Housing Micro Finance

POWERING INNOVATIONS IN MICROFINANCE conference on microfinance July 24 - 25, 2008 * Asian Development Bank, Manila, Philippines

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CONCURRENT WORKSHOP SESSIONS Friday, July 25, 2008

11:00 a.m. - 12:30 p.m. Early Experiences in Housing Microfinance

Auditorium Zone A & B

Housing microfinance cater to the financing needs and affordability of the poor in a sustainable and non-subsidized approach. The practice involves the application of microfinance principles and best practices to the provision of housing finance for home improvements, house construction as well as house/ lot acquisition. It is seen as a powerful way to improve the living conditions of the enterprising poor and the lowincome households which will contribute to better health, increased productivity and improved quality of life. This session will consist of presentations from Mr. Eduardo C. Jimenez, who was part of the Development of Poor Urban Communities Sector Project (DPUCSP), which is an Asian Development Bank-assisted social housing and community development program jointly executed by the Housing and Urban Development Coordinating Council (HUDCC) and the Development Bank of the Philippines (DBP). The DPUCSP presented the Housing Microfinance Product to the Bangko Sentral which was approved last 14 February 2008. There will also be a presentation by Mr. Ignacito Alvizo of Enterprise Bank, one of the early adopters of the Housing Microfinance Product of the DPUCSP. The session will be rich with both concepts as well as practical applications of the housing microfinance.

Resource speakers: Eduardo C. Jimenez, Microfinance Consultant, Bangko Sentral ng Pilipinas Ignacito Alvizo, Director, Enterprise Bank

Facilitator: Pia Roman, Bangko Sentral ng Pilipinas Documenter: Noemi Bonaobra, Bicol Microfinance Council

HOUSING MICROFINANCE and the HOUSING MICROFINANCE PRODUCT MANUAL

JULY 2008

Outline of the Presentation • Definition and importance of housing microfinance • Housing microfinance and mortgage finance • Microenterprise lending and housing microfinance • Policy action plans for pro-poor housing provision • Housing Microfinance Product Manual: Summary of Credit Policies and Procedures

What is Housing Microfinance? Housing microfinance involves the application of microfinance principles and methodologies to the provision of shelter finance and consists mainly of loans to the poor and low-income households for (i) home improvement/repairs, (ii) housing construction, (iii) house and/or lot acquisition, and/or (iv) access to basic infrastructure or public services. Source: Consultative Group to Assist the Poorest (CGAP), World Bank

Housing microfinance links mortgage finance and microenterprise finance and constitutes a more appropriate lending methodology for serving the housing finance needs of the working or entrepreneurial poor.

Mortgage Finance

Housing Microfinance

Microenterprise finance

Importance of Housing Microfinance •Considered a non-subsidized, sustainable approach tailored to meet the housing needs of the entrepreneurial and working poor •Results in asset creation for the poor at the needed scale as demand for social housing continues to grow •Addresses poor cost recovery efforts in past government housing programs and corrects market distortions caused by interest rate subsidies •Supports mass housing which has been reaffirmed as the centerpiece program of government in poverty alleviation •Increases the value of services received by MFI clients •Increases transparency of MFI transactions by treating housing loans distinctly from microenterprise loans

Mortgage Finance and Housing Microfinance MORTGAGE FINANCE •Bigger loan sizes

HOUSING MICROFINANCE •Loan sizes are smaller than mortgage finance but larger than microenterprise finance

•Requires a mortgage lien; full legal title •Works with paralegal or substitute titles to property •Formal employment sector; middle and •Low-income and informal sector upper income households •Long repayment periods (typically from •Repayment periods are shorter (often 15 - 30 years) 2-10 years; may be up to 15 years) •Housing units are constructed commercially and sold as a complete unit

•Fits the incremental building process and self-help home improvement and expansion needs of the clients

Microenterprise Lending vis-à-vis Housing Microfinance Typical Microenterprise Loans

Housing Microfinance Loans

•Loan affects borrower’s income

•Loan affects borrower’s asset base and may impact income (home based enterprises)

•Offer smaller loan amounts

•Relatively larger incremental amounts

•Lending methodology can be individual •Usually individual loans or group loans •Repayment capacity often based on generation of future income

•Repayment capacity based on borrower’s current income

Policy Initiatives to Accelerate Pro-poor Housing  Forms part of the inter-agency policy action plan developed in October 2002 (Urban Land Reform Conference)  Improving the proclamation, land conversion and registration processes for pro-poor housing  Distributing secure tenure through rights-based secure tenure approaches  Adopting appropriate methodologies to make shelter financing more catered to the needs of and more affordable to the poor.

  

Housing microfinance is one of the key initiatives Approval of DPUCSP>>> ADB/HUDCC/DBP Partnership Submission by HUDCC of Policy Paper and Housing Microfinance Product Manual to the BSP

Policy Initiatives to Accelerate Pro-Poor Housing  BSP/Monetary Board approval on February 14, 2008  Signing of MOA between BSP and HUDCC on April 2, 2008 ✓ Define the roles and responsibilities of the BSP and HUDCC in the implementation of the program ✓ Set the applicable accreditation standards and procedures for banks that will be offering housing microfinance services to their existing or new low-income clients.

Housing Microfinance Product: Summary of Credit Policies and Procedures ELIGIBILITY CRITERIA

Existing Clients : • • • • • •

Must be an active borrowing member for at least 2 years Consistent 95% repayment record and at least 90% attendance in center meetings if applicable for the past 2 years Should have an operating and earning enterprise With other verifiable sources of income Capacity to put up the required equity For housing construction and house and/or lot acquisition, with tenure security or proof of legal use, possession or ownership of their residence (for both house and lot, when applicable)

New Clients: • • • • •

Generally, low-income earners with no access to conventional home finance institutions (e.g. Pag-IBIG, SSS, GSIS) With verifiable proof of regular income and savings Capacity to put up the required equity Willing to participate in all activities that will be undertaken within the framework, systems and principles of microfinance such as training and transformational activities For all housing microfinance loan types, with tenure security; proof of legal use, possession or ownership of their residence (for both house and lot, when applicable)

In the context of housing microfinance, a client or borrower has secure tenure when the following conditions exist: • The client has legal use, possession or ownership of the property at the time the loan application is made or will be acquiring those rights because of the loan • It is determined that the client will not be forced to vacate the property during the time it takes to repay the loan; and • The client’s right is supported by valid proof or legal documentation.

Summary of Credit Policies and Procedures LOAN TYPES AND PURPOSES

Home improvement/ repair loan

• finance improvements (both major and minor) to the structure of the home, including but not limited to replacing doors, windows and roof, adding rooms, installing utilities, toilet facilities, connection to basic services, painting, repairing walls, ceiling or floors, replacing foundations and building second floors above the client’s businesses

New housing construction

• finance the construction of a new house on a lot owned by the borrower; • finance the purchase of housing materials in relation to a planned housing project

House and/or lot acquisition loan

• finance the purchase of serviced land parcels for individual households • purchase of an existing house (includes acquisition of a house or unit such as those in a low-cost or socialized housing subdivision)

Housing Microfinance Product: Summary of Credit Policies and Procedures LOAN SIZE Determining Factors: •

Purpose of the loan: House repair, construction, or house and lot purchase

•

Client’s capacity to repay: Demonstrated ability to repay based on the household income; a benchmark for affordability is that the loan payment should be less than or not exceed 60% of the client’s income as determined by an analysis of the client’s total household cash flow.

•

Amount of savings with the MFI: The amount of savings a client has in the bank can determine the maximum loanable amount that he/she may be entitled to during a particular loan cycle.

•

Type of tenure security for collateral: The type of tenure security or legal right enjoyed by the client over the house and/or lot may be used to determine the value of the loan

Summary of Credit Policies and Procedures TERMS AND CONDITIONS OF LOAN

MINIMUM AMOUNT MAXIMUM AMOUNT LOAN TERMS INTEREST RATES

DELIVERY METHODOLOGY REPAYMENT TERMS

Home Improvements

House Construction

House and/or Lot Purchase Depends on the project cost (typically higher than the average enterprise loans)

P150,000

P300,000

P300,000

Up to 5 years

Up to 10 years

Up to 10 years

Market-based Home improvement loans may have the same or lower interest rates as enterprise loans

Groups or Individuals Daily, weekly, semimonthly, monthly

Market-based Market-based Loans for housing construction and house and/or lot acquisition that have longer terms may have lower interest rates than short-term enterprise loans

Provided to individuals rather than groups

Daily, weekly, semimonthly, monthly

Daily, weekly, semimonthly, monthly

Summary of Credit Policies and Procedures TERMS AND CONDITIONS OF LOAN (continued) Home Improvements •Co-maker •Savings GUARANTEES • Household goods and business assets •Spouse’s signature •Postdated checks •Assignment of insurance proceeds •Land, property rights •Government guarantees

PENALTIES OTHERS

House Construction

House and/or Lot Purchase

Same as home improvement lloans; other guarantees may include the mortgage or assignment of: • Land title (OCT/TCT) • Deed of Sale • Contract to sell • Other proof of ownership such as tax declaration, order of award, sales / free patent • Proof of legal use and possession such as usufruct, lease contract, certificate of entitlement for lot award and other rights-based instrument

If the loan funds are not used for the purpose applied for and approved by the bank, the loan shall be automatically become due and demandable •Clients will be required to open an account with the bank •Qualified clients will be allowed to have simultaneous loans provided they have the ability to pay both loans

Summary of Credit Policies and Procedures LOAN PROCESSING

Loan Application

• Borrower prepares and submits loan proposal to the Account Officer (AO). AO assists the borrower where necessary. • Payment of loan application fees, if any.

Loan Appraisal

•The bank will base credit decisions on a client’s demonstrated capacity and willingness to repay as determined by a detailed analysis of the client’s financial situation.

Loan Documentation

• Completion of basic loan documents must be done before loan can be disbursed.

Loan Recommendation and Approval

•The Account Officer makes a recommendation. • Approval is done at the Branch Level (Credit Committee)

Loan disbursement • Directly to the client, either through the client’s account with the bank or a check unless a different arrangement is agreed upon by the bank and client. • Must be disbursed within 5 working days from time of application

Summary of Credit Policies and Procedures LOAN PROCESSING (continued)

Loan Monitoring (current loan)

•Conduct of loan utilization checks

Loan Collection (Past due loan)

•Zero tolerance to arrears shall be strictly observed •For home improvement loans, the bank will follow BSP Circular No. 409 •For housing construction and home acquisition loans, the bank will apply Appendix 18 of the Manual of Regulations for Banks.

Reporting

•Generation of up-to-date reports on loan portfolio and client status

Summary of Credit Policies and Procedures INTERNAL CONTROL

• An efficient internal control system is essential for managing financial and operational risks, in particular the risk of fraud. • Compliance with the bank’s internal control policies as contained in the internal control and/or audit manual of the bank.

Summary of Credit Policies and Procedures MANAGEMENT INFORMATION SYSTEM (MIS)

• An MIS that can handle a new product, use differing repayment schedules such as weekly versus monthly, service clients with more than one loan outstanding at any one time, and handle longer loan terms. • Covers the entire loan process from client information, investigations, loan appraisal, loan recommendation and approval, repayment schedule, loan disbursement, repayment/savings transactions, and post-loan performance analysis.

Loan Loss Provisioning •For home improvement loans that are similar to microfinance loans, BSP Circular No. 409 will apply. •For HGC guaranteed loans, HGC guidelines will govern. •For all other loans, general loan loss provisioning rules will apply (Appendix 18, Manual of Regulations for Banks).

Key Reforms and Features Approved by the BSP • Distinguishes housing microfinance loans from microenterprise loans but entitled to the same incentives as microfinance loans • Authorizes bank MFIs to provide lot acquisition, house and lot acquisition, and home improvement loans to clients up to 90% of appraised values • Allows banks to give non-collateralized housing microfinance loans and/or to accept collateral substitutes • Alternative compliance to Agri-Agra Law (PD 717) • Availability of HGC guarantee (0% risk-weighting of loan assets)

MICRO HOUSING LOAN PROGRAM

Enterprise Bank’s Beginnings • Founded on May 10, 1976 • Lianga, Surigao del Sur • Mission: To provide credit to local businessmen and spur economic development in Lianga

Enterprise Bank’s Beginnings Founding Name New Rural Bank of Lianga Manpower Compliment 11 employees

EBI today Enterprise Bank, Inc. has expanded to a network of 10 branches and 16 service outlets all over Mindanao, with a total manpower complement of 368 employees as of June, 2008

Davao Branch

Head Office

The core values of hard work, loyalty, sense of belonging and commitment have sustained EBI for 32 years. Personalized service to every client’s need will carry the bank through the years ahead.

Loan Products Small Business Lending

Microfinance

Consumer (Salary) Loans

Portfolio – 617 M as of May, 2008

Php109 M Small Business Loans (18%)

Php146 M Microfinance (24%)

Php361 M Consumer Loans (58%)

EBI’s Flagship Product Kalisod Mo, Tabangan Ko A credit program which adopts the basic Grameen Bank model of solidarity lending, paved the way for EBI to become a leading microfinance institution in Mindanao today.

KMTK Microfinance Loan Products • KMTK Regular - Livelihood • Microfishing • Micro agri • Micro transport • KMTK E-load (Smart, Globe and Sun Cellular) • Health Plus (generic drug distribution) • KMTK Kahayag (solar panels) • KMTK Pabahay (home repair and improvement)

The KMTK – Pabahay Program (Micro Group Housing) Objective: Provide KMTK Clients with access to credit with flexible terms and effectively utilize the proceeds for house repairs and other improvements that will make their homes more habitable and fit to live in. EBI believes that a decent home will enhance the clients’ well being and ultimately, their ability to sustain their livelihood and capacity to pay off their loans.

KMTK Pabahay priority projects:

• Building and repairs of toilets

• Construction or de-clogging of septic tanks

• House repair and improvements or building of additional room

KMTK Pabahay priority projects:

Walling, ceiling, roofing, flooring, replacement of foundations, drainage, fencing, gate construction, plumbing

Connections to basic services like water and electricity

Product Updates Product launched on June 30, 2006 1,141 clients as of May, 2008 Php 4,959,791 portfolio Currently implemented in Tagum, Davao, Cagayan de Oro, Tandag, Butuan and San Francisco (Agusan del Sur)

Features of the KMTK- Pabahay Loan Loanable Amount

Maximum

P25,000.00

Minimum

P5,000.00

Average

P6,000 (based on the most frequently issued loan size)

Loan Terms

6-12 months (with options to preterminate or pay in advance

Interest Rates

24% per annum

Other Fees

Service Charge

5% of the loan

Gross Receipt Tax

7%

Repayment Terms

Weekly

Loan Disbursements

70% of the loan amount is provided in the form of materials 30% in cash

Who are eligible to avail • No past due account upon application • Attendance rate is at least 80% • 18 to 60 years old • Resident of a 1st Class Municipality • A bonafide KMTK Class A client for 1 year with continuous availment and savings of not less than P3,000 • Borrower owns the property being upgraded • If rented, must have a valid lease contract during the entire period of the loan

Early Challenges • MIS of the bank The system could not separate the micro housing product from the livelihood loan; the information had to be extracted manually.

• Quarterly loan payment scheme was difficult to monitor Hence, the bank decided to change the loan payment into weekly, along with the payment for the livelihood loan.

Early Challenges • Capacity of AO to market the loan product Marketing house repair loans was extra load to AO thus affecting their productivity and efficiency. To resolve this, the bank created a separate unit that handled the marketing, client evaluation and monitoring of housing loans.

Success Factors • Top to bottom involvement of the EBI management in product development and implementation • Clear target market and eligibility criteria • Control measures The Bank imposes a Maximum Credit Limit (MCL) using the formula “amount of savings x 230%”. This ensures savings as well as fair and transparent administration of the loan The 70-30 disbursement prevents the loan from being diverted to another use.

Success Factors By understanding client needs, demand and preferences, EBI was able to design a demanddriven loan product that complements the KMTK Livelihood Program and meets the clients’ need for access to credit for home improvements.

“microfinance - the core of our institutional strength is also our invaluable tool and meaningful participation in helping eradicate poverty”

IGNACITO U. ALVIZO

Founder, EBI

Thank you.

Edited by Foxit PDF Editor Copyright (c) by Foxit Software Company, 2004 - 2007 For Evaluation Only.