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HS/ISBN: (series)
ISBN:
UNITED NATIONS HUMAN SETTLEMENTS PROGRMMEP.O. Box 30030, GPO Nairobi 00100, KENYATelephone: 254-20-7623120;
Fax: 254-20-7624266/7 (Central Ofce)E-mail: [email protected]
Website:http//www.unhabitat.org
Printed in Nairobi
AGUIDET
OPREPARINGAHOUSINGFINANCESTRATE
GY
GUIDE TO PREPARING A
HOUSING FINANCE STRATEGY
A Housing Finance Strategy is a plan or deploying the resources available(and i needed increasing them) to inance the demand or housing bydierent segments o society. A Housing Finance Strategy is inluenced bynational, regional and sub-regional agendas and is linked to a wide rangeo other strategies and actors.
This guide sets out the key elements o a housing inance strategy andthe process o developing a housing inance strategy, including the studyo housing demand, identiying available resources, market orces andstrategies to accomplishing housing inance goa ls and objectives. It providesassistance or member states on how to prepare successul housing inancestrategies and action plans. It guides member states in their uture housing
inance planning and better positions themselves to meet market potentialsand address the gap between demand and supply in housing inance.
THE HUMAN SETTLEMENTS FINANCING
TOOLS AND BEST PRACTICES SERIES
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GUIDE TO PREPARING A HOUSING
FINANCE STRATEGY
Nairobi, 2009
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Te Human Settlements Financing ools and Best Practices Series
Guide to Preparing a Housing Finance Strategy
First published in Nairobi in 2009 by UN-HABIA
Copyright United Nations Human Settlements Programme Nairobi, 2008
HS/ 1070/08E
ISBN: 978-92-1-132022-0 (series)
ISBN: 978-92-1-132064-0
Disclamer
Te designations employed and the presentation o the material in this publication do notimply the expression o any opinion whatsoever on the part o the Secretariat o the United
Nations concerning the legal status o any country, territory, city or area or o its authorities, orconcerning the delimitation o its rontiers o boundaries.
Views expressed in this publication do not necessarily reect the views o the United NationsHuman Settlements Programme, the United Nations, or its Member States.
Excerpts may be reproduced without authorization, on condition that the source is indicated.
Cover photo: Xing Zhang/UN-HABIA
Acknowledgements
Director: Oyebanji Oyeyinka
Principal Editor and Manager: Xing Quan Zhang
Principal Author: Raymond Struyk
Contributors: yler Yang, Marisol Ravicz, Nadezhda Kosareva, StigJensson and John Webber
English Editor: Ingrid Uys
Design and Layout: Anne Musotsi
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And or this, we
need innovative
governance, and
local thinking and
reporting i we areto bring hope to
the urban poor.
Equally impor-
tantly, we need to
support our towns
and cities, indeed
our countries, to adopt pro-poor policies and
strategies that will obviate the need or urther
slum creation.
It is against this background, that the Human
Settlements Financing ools and Best
Practices series ocuses on the development
o know-how, knowledge and tools in human
settlements nancing, rom which Member
States can learn in delivering aordable hous-
ing to the poor.
Dr. Anna ibaijukaUnder-Secretary-General andExecutive DirectorUN-HABIA, Nairobi, 2008
Te global housing crisis, especially in the
developing world, is getting worse by the day
making the right to adequate shelter a quest
that is becoming more and more difcult to
meet, despite the targets set by the MillenniumDevelopment Goals.
Such is the rate o urbanization the inux o
people into towns and cities, and their natural
growth that the world has now reached a
point where or the rst time now, hal the
global population lives in towns and cities.
By the year 2050, six billion people two-thirds o humanity will be living in towns
and cities. And as urban centres grow, the locus
o global poverty is moving into towns and
cities, especially into the burgeoning inormal
settlements and slums, o the developing
world. In the developing world, this is hap-
pening so ast that slums are mushrooming in
what is termed the urbanization o poverty.
Tis makes it imperative that we use every
means at our disposal to ensure that we at
UN-HABIA, and our partners, keep ap-
plying ourselves to arget 11 o the Goals to
achieve signicant improvement in the lives o
at least 100 million slum dwellers, by 2020.
FOREWORD
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TablE OF COnTEnTs
FOREWORD I
LIST OF TABLES, FIGURES AND BOXES IV
PART I CONCEPT AND CONTENT 1
CHAPTER 1 WHY A STRATEGY? 3
Vritio i the Depth o Houig Fice Deveopmet 3
Wht Doe low Voume o Houig Fice Me? 6
Orgizig Houig strtegy 6
The strtegy Mut e Compreheive 7
How Wi the strtegy e Fufed? 9
Prior Coditio or Preprig strtegy 11
Thee Guideie 12
CHAPTER 2 WHAT A STRATEGY DOES 13
a Iutrtio 13
leo 16
CHAPTER 3 STRATEGY OVERVIEW 17
Techic Eemet 17
The Poitic Proce 18
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PART II TECHNICAL ANALYSIS 19
CHAPTER 4 THE DEMAND FOR HOUSING FINANCE 21
Preprig Demd Etimte 21
Cotructio Period Fice 22
acce to Houig Fice 25
CHAPTER 5 HOUSING FINANCE SUPPLY 29
The big Picture 29
Wht to ler aout Ech Type o ledig 31
addreig leder Efciecy d Rik Mgemet 34
Fudig source or leder 39
Govermet Progrm d Iititive 44
CHAPTER 6 OPTIONS FOR ADDRESSING THE GAP 55Icreig the Voume o Houig ledig 56
Icreig the Fud avie or Houig ledig 59
PART III ORGANIZING AND IMPLEMENTING A STRATEGY
DEVELOPMENT 61
CHAPTER 7 INSTITUTIONAL FRAMEWORK WHO DOES WHAT 63
Who shoud led the strtegy Preprtio? 63
Who shoud Prticipte? 64
How shoud the Techic ayi e Orgized? 65
Who shoud Py or the strtegy Deveopmet? 66
How to Determie the Recommedtio? 67
Defig the strtegy 68
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v
CHAPTER 8 THE ACTION PLAN 71
The P Competed 71
Mgig Impemettio 72
CHAPTER 9 MONITORING RESULTS 75
Demd or Houehod side 75
suppy side 77
Who Prepre the ayi d Report 78
Reviewig Reut 79
REFERENCES 81
ANNEXES 85
a. suppemet Exhiit 85
b. Etimtig the Demd or Houig Fice 103
LIST OF TABLES
1.1 Exmpe o Mortgge Fice Ihiitor d Poie
Govermet step to Reove Them
2.1 Houe acquiitio i Dr e sm i 1990
2.2 source o Fud or Dweig Cotructio
4.1 shre o Houehod Uig borrowig Fud i the Pt 12 Moth
5.1 Poie atertive Ficig source y Houig Ivetmet Type
5.2 Iutrtive Type o Iormtio to Coect o leder Requiremet orHouig lo to Idividu
5.3 net Iteret Mrgi i Itertio Comprio
5.4 seected Rik Mgemet Optio
5.5 Optio or attrctig Fud rom Cpit Mrket
or Mortgge ledig
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v
5.6 Rtig o Govermet Itervetio to Icree Homeowerhip
d attimet o Good Quity Houig
5.7 Poie Govermet Houig Fice Mrket Deveopmet actio
6.1 Chrcteriztio o Houig Fice Gp i Egypt y Teure-loctioGroup d source o Fice
6.2 seected Chege to Icreig Houig ledig
Voume d Poie Repoe
6.3 Ide or attrctig Whoee source o Fice
6.4 Exmpe o actio i Houig Fice strtegy
7.1 Exmpe o actio i Houig Fice strtegy
8.1 actio P Exmpe
9.1 Key Iormtio Item or Houehod survey
a.1 2007 Govermet Updte o seected Eemet o
the 2003 Tzi-Un Hitt P o actio
a.2 summry o Rui Federtio aorde Houig Mrket Iititivesttu o legitive Propo, Jury 2005
b.1 Iutrtive Preettio o au Houig Fice Demd i Ciro,2006
lIsT OF FIGUREs
1.1 Rtio o Outtdig Mortgge Det to GDP or seected Coutrie
1.2 Mortgge Depth v. Tot Credit Depth
1.3 Mortgge Depth v. ledig Efciecy
1.4 The Proce o strtegy Deveopmet
5.1 atertive or Commerci bk to Work i the Microfce Mrket
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v
lIsT OF bOXEs
2.1 Outie o the Tzi Houig Fice strtegy
4.1 Kowedge o the Mortgge lo i Ciro
4.2 Moie bkig Reiveted
5.1 ledig Iteret Rte Mke-up o lti americ MFI
5.2 Pricip Rik i Dweig Purche or Progreive Cotructio Fice
5.3 The Chie approch to Houig suidie
b.1 aeig Demd or Houig d Houig Fice: a Exmpe orIdoei, y Mrj Hoek-smit
b.2 aeig Demd or Houig d Houig Fice: a Exmpe orMocow d budpet, y Jze Heged et .
lIsT OF abbREVIaTIOns
ba bker aocitio
Cb Credit ureu
CGaP The Couttive Group to ait the Pooret [a MicrofceProgrm]
EsFE Europe Fud or southeter Europe
GOT Govermet o Tzi
MFI Micro Fice Ititutio
nGO no Govermet Orgiztio
PTY pymet-to-icome rtio
sME m d medium eterprie
VRM Vrie iteret rte mortgge
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PaRT I
COnCEPT anD COnTEnT
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WHY a sTRaTEGY?
Te cold reality is that in many countries
amilies who want to construct, purchase, or
improve their housing situation, are inhibited
because they cannot borrow unds. Loans thatare available are channeled to middle- and
higher-income amilies. In these countries
most amilies, especially the poor, improve
their housing only as their savings will permit
as they are unable to leverage their incomes
through loans.
Te eect o this situation, combined with
extremely low income levels, are amiliesin cities and in the countryside who live in
extremely difcult conditions characterised
by poor quality dwellings and an absence o
water and sewerage services that much o the
world takes or granted. Te rapid growth o
cities and the increasing urbanisation in the
developing world are well documented, and
it makes clear this situation can only become
worse in the years ahead unless it is addressed
(Okpala et al. 2005). In the ollowing ew
pages, the current global housing nance situ-
ation is briey highlighted and a case is made
or the use o a housing nance strategy to
overcome this severe problem.
VaRIaTIOns In THEDEPTH OF HOUsInGFInanCE DEVElOPMEnT
How restricted is the availability o housing
nance in some countries? Characterising di-
erences among countries in the development
o their housing nance systems is a challenge
because o the limitations on data and market
ragmentation and segmentation. As discussed
urther below, lending or housing in some
transition countries and many developing
countries is segmented primarily between or-mal lending - mortgage lending similar to that
in industrialised countries - and micro lending
that supports the incremental construction
and improvement o dwellings or occupancy
by households who either cannot qualiy or
or cannot access ormal mortgage loans.
Unortunately, comprehensive data on
national housing nance development are
completely lacking in many countries. Te
comparative data available are or ormal
lending, particularly the ratio o the outstand-
ing volume o mortgage loans to a countrys
GDP.
01
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Te ratio is reported or an array o countries
in Figure 1.1, using data generally around
2004. It is a rough but serviceable indicator.It is rough because it excludes: micro nance
or all kinds o housing;1 a good deal o the
nancing or rental housing which is oten
equity nanced; and, government nance or
housing unless it takes the orm o low interest
rate mortgage loans.
Te broad pattern shown in Figure 1.1 is
instructive, with expected dramatically higher
values or industrialised countries. Malaysiasratio tops 20 percent in large part due to such
lending being a long-term government prior-
ity maniest in the operation o its secondary
acility, Cagamas, and other actions.
While many countries have ratios in the 10-
15 percent range, there is a rough negative
relationship between per capita income and
mortgage market depth.
Surprisingly, the depth o mortgage lending
is not closely related to either a countrys
nancial depth or to its nancial efciency.
Tis is important because it reects the reality
that mortgage market development does not
simply ollow broad nancial market develop-
ment. Tis point is explored urther in the
ollowing paragraphs.
Figure 1.2 details mortgage lending and total
lending as a share o GDP or 11 countries
on our continents. Four o the countries that
have mortgage lending equal to 3 to 5 percent
The distortion rom exclusion o this source may be modest. For example,
data or South Arica, which has a vibrant micronance sector, show
that micro lenders in 2006 accounted or only about 2 percent o
outstanding credits. Separate data or housing loan are not available
but micro lenders are unlikely to have no more than a 2 percent share
o such loans. Honohan, P., and Beck, T. (2007). Making Finance Work
or Arica. Washington, DC: World Bank.
o GDP have approximately the same total
credit to GDP ratio as our countries or whom
mortgage lending is equal to 10 to 14 percento GDP. Further, in Brazil, where mortgage
lending is equal to 5 percent o GDP, total
credit equals almost 100 percent o GDP. By
contrast, in Jordan the mortgage to GDP ratio
is more than double that o Brazil - 11 percent
in Jordan, but total credit to GDP is slightly
below Brazils level - 92 percent in Jordan.
Similarly, Figure 1.3 shows that the depth o
a countrys mortgage market is not stronglyrelated to its nancial market efciency (as
measured by the spread between the bank-
ing systems lending and borrowing rates).
Te three countries with an approximately 4
percent mortgage to GDP ratio have almost
the same lending rate spread as our countries
with a 10 to 14 percent mortgage to GDP
ratio. Further, Croatia and China have almost
the same mortgage to GDP ratio but Chinaslending spread is less than 4 percentage points
whereas Croatias is 10 points.
Finally, Croatia and Columbia have almost
double the mortgage to GDP ratio as Slovenia,
the Slovak Republic and Poland but also have
much higher lending rate spreads.
Why is this? Mortgage depth can be much
more strongly inuenced by government
housing and housing nance policies than by
general nancial development. As discussed
below, well intentioned but erroneous policies
such as government imposition o interest
rate controls on mortgage lending by private
as well as public lenders to make loans aord-
able can have the eect stunting mortgage
market development even while overall nan-
cial markets mature and deepen.
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FIGURE 1.2 MORTGaGE DEPTH Vs. TOTal CREDIT DEPTH
Sources: Chiquier (2006) and World Bank World Development Indicators.
0
20
40
60
80
00
20
40
Mortgage % GDP
TotalCredit%GDP
Brazil
China
Colombia
Croatia
India
Jordan
Latvia
Mexico
Poland
Slovak Republic
Slovenia
0 2 4 6 8 0 2 4
FIGURE 1.1 RaTIO OF OUTsTanDInG MORTGaGE DEbT TO GDP In sElECTED COUnTRIEs
Source: Chiquier (2006)
Depth Residential Mortgage Markets
0%
10%
20%
30%
40%
50%
60%
70%
Usa
EU-15
Cnd
Hong-Kong
Myi
Etoni
ThindChie
ltvi
CoomiChin
Mexico
Jordn
Croti
boivi
Hungry
Morocco
Tunii
CzechRep.
brziIndi
Pond
sovki
soveni
bngdeh
IrnPeru
ageri
sudiari
PkitnGhn
DebtAs%GDP
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FIGURE 1.3 MORTGaGE DEPTH Vs. lEnDInG EFFICIEnCY
Sources: Chiquier (2006) and World Bank World Development Indicators.
-
2.0
4.0
6.0
8.0
0.0
- .0 6.0 9.0 2.0 5.0
Mortgage % GDP
lendingRatespread(%)
China
Colombia
Croatia
Jordan
Latvia
Mexico
Poland
Slovak Republic
Slovenia
is the better-o amilies. Incremental housingdevelopment carried out on a cash-only basis
is not only slow; it tends to be quite inefcient
- the tendency is to begin with poor quality
materials that need repeated replacing and
possibly to demolish when the next stage
o construction is carried out (UN-Habitat,
2005; 159). In sum, a low volume o nance
means unnecessarily poor living conditions
and extra housing costs to the poorest seg-
ments o a countrys population.
ORGanIsInG a HOUsInGFInanCE sTRaTEGY
A housing strategy is a plan or deploying
available resources (and i needs be, increas-
ing them) to nance the demand or housing
by dierent segments o society. Te purposeo a strategy is to get the most rom available
resources. Preparing and implementing a strat-
WHaT DOEs a lOW VOlUMEOF HOUsInG FInanCE MEan?
Loans or housing permit amilies to leverage
the unds to spend each month on housing so
that they can purchase a unit sooner or reach
the next level o incremental development o
their dwelling. Te same monthly payments
can go to loan repayments or they can be
saved or years until the amily can purchase
the housing unit. In economists jargon, loans
pre-empt housing demand.
Where nance is limited, housing construction
is slow, thereby driving up the price o housing
services - both rentals and units or purchase
- and this makes it even more difcult or most
amilies to save to obtain good quality hous-
ing. Critically, when housing nance is scarcethere is a denite pattern o who receives
most o the loan unds that are available: it
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egy is a task that requires broad stakeholder
involvement, a good deal o technical analysis,
and strong political leadership.
Te emphasis on stakeholder involvement and
getting the process correct is clearly evident in
the steps in the strategy development proc-
ess shown in Figure 1.4. Te process starts
by identiying the relevant stakeholders and
ensuring their active involvement, beginning
with dening the strategic objectives.
Te primary technical steps in strategy ormu-lation are, in a simplied orm, the ollowing:
Understand the broad housing situation inthe country, including basic housing qual-ity and related inrastructure conditions,the extent o preerence or home owner-ship versus renting
Determine eective housing demand byincome class and location (urban, rural) to
identiy and dene market segments andthe volume o nance required by eachsegment in the planning period (note thatbecause loan terms dier across householdswith dierent incomes, there is no simpleratio to apply to income to reach a housingnance demand estimate).
Inventory housing nance currentlyavailable - products and volumes, marketcoverage and lending policies (or example,treatment o dierent sources o incomein underwriting standards, physical access,registration requirements) by market seg-ment. Tis must include all sources - private,both ormal and micro, and government.Find out where lenders obtain their unds,and the elasticity o these sources
Determine the gap between potential de-mand and current supply or each market
segment
Prepare a plan or closing the gap that isinormed by the inormation developed inthe prior steps.
Sounds simple? As the ollowing chapters
document, it is not simple but it clearly is
doable. Te best technical analysis will be
unproductive i the nancial community,
broadly dened, and the relevant government
agencies are not ore square behind it.
Naturally, a primary question is how can the
gap be closed or the plan be ullled.
THE sTRaTEGY MUsTbE COMPREHEnsIVE
oo oten housing nance strategies address
only the requirements o ormal nance and
then only in a countrys principal cities. Such
strategies will oten omit a major share o all
households. Tis is a clear mistake.
Consider the ollowing observations over the
past decade o developing nations:
In Mexico, sel-built housing accounts orroughly hal o all new buildings.
In nine Asian countries, between 40 and95 percent o all households have no pos-sibility o acquiring a unit built by the
ormal sector, and thereore little chance oobtaining nance.
An estimated 70 percent o housing in-vestment in developing countries occurthrough progressive building and thereorewith little nance beyond householdsavings (UN-Habitat (2005), pp.70, 99,110).
Room- and unit-renters account or the
principal tenure orm or lower incomeamilies in the urban areas o a number oArican countries.
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FIGURE 1.4 OVERVIEW OF THE HOUsInG FInanCE sTRaTEGY DEVElOPMEnT PROCEss
PREPaRaTIOn
Identiy leaders o the process
Identiy stakeholders and include them in all aspects o the process
Dene work objectives and outputs
Dene the analytic program and oversee it
Analysis
Identiy housing demand segments and estimate current and expected demand in each segment
Document the current supply o housing nance, the segments o the market each services and impedi-ments to expansion in volume and market coverage
Identiy gaps between demand and supply by segment
Strategy Formulation
Identiy options or closing the demand-supply gaps
Increasing the volume o lending
Increasing the unds available or housing lending
Determine the most easible and eective options
Develop the action plan to implement the selected options
Implementation Monitoring and Evaluation
Establish monitoring arrangements
Monitoring the household side: who isreceiving ormal and inormal loans
Monitoring the supply side
Loan and borrower proles
Delinquencies and deaults
erm distribution o liabilities
Dene eedback mechanism
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Te situation is problematic in some transi-
tion countries:
In Kyrgyzstan, in the years ollowing thecollapse o the Soviet Union, over 200,000people migrated rom the countryside tothe capital, Bishkek, in search o work.Tey are living in basic dwellings mostlywithout inrastructure services but withincommunities with ormal layouts thanksto prompt action by the local government.Little nance is available or upgrading.
In some o the countries o SoutheasternEurope, the Caucuses, and Central Asia alarge share o rural households live with-out piped water or indoor toilets. Again,nancing or housing improvement isscarce.
Tese examples highlight the need or a na-
tional housing strategy to address all market
segments, where segments are dened by
household purchasing power, location, andtenure orm. o do this micro nance requires
a ull role as a source or housing lending
where needed.
Micro housing lending can and has allowed
amilies to accelerate the rate at which they
consolidate their dwellings. Micronance
Institutions make a succession o loans to
amilies constructing their homes incremen-
tally, beginning with small loans or short pe-
riods and gradually increasing the size and the
loan period as borrowers demonstrate their
ability to pay. Loan agreements are typically
simple and the emphasis is on ability to pay
rather than on pledged collateral.
echniques are available to reduce urther the
credit risks associated with such loans.
(For urther discussion, see Ferguson and
Navarrete (2003).) 2
One sometimes hears that ew Micronance
Institutions make loans or housing. In act,
estimates suggest that around 30 percent o
Micronance Institutions loans or business
purposes are diverted to incremental housing
improvements (e.g., Cain, 2007). In part the
task is to ormalse a type o lending that isalready occurring.
HOW WIll THE sTRaTEGYbE FUlFIllED?
Establish conditions so that private sector
lenders, ormal and micro nance, can extend
credit to most market segments without tak-ing undue risk.
Over the past twenty years there has been
a gradual but airly pervasive shit toward
market provision o housing. In some cases
this is due to the poor perormance o public
institutions charged with constructing hous-
ing or acting as lenders (see Chapter 5 or
more on this). But probably more important
is that in many countries governments have
helped set the necessary conditions that per-
mit private lenders to prosper and serve most
o the market.
2 In this Guide no distinction is made between licensed and unlicensed
MFIs. In part this is because o the variation in these organizations
ranging rom small, highly localized NGOs to commercial bank
subsidiariesthe diversity across countries in the legal environments
in which MFIs operate, and dierences in the degree o supervision to
which dierent classes o MFIs within a country are subject.
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10
TablE 1.1 EXaMPlEs OF MORTGaGE FInanCE InHIbITORs anD POssIblE GOVERnMEnT
sTEPs TO REsOlVE THEMProblem Possible Solution
There is a mismatch between ormal lenders under-
writing standards and many borrowers qualications.
Banks are lending only to salaried employees and
have high minimum loan sizes.
The Central Bank and the Bankers Association agree
to press or lower loan sizes and or lending to those
with less easily documented incomes. It is recognised
that this will make lending more costly and should be
refected in the interest rate charged.
Micronance Institutions are short o lendable unds
or housing. One option is larger lines o credit rom
commercial banks. Banks are concerned that the risk
o such credit lines is signicant because Micronance
Institutions are not strongly supervised. o credits
to Micronance Institutions will be reduced and the
unds should fow.
The Government moves supervisory responsibility or
Micronance Institutions rom a social ministry to the
Central Bank. The Central Bank will develop alterna-
tive standards or Micronance Institutions compared
with commercial banks but supervision will denitely
be stronger or Micronance Institutions than it is
now. The risk level perceived by commercial banks in
extending lines
It is worth spending another moment on
the governments role. Governments are in a
unique position to execute two critical unc-
tions. Te rst is to set enabling conditions
in which private lenders are able to operate
successully. Tese are discussed urther in the
next section. It is oten not a matter o an ab-
solute shortage o unds but rather the terms
used by lenders in making lending decisions.
Banks in Arica, or example, are oten quite
liquid (Honohan and Beck, 2007, pp. 74-5),
but they do not lend because they employ
archaic underwriting standards or believe
the associated risks to be too great. able 1.1
gives two o many examples o actions that
government agencies could take to promote
increased lending by banks and micro lenders.
Second, governments are in the unique posi-
tion to acilitate market development through
three channels:
Legal ramework and related supervisionor Micronance Institutions: matureMicronance Institutions need the author-ity to attract unds as depositories and they
need strong supervision to give condenceto lenders who can provide mid-term und-ing to them that is suitable or multi-yearhousing loans.
Insurance: Risk sharing between govern-ment and private lenders, with governmenttaking the risk o exceptional events, e.g.loss rates beyond ex ante careul estimates.Examples include, mortgage deault insur-ance and insurance to commercial banks in
1.
2.
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11
extending lines o credit or housing loansto micro lenders.
Creation o acilities critical to mortgagemarket development, which are too riskyor the private sector to undertake in thecurrent stage o market development.Tese might include a secondary mortgageacility or a credit rating agency. Tey arerisky in the short-run because o the largeup-ront investment required and the rela-tively low volume o initial activity. Whensuch organisations are more mature, theycan be privatised.
Concrete examples o these actions are pre-
sented in later chapters.
In summary, a housing nance strategy
requires a clear statement o objectives, an
understanding o local conditions, a sense
o how policy and programme eatures are
linked to outcomes, and a plan or generating
and applying the resources needed to imple-ment the strategy (Mayo et al., 1986, p.198).
Dening objectives at the start o the plan-
ning process is necessary to help guide it, but
the nal objectives will be inormed by the
results o the analysis undertaken in strategy
preparation. In short, objectives setting will
be an iterative process.
PRIOR COnDITIOns FORPREPaRInG a sTRaTEGY
Te process detailed below or developing
a realistic and actionable national housing
nance strategy presumes that some unda-
mental conditions exist. Simply stated, mar-
ket conditions must be reasonably conducive
to long term housing lending to make such
an exercise worthwhile. I basic conditions
3.
are not in place, improvements to the housing
nance system will be nearly impossible.
Conditions that should be in place to acilitate
micro and ormal lending include: 3
Support or both micro and ormal lending
reasonable macroeconomic stability - highor volatile ination produces large interestrate risks; stagnate growth restricts the abil-ity o borrowers to make payments
no interest rate controls on mortgage lend-ing; they typically make lending unprot-able
well-dened and protected property rightsthrough a unctioning registration system.
Support or micro lending
Legal support and supervision orMicronance Institution operations, in-
cluding multi-level licensing based on ca-pabilities and mission o the MicronanceInstitutions; at the highest level they canbe depositories and very strong nancialstability. Te supervisory authority musthave the same competence as the centralbank (and indeed could be this agency).
sUPPORT FOR FORMal lEnDInG
no directed credit requirements rom theCentral Bank to commercial banks orhousing lending; banks will lend i suchlending is protable; orced lending istypically ineective
The necessity or the various conditions in this list has been stated
by Buckley (994), Jaee and Renaud (997), Tomlinson (2007), UN
Habitat (2005), p.55.
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no large government lending programsthat make long-term housing nance avail-able at below-market interest rates because
lenders will not want to try to competewith the cheap money and poor repaymentcollection rates
the basic legal system or lending in placeincluding a serviceable mortgage law anda unctioning, and at least moderately e-cient, oreclosure system to increase thecertainty and reduce the cost to lenders.
In the absence o these conditions, develop-
ment o a ull housing nance strategy is notadvisable. Rather, a strategic exercise ocused
squarely on these problems should be pre-
pared. When these impediments are in the
process o being resolved, a ull strategy can
be developed.
THEsE GUIDElInEs
Te ollowing presentation is ocused squarely
on increasing the volume o nance available
to all market segments in an economically
sustainable way. Tis ocus is maintained by
not explicitly covering several closely related
topics, particularly
the real side o the housing market, i.e.provision o sufciently serviced land or
housing, presence o reasonable housingconstruction standards, or an efcienthousing construction sector
broadly reviewing the current state ohousing nance development or identiy-ing which type o lender may be the most
efcient or eective in a given circumstance,i.e. savings association or commercial bank(more inormation on this topic can beound in UN-HABIA (2002) Chapter1 and UNHABIA (2005)
examining subsidies that operate outsidethe nancial system or low income house-holds to improve their housing conditions,e.g. the direct construction o rental hous-ing or this group.
Overall, the presentation consists o three
parts.Tere are two more chapters to this
rst part that give an overview o a national
housing nance strategy. Part IIs our chap-
ters detail how such a strategy is prepared on
a step-by-step basis. And Part III discusses
the development and implementation o the
Action Plan.
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02WHaT a sTRaTEGY DOEs
A housing nance strategy is important as a
device or organising and ormalising think-
ing about how to more efciently employ a
countrys housing nance resources and toexpand them. It provides a ocal point or
such thinking and results in a realistic action
plan that can be implemented over the years.
Few strategies have been published. Tis is be-
cause there are working documents or single
countries, and not a generic document that is
ormally published. It does reect the reality
that not many have been prepared, presum-ably because this is a substantial undertaking.
By contrast, numerous examples have been
published about broad advice on mortgage
sector development and strategy statements
or improving the volume and access to hous-
ing nance or a particular market segment
(or example, Chan et al. (2003), Ikejioor
(1998), Mayo, Malpessi, and Gross (1986),
Pugh (1994), Ferguson and Navarrete (2003),
Siembieda and Moreno (1997), and Mints
(2004)).
an IllUsTRaTIOn
A good way to understand a strategys util-
ity is to examine one. anzania prepared a
strategy in 2003, although it was not ormally
labeled as such (Government o anzania andUN HABIA, 2003). At the time, the basic
conditions or the development o a housing
nance system were barely met in the country.
Te strategy appropriately devoted most o its
attentionespecially in the action plantosteps that would address these undamental
impediments to system development.
Some context or the strategy is provided in
the gures in ables 2.1 and 2.2 or Dar es
Salaam. In 1990, (the latest date or which
data were available in 2003),the majority o
dwellings acquired in both the ormal and
inormal sectors were constructed by simplelaborers (undis). Units constructed by own-
ers (sometimes with hired help) accounted
or 11 percent in the ormal and 32 percent
in the inormal sectors, respectively. Only
22 percent o occupants obtained their units
by inheritance or by purchasing an existing
unita tribute to the citys rapid growth.
Only 8 percent o ormal sector units were
built using construction loans rom nan-
cial institutions, especially the government
housing bank, which accounted or only 8
percent o ormal sector units. Savings were
overwhelmingly the most common source o
construction unds, accounting or 58 percent
o all units. In interpreting these gures it is
important to know that 56 percent o house-
holds in Dar were room renters at this time
and another 17 percent were unit renters.
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TablE 2.1 HOUsE aCQUIsITIOn In DaR Es salaaM In 1990 (PERCEnT)
Mode o houe cquiitio Formal sector Inormal sector All ownersOwner constructed 2 24
Constructed by undis 56 5 54
Contractor-built --
Bought house rom previous owner 4 8
Inherited the house 9 9
Other means
Source: Government o Tanzania UN-Habitat (2003)
TablE 2.2 sOURCEs OF FUnDs FOR DWEllInG COnsTRUCTIOn (PERCEnT)
source o ud Form ector Uped ector a ower
Savings 6 56 58
Selling assets 9 5
Loan rom riends 7 4
Loan rom employer
Credit union 2
Tanzania Housing Bank 6 2 4
Unspecied 2 4 25
Source: Government o Tanzania UN-HABITAT (2003)
Loans rom the anzania Housing Bank, es-
sentially the only lender and now deunct, was
reported by only 6 percent o those construct-
ing ormal sector housing and 2 percent o
those constructing in the inormal sector.
Te strategy reports content is outlined in Box
2.1. It spent a good deal o time documenting
the existing problems in the housing sector as
well as in the provision o housing nance, and
it explains in some cases how these conditions
arose. Te report spent comparatively littleenergy on preparing estimates o potential
eective housing nance demand. Tis was
appropriate given the housing nance sectors
state o development.
Clearly the reports most important contribu-
tion has been the accurate identication o
the principal problems and the assignment o
responsibility to organisations or their reso-
lution - a real action plan. Te actions to be
taken are stated in the report as well.
Did the planning exercise make any dierence?
No ollow-up report documents the degree towhich the action plan was executed. But one
can compare the state o development o the
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housing nance system in 2007 with that o
2002 and the extent to which legal changes
called or in the action plan have been ac-complished.
Te ollowing points provide an overview o
the mid-2006 status:
Critically, macroeconomic stability hadbeen restored. Ination had droppedrom 30 percent early in the decade to 4.2percent at the end o 2005. Tis stabilitymakes long-term lending much more at-
tractive to banks.
Formal sector housing lending remainedminimal, owing primarily to worries oexcessive credit risk.
Te micro nance sectors regulatorystructure had been notably strengthenedand major Micronance Institutions wereabout to become depositories. A clearobjective o the regulatory improvementswas to make banks more willing to providemicro lenders with term loans, althoughunds had yet to start owing. Whileexplicit housing loan products had yetto be introduced, a share o loans nomi-nally or other purposes was being used orhousing construction and improvement.(Inormation rom Merrill and omlinson
(2006).)
bOX 2.1 OUTlInE OF THE TanZanIa HOUsInG FInanCE sTRaTEGY
Review o current conditions and past initiativesMacroeconomic environment, real interest rates
Housing conditions, levels o unit construction by ormal vs inormal (compliance with building codes)
History o ailed GOT active housing interventions, particularly the Tanzania Housing Bank
Financial sector reorm process and current nancial sector conditions
Formal real estate sector, including the supply o serviced land
Inormal real estate sector
General assessment o eective housing demand and a comparison o the cost o alternative housingtypes.
Supply o housing nance: assessment o current sources
Impediments to development o the housing credit system
Real side
Land occupied without titleso no ormal nance available
Registration services are problematic
Financial side
Shortcomings o the Mortgage Law, Foreclosure Law
Shallowness and inexperience o the sector
Options to increase housing lending
Action plan statement and implementation responsibilities
.
2.
.
4.
5.
6.
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able A.1 presents a more detailed status re-
view o selected legal changes called or in the
Action Plan by listing the changes called or in2003 and the relevant laws in 2007. (Tis sum-
mary draws on Rabenhorst and Butler (2007)
and inputs rom one o the authors.) Progress
has been mixed at best. Notable progress has
been achieved in three areas: (i) positioning
micro lenders to make housing loans and
obtain nance rom commercial banks; (ii)
implementation o a legal regularisation
programme or spontaneous settlements; and
(iii) making signicant progress in preparingthe way or a secondary mortgage acility. Te
rst two reorms are particularly important
because they may result in a dramatic expan-
sion o credit to households not qualiying or
bank housing nance.
While these three actions are encouraging,
one must also note that the other dozen called-
or actions listed in the table have seen littleprogress. Perhaps most damaging is the lack
o revision on key provisions in the mortgage
law. A mortgage market ask Force created
in 2006 is now working on these issues and
progress is expected.
lEssOns
Te anzania example makes three important
points:
a strategy can directly or indirectlyserve as an organising device in aconcerted eort to strengthen anddevelop a countrys housing nancesystem. Real improvements can anddo ollow. In most countries achiev-
i.
ing the kind o change called or ina strategy is challenging.
a country can develop a strategywith varying degrees o precisionthat requires varying level o re-sources. Much o the material in theollowing chapters addresses techni-cal analysis. Te limited range oborrowers served and the many othe key impediments to expandedlending will be evident with com-
paratively simple analysis. Beyondthis, better analysis is desirable;but more important is developingthe strategy collegially to attract allthe key stakeholders and obtain anagreed action plan that has a solidchance o being implemented.
strategies take time to come to reali-
sation. Key actions are oten thoserequiring changes in a nations lawor the creation o new institutions.Passing the necessary legislation istime consuming. In countries with aCivil Code legal structure, the Codeitsel may need to be modied whichis a difcult undertaking. Creationo new institutions, such as a credit
bureau or secondary market acili-ties, is a major undertaking requir-ing several years at best. Te timerequired to realize a plan shouldinorm action plan schedules andexpectations in the strategy prepara-tion process i disappointment is tobe avoided.
ii.
iii.
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1
sTRaTEGY OVERVIEW
Successul housing nance strategy develop-
ment has two co-equal elements: technical
analysis and developing support in the nan-
cial community (broadly dened), relevantgovernment agencies, and consumer-oriented
non-governmental organisaions. Tis chapter
briey outlines the two components o a
ramework or a more detailed presentation.
THE TECHnICal ElEMEnTs
Tere are ve basic technical tasks or prepar-ing a housing nance strategy.
1. Dene concrete objectives. Although this is
listed rst, and some general goals should be
dened when the project is launched, realistic
objectives will be dened on the basis o the
inormation developed in steps 2 through 5.
Tis is an interative process.
2. Identiy housing nance demand segments.
Housing aordability is dened by savings
levels (downpayments), income with which
monthly loan repayments can be made, and
loan terms. Separate estimates are or owners
and renters and or principal locations, e.g.,
the capital, other cities, and rural areas. Te
result is an estimate or each market segment
03
o the annual volume o nance required to
meet demands.
3. Document the current supply o housing -nance. Tree sets o questions are addressed:
Who gets loans rom which lenders andon what terms? What lenders practicesmay be limiting access? (Lenders includebanks, ormal non-bank institutions, andMicronance Institutions.)
What are lenders sources o unds andhow elastic are they, i.e. could they ex-
pand to meet a larger demand or doesexpansion need to be included in thestrategy?
For each type o lender, what is the e-ciency in loan origination, servicing,overall operations, and risk manage-ment?
4. Identiy the gaps between demand and sup-
ply. Tis should be done by segment and one
should identiy impediments to a greater
volume o nance in segments where demand
ar outstrips supply.
a.
b.
c.
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5. Develop creative responses to the gaps dened,
select an approach, and codiy it into an action
programme.
Tese topics are covered in Chapters 4-6.
THE POlITICal PROCEss
Without wide-based support in the nancial
community, including the Central Bank,
among consumers, and within government
agencies even the best technical analysis or ahousing nance strategy will have little eect.
Donor-led strategy eorts ace particular chal-
lenges in coalition building.
Te natural tendency will be to look rst and
oremost or leadership in government agen-
cies and the major commercial banks and
other major players in the ormal nancial
market. Tis is necessary and appropriate be-cause o the resources they command. But it is
ar rom sufcient. For a strategy to be eec-
tive it must comprehensively cover all market
segments, especially the micro-lenders serving
lower income amilies with smaller credits.
Tese lenders and consumers, represented by
Micronance Institutions and the relevant
non-governmental organisations, must as
well be ull partners in the process. Without
the ull range o participants, the strategy is
very likely to address the needs o only upper
income households in many developing
countries. Securing the kind o broad support
and buy-in essential or development and
implementation is a much greater challenge
than executing the technical analysis.
Below is a list o questions or those consider-
ing preparing a strategy. Questions that need
answers in order to structure the process andensure a successul outcome.
Who are the primary stakeholders andwhy?
Who has necessary motivation and prestigeto lead the exercise?
How can one engage the stakeholders?
How will they participate in the process?
Who prepares the strategy?
How is the strategys preparation nanced?
Ater agreement on the strategy or improve-ment, how will it be implemented? Whowill be responsible? With what resources?
Who will monitor the implementation?
Te process o motivating and organising the
strategys development and implementation isthe topic o chapters 7-9.
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PaRT II
PREPaRInG THE sTRaTEGY
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THE DEManD FOR HOUsInG FInanCE
Understanding the purchasing power - the
eective housing demand - o households is
undamental to valid housing strategy prepa-
ration. Preparing this part o the strategy ischallenging mostly because o the data require-
ments. But leaving these aside, demanding es-
timations can be mechanical exercise that alls
short o providing important insights into the
current situation and uture possibilities. Te
key step is to prepare an overview o current
conditions to orient the analysis.
CURREnT COnDITIOns
A modest number o acts can provide a clear
understanding o the basic housing conditions
in a country. Tese acts include
Te degree o urbanisation and the impor-tance o the largest 3-5 citiesthe share othe population living in ofcially dened
urban areas and the share living in the larg-est ew cities (usually there is a clear breakbetween the size o the largest 1-5 citiesand other smaller ones).
Te distribution o households in thelargest cities, other urban areas, and ruralareas among dierent tenure orms, rang-ing rom ormal home ownership to roomrenters in inormal dwellings.
Te share o dwellings in the three locationgroups that meet minimum standards interms o construction materials and provi-sion o public services.
Te growth in the number o householdsby location over the past 20 years and theorecast or the next 15-20 years.
Armed with this inormation, the results
o the demand estimates can be more intel-
ligently interpreted.
EsTIMaTInG HOUsInGDEManD
Te demand or housing nance is derivedrom households (owners and renters)
demand or housing services, and rom
the desire o owners to invest in housing as
an asset. Because owners and renters have
dierent housing objectives, the amount o
income they are willing to devote to housing
usually diers, with owners willing to spend
more. Similarly, amilies living in rural areas
generally have dierent housing requirements
and needs than their urban counterparts. Tis
leads to dierences in the share o households
who own their units and in the share o in-
come and the amount spent on expenses.
Tere is a good deal o experience in making
aordability calculations, where the loan
amount or households or dierent income
groups is based on their income and loan
terms. Tis inormation, combined with as-sumptions about downpayments, yields an
estimate o the dwelling price each particular
04
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household group can aord. Te ollowing
list determines the number o loans or which
there is demand and then the amount onancing required to meet those demands.
Annex B contains a detailed exposition on
how to make such estimates.
Steps in computing housing nance demand,
with separate estimates prepared or house-
holds who will want to own their homes and
those who will be renters:
Determine the amount o money each in-come group is prepared to spend monthlyon housing.
Estimate the average loan size each incomegroup could take, using the expenditureinormation rom the previous step.
Estimate the annual number o loans thatwill be sought, based on inormation onhousehold ormation, complex householdsthat experience a amily moving out, thenumber o households trading up to betterunits, and the number o households whowill be continuing to develop their units orupgrade their completed units.
Te product o the loan size and number oloans sought gives the overall demand esti-mate and the target or the development ocorresponding housing nance supply.
A critical attribute o the estimates discussed
above is that they cover the whole market, not
just the market or ormal nance, which is
the ocus o most housing nance demand
estimates.
As stated earlier, these calculations ideally
should be done or owner-occupied and rental
housing in each type o location where there
are systematic dierences in the purchasing
power o the households (including bothhousehold incomes and the terms on which
1.
2.
3.
4.
loans are available) or in the price o dwellings
that would qualiy or ormal nance.
Te conclusion o this analysis is an estimate o
loan volume or 2-3 years in the uture, or sev-
eral estimates that vary with the assumptions
about the extent o institutional development
achieved, o the required volume o lending
by location, tenure, and income group. Tese
are the targets that policymakers will design a
strategy to achieve.
COnsTRUCTIOnPERIOD FInanCE
Tis type o nance provides interim unds
or building. Tese loans are paid o when
units are sold to owner-occupants, with the
developer using the sale proceeds to make
the payment, or when landlords obtain per-
manent nancing or the investment portionthey do not und with equity. In act, in many
countries loans rom ormal lenders or the
ull development o multi-amily or single
amily buildings constitute a small share o
total construction nance. In the inormal sec-
tor most construction is incremental, and its
unding has already been accounted or in the
computations presented above. Additionally,
developers o ormal dwellings oten obtain
much o their construction nance through
advanced payments rom the ultimate pur-
chasers.
In most transition and developing countries,
construction period loans are oten made only
on more prestigious projects and even then
only or a minority o the total cost. Lenders
have ound it difcult to underwrite these
loans and to control payments, leaving themvulnerable to credit risk. Market assessment
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has proved challenging and many lenders have
suered signicant losses when they approved
loans at the top o a construction boom onlyto see the market collapse and loans turn sour.
Numerous lenders have released unds too
quickly compared to construction progress
and been unable to recover the unds when
the builder has decided to stop construction
or whatever reason.
It is evident that it is challenging to estimate
the volume o construction nance needed
and the amount that will actually be supplied.Many central banks do not gather separate
inormation on this kind o lending. Even
tracking recent lending levels is problematic.
In these circumstances, the best basis or de-
termining near-term uture loan levels and
what is needed to promote more o this kind
o lending, is discussions with both develop-
ers and lenders about their recent experiences,
problems o obtaining and making loans, anduture plans.
KnOWlEDGE OF THEMORTGaGE lOan
Te common assumption is that those in need
o housing nance understand housing loans,
particularly mortgages, and that they have
ready access to lenders oering these products.
Te truth is at odds with this assumption.
Large disparities have been observed between
the number o amilies who could borrow
and the number who actually do. o raise the
incidence o borrowing or home improve-
ments in many countries will require more
knowledge and better access to induce lendersto serve a wider market.
Tis section oers some inormation on
two aspects o the actual situationbasic
knowledge o mortgage loans and access by
lenders or both ormal and inormal housing
nance.
Te rst step to taking out a loan to purchase
a home to build a home is to know thatsuch loans exist and to have a rudimentary
knowledge o their main eatures. Tere is
little evidence o what consumers actually
know, particularly in developing countries.4
Te results o a recent survey conducted in
Cairo suggest that knowledge levels even
among the well-to-do are not very high (Box
4.1). Similar ndings were obtained in a
representative survey o amilies planning topurchase a dwelling in Indonesias seven larg-
est metropolitan areas (Struyk et al, 2008).5
Logically, i consumers have little knowledge
o mortgage products, they will be reluctant
to apply or a loan. It is in the interest o lend-
ers to mount an educational campaignss to
increase consumers awareness and boost loan
volumes.
4 There are marketing analyses or industrial countries o consumer
preerences or particular mortgage loan eatures, e.g., variable
rate versus xed rate mortgages. See LaCour-Little, M. (2007) The
Home Purchase Mortgage Preerences o Low- and Moderate-Income
Households, Real Estate Economics, 5, , 265-90, and other studies
cited therein.
5 No similar studies o the knowledge o housing micro nance products
have been located.
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bOX 4.1 KnOWlEDGE OF THE MORTGaGE lOan In CaIRO
The use o mortgages to purchase a house is nascent in Egypt. Clearly, the rst step in activating consumers to
take out a mortgage is or them to understand this instrument. The results reported here are rom a February
2007 survey o 504 Cairo consumers rom the middle socio-economic bracket who stated that they planned
to purchase a unit in the next three years or had purchased a unit in the previous ve years. The survey was
designed to determine their understanding and knowledge o mortgage loans and their attitude towards them.
This is not a representative sample.The ndings give the upper limit on knowledge levels.
About 5 percent o respondents reported having heard or read something in the past year about taking out
a mortgage. This is a airly high penetration rate and indicates that the concerted marketing campaigns o the
prior years were reasonably successul. O those who had heard something on the topic, close to hal stated
that they had paid close attention to the inormation or had careully considered whether a mortgage would
be a good thing. Such a high rate o close attention indicates that many in the sample population have a real
interest in the subject, as one would expect rom recent and would-be home purchasers.
Respondents demonstrated only a low to modest understanding o mortgages, as ascertained rom responses
to an open-ended question asking them to say what a mortgage is. However, respondents scored higher on
their knowledge o specic knowledge loan eatures, such as the consequences o not making payments on
time, and the maximum share o income that could be used or monthly payments according to the law.
The results o regression analysis o actual knowledge o mortgages indicate that exposure to inormation on
this instrument, and the amount o attention consumers pay to it have been key in shaping knowledge and
attitudes. The respondents socio-economic class and age, or even participation in a registration, on the other
hand, has had little bearing. The ndings highlight the important role that education campaigns and media
coverage have played in inorming the population. They also indicate that experience with home purchase
mortgages and property registration is so limited that even among households rom higher socio-economic
groups, understanding and knowledge o these instruments are not common. Both points argue or the con-
tinuation o campaigns to inorm the public.
Source: Struyk (2007)
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aCCEss TO HOUsInG FInanCE
Who can borrow and or what they can borrowis a moderately complex subject. Te discus-
sion is divided into two parts. Te rst (and
main) part covers general access to nance
in developing countries and then considers
evolving options that may well increase access
sharply. Te second part ocuses on access to
nance or rental housing or lower income
amilies, in part to emphasise this largely
neglected element among housing nance
instruments.
Overview. Because o the lack o studies on
access to housing nance due to geographic
isolation, the sel-imposed restrictions o
ormal sector lenders, and the comparatively
low incidence o micro lenders making hous-
ing loans, reliance here is on inormation on
general access to nance. Te basic picture is
available rom the gures in able 4.1 or 20transition and developing countries on the
percentage o households who took a loan
rom any source, ormal or inormal, in the
12 months preceding the survey that gathered
the inormation. Micro lenders are included
in the inormal group as are inormal money-
lenders, and rotating savings clubs. (See notes
to the table or details.)
Te unweighted mean or the percentageo households taking loans rom ormaland inormal lenders, respectively, are 6.5and 17.6 percent, i.e. inormal loans are2.7 times more common than ormal.
In seven countries, less that 5 percent ohouseholds took a loan rom a ormalsource. By contrast, only three countrieshad a low participation rate in inormalloans.
Five countries have very high rates (29 per-cent or higher) o households borrowing
rom inormal sources. Vietnam is alonein high borrowing rates rom both ormaland inormal sources.
Te overall picture is o low levels o consumer
lending by ormal lenders in these countries,
with inormal sources taking up most o the
slack.
Tree reasons stand out or low nancial
services accessibility rates, i.e. in this case, the
share o households who can readily borrow
money.
low service penetration rates, i.e.the extent to which lenders cater todierent sections o the population.
the geographic isolation o manyhouseholds rom lending branches,even in urban areas.
the unsuitability o products oered
to many amilies, including thehigh transactions costs o having asavings account.
A recent analysis examined the ormal lender
branch and AM penetration rates dened
on both geographic and demographic bases
in nearly 100 countries. (Geographic branch
penetration is the number o branches per
1,000 square kilometers; demographic pene-
tration is the number o branches per 100,000
population.) Analysis o these rates shows that
larger economies enjoy greater levels o out-
reach, suggesting scale economies in service
provision by larger nancial institutions. Te
quality o institutional support or the bank-
ing system and physical inrastructure explain
cross-country variation in outreach, e.g.
density o the road network, Finally, greater
importance o government banks is associatedwith less outreach (Beck et al. (2005), p.5).
i.
ii.
iii.
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ransactions costs are a signicant impediment to households opening accounts with ormal
lendersoten the required rst step or loan eligibility.
TablE 4.1 sHaRE OF HOUsEHOlDs UsInG bORROWInG FUnDs In THE PasT 12 MOnTHs(PERCEnT)
Coutry Tht orrowed ipt 12 moth
Tht ued ormfci ititutio
Tht ue iormfce to orrow
Armenia - - 4.5
Bosnia & Herzegovina 2.8 6.2 5.8
Botswana - .7 29.
Bulgaria 5.4 5.4 -
China (Hebei & Liaoning 28. 5.2 24.7
Cote dIvoire 2.8 .2 2.
Guatemala .8 2.5 7.4
Guyana 4.7 . 2.5
Jamaica 0.5 .9 5.9
Kyrgyz Republic 6. 0. 5.
Namibia - 5. 5.2
Nepal 57.0 2.9 50.0
Nicaragua 22.5a 7.6 7.8
Pakistan 0. . 29.4
Panama .5 0.8 0.8
Peru 6.6 2. 4.5
Romania 5.9 6.0 .4
South Arica 44.8 4.9 42.6
Swaziland - 4. 6.
Viet Nam 49. 26. 0.4
Unweighted average 2.8 6.5 7.6
Source: Claessens (2006), Table 1.
a. Includes credit purchases.
-- Not available.
Note: Formal nance providers include banks (public or private), cooperatives, and credit un-
ions. For a ew countries other nancial institutions, such as security rms and postal savings,
are also included in ormal. Inormal includes others that provide nancial services, such as
Micronance Institutions and non-governmental organisations, rotating savings and credit as-
sociations, moneylenders, pawnshops and other country- or region-specic arrangements.
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In this context, a notable success has been in
South Arica and its so-called Mzansi account,
with 3.3 million savers opening accounts inthe rst 18 months. Te account is a basic,
standardizsd debit card-based transactional
and savings account. All that is required to
open the account is a valid ID. o keep costs
down and to ensure that the account is easy
to use, transactions are limited to deposits,
withdrawals and debit card paymentsthe
account includes a debit card that can be
used at retail outlets. No management ees
are charged and one ree deposit per monthis permitted.
Mobile and cell phone banking holds the
promise o sharply increasing the share o
households with a deposit account with a
ormal nancial institution. Te need or
improved access is particularly prominent in
rural areas, but signicant areas o major cities
are underserved as well. One approach is theuse o mobile banking where the volume o
business does not justiy opening a branch o-
ce. Tere is notable positive experience with
this approach (Box 4.2).
Te promise o mobile banking or mortgage
origination has been realised by HDFC-India,
a major ormal sector lender, or a number o
years. Its agents visit villages on a regular basis
to collect deposits and take loan applications.
Tis technique has been an important element
in its overall lending strategy.
Lastly, cell phone banking is being utilised
in some places and shows promise. Certain
South Arican nancial institutions intro-
duced m-banking options rom about 2004
and marketed them strongly. An analysis o
this experience ound that by 2006 it had notresulted in a major increase in the number o
households with ormal banking relationships.
In part, this was due to substantial ignorance
about the product despite inormation
campaigns. On the other hand, the analysispoints out that since about one-third o the
unbanked have cell phones, there is reason to
anticipate expansion (Porteous, 2007).
Te uture role o inormation and commu-
nications technologies in increasing access
by the poor to banking services appears posi-
tive but a good deal o uncertainty remains.
Conclusions based on a recent survey o cur-
rent practices and the experience o 62 nan-cial institutions in developing countries with
inormation and communications technolo-
gies are that so ar not many new customers
are being attracted to these services, although
some poor households are using them. Te
protability o banks remain uncertain. 6
Rental housing. Te topic is the extent o ac-
cess o small investors to nance to developerental rooms or units. Where rentals are widely
accepted as an adequate and permanent hous-
ing solution, encouraging the development
o such housing through the availability o
nance will be an important element in a
housing nance strategy.
Tere is no inormation on the extent o either
the demand or or the supply o unds or this
purpose. Discussions about micro housing
nance lending ocus on unds or the devel-
opment or improvement o owner occupied
units. It may well be that a signicant share
o the micro small and medium enterprise
lending that is diverted to housing goes to the
construction o rental rooms or units. But the
inormation is lacking.
6 Analysis details and a list o the nancial institution respondents are in
Ivatury, G. (2006) Using Technology to Build Inclusive Finance Services.
Washington, DC: CGAP Focus Note no. 2 .
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bOX 4.2 MObIlE banKInG REInVEnTED
Kenyas Equity Bank holds a prominent position among those interested in outreach to the poor. One reason
or this is the practical reintroduction o a relatively simple technology brought up to date: the mobile bankingunit. In 2006, the bank was doubling its number o vans and expected to have 00 in operation by the end o
year. Each van is equipped with laptops that have telecommunication links to a xed branch, allowing the van
to provide a wide range o banking services. The standard schedule is or a mobile unit to visit each location
once a week. By mid-200, two-thirds o the loans outstanding were to clients served through mobile banking
units.
Source: Honohan and Beck (2007), p. 155.
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HOUsInG FInanCE sUPPlY
THE bIG PICTURE
A good starting point is to assess the market
or housing lending by understanding whichlenders are making housing loans available or
what purpose. able 5.1 illustrates this type o
classication. It is useul or identiying the
lenders rom whom inormation should be
acquired or dierent types o lending.
Te table lists six sources o nance and three
possible uses o nancepurchase o a ull
unit, incremental unit development, anddevelopment o rental housing. Financing o
rental housing is oten overlooked in housing
nance discussions, but rentals are an impor-
tant tenure orm in many countries, despite
the act that mass privatisation o ormer
State-owned housing in Eastern Europe and
the ormer Soviet Union in the 1990s created
a dozen or so super home owner states where
80 percent or more o all housing is owner-
occupied.7
7 Another source less requently employed are community unds. Such
a und is a nancial mechanism that encourages savings through
establishing and strengthening local savings groups with the und
typically used by communities or land purchase, inrastructure and
service investments, and, in some cases, housing construction. For
urther description, see UN Habitat. (2002) Financing Adequate
Shelter or All: Addressing the Housing Finance Problem in Developing
Countries. Nairobi: UN Habitat.
Te work outlined in the previous chapter will
provide a good idea o the volume o unds
required by dierent market segments over
the next several years. Here the work shits tothe supply side o the market. Te analysis in
this case is more critical than on the demand
side. In most countries it is obvious that the
unds needed to meet eective demand are
not available or, i lenders have unds, loans
are not being made available. In addition to
understanding the current lending patterns,
analysis must dig deeper to understand the
basis or the current pattern. It is quite pos-sible, or example, or lenders to believe that
they are open to serving a wide range o clients,
while not realising that their underwriting
standards or minimum loan sizes have the
eect o excluding most would-be borrowers.
Te analysis required consists o several related
activities. Overall, it is moderately complex,
and it is important or the reader to review all
the material and then to go back through it
again to be certain that he understands how
the pieces t together. A section at the end o
the chapter discusses the comparison o the
estimated demand or housing loans and the
supply o loanswhat is reerred to here as
the gap.
05
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0
As noted in the last chapter, in Dar es Salaam
over hal o all households are room renters.
Tis pattern is airly widespread in Aricawhere rental housing is generally an important
housing source (more inormation on this can
be ound, or example, in Angel (2002), Angel
and Amtapunth (1989), Homan (1991),
and Ikejioor (1998).
Non-loan sources o nance are included in
the table or good reason: in most develop-
ing countries they are the primary source o
nance, as seen above or anzania. Whilecomprehensive data are lacking, that which
is available documents this act. In 2007, in
Cairo, 77 percent o those purchasing units in
the past ve years reported using cash, i.e. not
having a loan. A similar share o Jordanians re-
ported all-cash purchases in 1983 (Struyk and
Roman (2007)). Remittances are an impor-
tant source o savings or dwelling construc-
tion or purchaseor both owner occupancyand the development o rentals as an income
source. Housing investment is particularly
attractive in countries where savings products
do not carry competitive interest rates and
other investment opportunities to the small
investor are limited. Te low share o housing
nance provided by loans underscores again
the need or urther development o the hous-
ing nance sector in these countries.
In many developing countries, installment
sales by developers are a prominent source o
dwelling purchase nance. Purchasers must
make large up-ront payments and install-
ments thereater, which the developer uses
to nance construction. Oten, as in Egypt,
installment payments continue or several
years ater the unit is completed. Occupancy
may only be permitted when 80 percent ormore o all payments due have been made and
even then the title deed remains in some cases
with the developer until all payments are
made (Struyk and Roman (2007)). Similar
arrangements are common in Russia and
other countries o the Former Soviet Union.
In some cases there have been abuses by de-
velopers delaying construction while they use
the advanced payments or other purposes.
Some developers simply disappeared withdown-payments.
In some countries, government banks or
agencies have been an important source
o housing nance. Methods used include:
direct loans; down payment subsidies, such
as those in Chile, Hungary, and Russia; loans
originated by private banks or government
lenders at below market interest rates; and, acombination o these options. Te dierent
approaches have very dierent eects on the
development o private housing nance as
described on page 30.
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1
TablE 5.1 POssIblE alTERnaTIVE FInanCInG sOURCEs bY HOUsInG InVEsTMEnT TYPE
source Ue o Fud
Purche ou uit
Icremet uitdeveopmet
Ret houigb
Market Loans
Mortgage loans rom
ormal institutions
Y N Unlikely
Micro housing nance loans Maybe Y Maybe
Developer installment sales Y N N
Loans rom employers Y Maybe N
Other sources
Savings rom overseas employment Y Y Y
Other sel-nance Y Y Y
Government programsa Y Y Y
a. Direct government lending or through private lenders
b. For construction or purchase o units or rental occupancy.
Tere may be important dierences in sourceso nance among large cities, smaller urban
areas, and rural areas. Separate analysis is typi-
cally appropriate by location type.
WHaT TO lEaRn abOUTEaCH TYPE OF lEnDInG
Te rst task is to understand loan volumes,
i.e. the volume o lending in each cell in the
upper part o able 5.1. While it is useul
to know total loans outstanding (stocks), it
is more important to receive ow data, i.e.
originations, or the most recent 1-2 years, to
understand what lender types are now most
active and which market segments are now
being served. Market segments are the
income-tenure-location groups o the type
shown in able 4.1. It is highly desirable touse the same denitions or the supply size
analysis as or the demand.
Some o the inormation needed to preparethese tables will be available rom ofcial
sources. Central banks track mortgage lend-
ing and other real estate lending o com-
mercial banks separately rom loans or other
purposes. Te regulator or micro nance
institutions may also have such data. However,
it is likely much o the inormation will have
to be gathered. Ideas or collecting this kind
o data are given below.
Te next task is to dene the products oered
by each lender or each o the three purposes
included in able 5.1. An illustration o the
inormation to be obtained or each product
or each lenderis in able 5.2. Note that the
let-hand column lists attributes o the loan
itsel, e.g. interest rates, the basis or comput-
ing the interest charge (simple interest or an
annuity loan), any additional charges or loanorigination, and so orth.
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TablE 5.2 IllUsTRaTIVE TYPEs OF InFORMaTIOn TO COllECT On lEnDER REQUIREMEnTsFOR HOUsInG lOans TO InDIVIDUals
Fici term security d Uderwritig Coditio
Loan to value ratio: ocial and in-practice maximum Registered title to property required
Payment to income ratio: ocial and in-practice
maximum
Loan lien required to be registered
Loan term: ocial and in-practice maximum Guarantors required
Type o loan: xed rate, variable rate, price-level ad-
justed, dual rate
Income denitions employed: treatment o wies in-
come, remittances; level o documentation required
Interest rate Government workers subject to relaxed underwriting
Basis or interest calculations: annuity loan or simple
interest charge
Minimum loan amount applicable
Prepayment restrictions that apply Insurance requirements applicable: property, lie, title,
mortgage deault
Particularly critical in determining i the
lender will reach lower income borrowers are:
the security requirement o the borrowerhaving a registered title to the property
the income denitions employed andwhether certain types o income are in-cluded in the income used or loan under-writing, e.g. regularly received remittances;also, the degree o documentation requiredor each income source; and
minimum loan amounts.
Tese denitions can have a powerul eect on
restricting access to loans. For example, Egypts
National Housing Plan is providing low and
moderate-income households the chance to
purchase dwellings using the combination
o signicant downpayment subsidy, the
purchasers downpayment contribution, and a
mortgage loan at a near market interest rate.
It is important or the analyst to use the
terms in use by nancial institutions or the
loan-to-value ratio, payment-to-income ratio,etc. rather than rely on the maximums listed
in internal lending guidelines. Te analyst
should determine how these elements are
combined into the products most oten sold
by the lender.
Te right column lists certain security require-
ments the lender may impose, and underwrit-
ing requirements and other conditions that
may apply. For example, the Housing Finance
Company o Uganda requires land title, the
development where the dwelling is located be
in an urban area that has all services provided,
and the dwelling be constructed o durable
materials. In South Arica, some districts
are simply redlined because oreclosures have
been high there (UN-HABIA (2005), p.99
and 70, respectively).
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o simpliy verication o income eligibil-
ity, the only acceptable applicants are those
whose income can be readily veried. Tisomits around 40 percent o all those believed
to be eligible or both the grants and loans
(Sims, 2007).
It would certainly be a mistake to think that
these restrictions are special to developing
economies. Stephens has documented a
host o restrictions among European Union
mortgage lenders, and red-lining is an ot-dis-
cussed phenomenon in the U.S. (see, respec-tively, Stepens (2004) and Avery et al. (1999)).
Further, it is likely that these restrictions will
multiply in the U.S. over the next ew years in
response to the sub-prime mortgage crisis.
As will be discussed in the next chapter, in-
ormation on the points listed in able 5.2
will be extremely valuable in thinking about
extending coverage to potential borrowerswho are now unserved.
What lending requirements should one obtain
rom lenders on loans made or rental housing?
Te nancial terms o interest are generally
the same as those or unit purchases, except
that the payment-to-income ratio will oten
not be applicable. However, the values will be
quite dierent or many items. For example,
loan-to-value ratios are much lowerseldom
over 60 percent; and, loan terms are shorter
than those or the longer home purchase
mortgages, oten only a ew years.
Te dierences o home purchase loans are
greater when it comes to loan underwriting.
One can list our distinctions that are impor-
tant to the underwriter:
Is the loan or a rental room being added tothe owners property, a room being added
1.
to a larger rental property, or or a singleamily unit?
Is the single amily unit or an elite higherincome market, including the expatriatemarket?
Is the loan or a multi-amily building ormiddle-income amilies?
Is the investor an individual or a com-pany?
I the loan is or something other thanroom construction, is it or the purchase
o an existing property or a new construc-tion?
Te oremost underwriting consideration will
always be the market analysisis their a ready
market or the unit? n other words, the key
question is whether there will be rental income
sufcient to cover the loan payments.For
small loans to individuals, the underwriting
is very similar to that or small and mediumenterprise loans. Security o title is another
constant requirement. But or new construc-
tion loans, with their extended timerames
and added uncertainties and larger multi
amily projects, other actors have to be care-
ully considered. (McCarthy (1996) discusses
residential property construction underwrit-
ing in the transition economy context.)
Te analyst should obtain inormation on
which o these various types o rental housing
a lender oers loans. For those or which loans
are made, a list o key underwriting actors
should be obtained. For those or which loans
are not made, inquiries should be made about
the reasons because these can eed into a list o
impediments that should be addressed when
drawing up a housing strategy.
2.
3.
4.
5.
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Where can the analyst obtain inormation on
loan products, underwriting standards, and
other eligibility requirements? Te answerdiers depending on the type o lender.
For ormal sector lenders, the best optionis through a survey sponsored by theCentral Bank. Central banks are otenwilling to help gather inormation this way.For example, the Central Bank o Armeniacooperated in a survey eort with a teampreparing a housing nance project or theGerman KW agency. I this is not pos-
sible, then there are two other options: atrade association, such as the local BankersAssociation, which might be willing tosurvey its members; or interviews with asample o lenders, especially with the cur-rent major players.
For non-bank nancial institutions thatare not supervised by the Central Bank,a sample o these lenders will need to beinterviewed to obtain the inormation.
Since several regulators may be involvedand the number o institutions involvedsmall, it may be more efcient to conductthe survey without investing resources innegotiating with the agencies.
For Micro Finance Institutions the situa-tion may be more complex. Te rst choiceis to solicit sponsorship o a survey by theirregulating agency. I not, then interview asample o lenders. For those that are notregulated, a survey is the only option.
Finally, because installment sales by devel-opers are typically not regulated, interviewswith them will be necessary.
Inormation on which particular market seg-
ments are being served will only be available
rom lenders themselves, probably on an im-
pressionistic basis, and/or rom a household
survey that explicitly inquires about sourceso nance or dwelling purchase and incre-
mental unit development.
aDDREssInG lEnDEREFFICIEnCY anD RIsK
ManaGEMEnTHousing aordability depends substantially
on the price o the loan, i.e. the interest rate.
While lending rates on housing are driven
substantially by the lenders cost o unds,
other actors play major roles. In particular,
poor risk management, low overall efciency,
and weak practices in housing loan origina-
tion and servicing can lead to unnecessarily
large spreads.
Tese are important topics, but they are not
the central elements in a strategy. Tey are
discussed here because o their importance,
and because the prese