USA

Phone (+1) 301.587.4700 | Fax (+1) 301.587.7315

[email protected] | www.chfhq.org

ISBN 0-9708872-2-1