Q: What are the reasons for the difficulty of accessing affordable finance for housing in developing countries?
- Fragile and poorly regulated enabling environment such as laws, regulations and market infrastructure that should enable conditions conducive to housing finance. It can be the result of ill-functioning property appraisal regimes.
- Inability to adequately assess borrowers’ creditworthiness due to the absence of credit bureaus or the informal nature of their income. Consequently, lenders usually do not offer special housing finance products that target low-income households. Lenders in emerging markets are also in need of established practices for managing risks and liquidity in housing finance portfolios.
- Need of long-term local currency funding. This is not always available in smaller local capital markets where the lack of a diversified investor base and viable secondary markets are a hurdle for developing affordable housing finance products.
- Consumers often lack financial literacy and an understanding of mortgage products, and are not aware of the risks related to taking out a mortgage loan. In many Sub-Saharan African countries co-existing customary and statutory laws lead to unreliable title documents and border conflicts. This results in higher transaction costs for acquiring or mortgaging land.
Q: Could you describe an example of a solution which has been tested to address the challenge of access to housing finance?
IFC is engaging with lenders for the development of specific loan products targeting low income groups. In India, for example, IFC has worked with Aadhar Housing Finance Ltd., which was set up by Dewan Housing Finance Company in 2010;
IFC made an equity of investment of US$ 4.5m.
Rahees Mohamed and his wife, earning $360 per month, are typical customers of Aadhar. With a loan of $10,000, they could realize their dream and “rebuild [the home] the way [they] wanted to”. Aadhar’s customers earn between US$80 to 400 per month. They are micro-entrepreneurs or employed. The average loan size is about US$ 11,000. Today, the company operates in 13 states and serves about 29,000 customers. The loan portfolio outstanding amounts to $273.5m (03/2016).
Why has Aadhar been so successful?
- It developed a clear understanding of the needs, preferences, and capacities of its customers. The products are designed in a way that they take into account the special needs of Aadhar’s customers
- Aadhar developed a comprehensive responsible finance framework: through information events, borrowers learn about products, documentation requirements, etc.
- It has engaged with developers to develop appropriate housing designs
- Aadhar established appropriate corporate governance and risk management systems to ensure smooth and efficient operations
Q: What are the key actions needed to take that solution to scale?
For more than 20 years, IFC has pioneered housing finance solutions in emerging markets by creating a platform for combined offerings of investment and advisory services to clients, partners and stakeholders as well as knowledge dissemination activities.
This approach allowed IFC to nurture important linkages between financial institutions, construction companies and government stakeholders. To date, IFC has invested $2.9 billion in housing finance projects and worked with 85 financial intermediaries in 46 countries to launch or expand housing finance operations.
In India, for example, IFC’s intervention has provided advisory services to MFIs and smaller housing finance companies (like Aadhar) to incentivize the development of housing finance products. Additionally, it made a number of strategic investments in developers, construction material suppliers and lenders to scale up activities and generate demonstration effects in the market.
Another important pillar has been the co-operation with the World Bank to engage with regulators and governing bodies to improve the overall regulatory and institutional framework on housing and housing finance in India.
About the International Finance Corporation (IFC)
IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector in developing countries.
The IFC utilizes and leverages its products and services—as well as products and services of other institutions in the World Bank Group—to provide development solutions customized to meet clients’ needs. They apply their financial resources, technical expertise, global experience, and innovative thinking to help their partners overcome financial, operational, and political challenges. IFC is also a leading mobilizer of third-party resources for its projects. The willingness to engage in difficult environments and leadership in crowding-in private finance enable IFC to extend its footprint and have a development impact well beyond IFC’s direct resources. Want to learn more about the IFC? Visit their website and more specifically what they are doing on housing finance.