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United Nations Economic and Social Commission for Asia and the
Pacific
United Nations Human Settlements Programme
N a t i o n a l H o u s i n g B a n k , I n d i a ( N H B )
Proceedings of the Regional Policy Dialogue
on Pro-poor Housing Finance 30 to 31 January 2008, New Delhi,
India
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Acknowledgements
This report was prepared by Mr. Vishal Goyal and Mr. P.K. Kaul
from the National Housing Bank, India and Ms. Natalja Wehmer and
Mr. Adnan H. Aliani, United Nations Economic and Social Commission
for Asia and the Pacific.
Disclaimer
This report is issued without formal editing.
The designations employed and the presentation of material in
this report do not imply the expression of any opinion whatsoever
on the part of the secretariat of the United Nations concerning the
legal status of any county, territory, city or area or its
authorities, or concerning the delimitation of its frontiers or
boundaries regarding its economic system or degree of
development.
Excerpts may be reproduced without authorization, on condition
that the source is indicated.
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TABLE OF CONTENTS
Introduction
..........................................................................................................................
1 Objectives of the Regional Policy
Dialogue......................................................... 2
Participation.....................................................................................................
2
Proceedings...........................................................................................................................
2 Inauguration and
overview.................................................................................
2 Capital
markets.................................................................................................
4 Mortgage and project lending issues
...................................................................
6 Making housing finance accessible to the poor
.................................................... 9 Regional
actions to promote pro-poor housing finance in Asia and the
Pacific...... 12
Conclusions
........................................................................................................................
13 Annex I:
Programme...........................................................................................................
15 Annex II: List of Participants
..............................................................................................
16 Annex III:
Presentations......................................................................................................
18
Address of Dr. Ravi Ratnayake, Director, Poverty and Development
Division, UNESCAP.................................................
18 Inaugural Address of Mr. S. Sridhar, Chairman and Managing
Director, National Housing Bank, India
..........................................................................
20 Discussion Paper on pro-poor housing
finance................................................... 23
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INTRODUCTION
Housing is a basic and fundamental right, since it not only
provides shelter and the space for households to live in privacy,
security and dignity, but also provides a point of reference
through which households can access other services and utilities.
Access to housing is a key determinant of urban conditions and of
the social status and well-being of households. Therefore, access
to adequate housing is essential for the achievement of the
Millennium Development Goals.
Housing is a key driver of a countrys economy. More than six
hundred industries are linked to housing. It is a labour intensive
industry that provides employment to both skilled and unskilled
workers. Land and housing market turbulences often translate into
capital and labour market turmoil. A well functioning and well
governed housing market is crucial not only for providing shelter
and security to individual households, particularly to the poor,
but is also critical for a countrys macro-economic stability.
Access to housing-finance is limited in countries of Asia and
the Pacific. A key reason is that the formal housing finance sector
is relatively small in most countries. In addition, the formal
banking sector (commercial banks, housing banks, house building
finance corporations etc.) prefers lending to those with
established credit records and regular incomes to ensure monthly
installment payments. The formal sector prefers borrowers with some
sort of collateral (e.g. land or the house itself) so loans can be
recovered in event of default.
Most poor people do not have formal credit records, regular
incomes or collateral. Moreover, they tend to build, improve and
expand their houses step by step as and when their incomes permit.
They often require a series of small housing loans that they can
pay off easily. Processing such small loans is not cost effective
for formal housing finance institutions. In response to the formal
housing finance institutions inability to reach the poor, many
governmental, non-governmental and community-based organizations
have added housing finance to their savings and credit schemes.
These institutions often rely on social collateral and
community-based screening processes to ensure repayment. However,
such programmes are often small in scale and reach only a limited
number of the poor.
In order to provide access to housing finance to a larger number
of the poor, financial and institutional linkages between formal
and community/civil society (CSO)-based housing finance
institutions need to be strengthened. This would, on the one hand,
enable the community-based institutions to increase their coverage.
On the other hand, it would enable formal sector institutions to
reach markets that were hitherto too risky or altogether
inaccessible.
The United Nations Economic and Social Commission for Asia and
the Pacific (UNESCAP) and the National Housing Bank, India (NHB)
have jointly initiated a programme on Pro-poor Housing Finance that
seeks to establish a regional network of formal and
community/CSO-based housing finance institutions to promote
experience and information exchanges and to undertake joint or
collaborative activities. The programme aims to move pro-poor
housing finance approaches beyond individual micro-credit schemes
to country and regional level financing structures.
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The first activity of the project was the Regional Policy
Dialogue on Pro-poor Housing finance. It was held at New Delhi from
30 to 31 January 2008 and was organized by the UNESCAP and NHB.
Objectives of the Regional Policy Dialogue
The objectives of the Dialogue were to:
Identify and discuss critical and emerging issues in housing
finance in general and financing housing for the poor in
particular.
Discuss the need for information exchange and networking on
pro-poor housing finance in the Asia and Pacific Region.
Participation
Participants of the Regional Policy Dialogue included chief
executive officers and senior officials from selected governments,
housing finance banks and institutions and senior decision-makers
from community-based and CSO-based housing finance institutions.
Representatives of UNESCAP, UN-HABITAT, the World Bank and USAID
also took part. A list of participants is annexed.
PROCEEDINGS
The Regional Policy Dialogue was divided into five sessions.
These comprised the inaugural session, three substantive sessions
on (i) capital market related issues; (ii) mortgage and project
lending related issues; and (iii) making housing finance accessible
to the poor. The substantive sessions were followed by a session
that discussed possible regional actions to promote pro-poor
housing finance in Asia and the Pacific, which, in turn was
followed by the concluding session. This section provides brief
summary of the presentations made and the discussions that
followed.
Inauguration and overview
The inaugural session was chaired by Dr. Ravi Ratnayke,
Director, Poverty and Development Division, UNESCAP. Dr. Nagesh
Kumar, Director General RIS gave the keynote address. Mr. S.
Sridhar, Chairman and Managing Director, NHB, delivered the
inaugural address. Dr. Vinita Kumar, Economic Advisor, Ministry of
Finance, Government of India and Mr. Shri Gandhi, Regional
Director, Reserve Bank of India were present on the occasion.
The Dialogue opened with Mr. P.K Kaul, General Manager, National
Housing Bank extending a warm welcome to all the participants. He
stressed the importance of creating a mechanism for knowledge and
experience sharing among the countries and pointed out that the
Dialogue provided an ideal platform for laying the foundation for
building of a network of institutions in the area of pro-poor
housing finance for the mutual benefit of the institutions as well
as the sector.
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Mr. Ravi Ratnayake, Director, Poverty and Development Division,
UNESCAP said that housing is a basic human right. Access to legal
housing enabled people to access basic services such as
electricity, clean drinking water and sanitation. It also provided
access to
other public services and programmes, such as education and
health care, citizen registration and voting rights. A formal
residential address facilitated finding jobs and accessing credit
and other financial services. Households, particularly poor
households, he said, often used their homes for economic activities
such as small manufacturing workshops, retail shops and renting
rooms for additional income. Housing was therefore much more than a
roof over ones head; it was a major factor in defining a households
economic and social status and well-being.
Mr. Ratnayake outlined major reasons for limited access of
low-income groups to housing finance. Formal finance institutions
did not provide pro-poor housing finance because their normal
operations required clients to have established credit records,
regular income and collateral all of which most poor people lacked.
On the other hand, many non-governmental and community-based
organizations had added housing-finance to their micro-finance
schemes. However, these schemes operated on too small a scale to
make a real difference. In order to reach a greater number of the
poor, he stressed, formal and non-governmental/ community-based
organizations needed to be linked.
He informed participants that a Meeting of Country Reporters on
Pro-poor Housing Finance was taking place back-to-back with the
Regional Policy Dialogue, to finalize guidelines for the
preparation of country reports on the state-of-art on housing
finance in India, Indonesia, Mongolia, Pakistan, Thailand and Sri
Lanka. The findings of the country reports would form the basis for
discussions at national workshops as well as provide inputs for a
comparative regional analysis on housing finance systems with a
particular focus on providing housing finance to the poor. Lastly,
he thanked the National Housing Bank for hosting the Regional
Policy Dialogue and the Country Reporters Meeting.
In his keynote address Dr. Nagesh Kumar, Director-General,
Research and Information Systems for Developing Countries (RIS)
made a strong case for closer regional cooperation in Asia and the
Pacific as the region is emerging as a new centre of gravity for
the world
economy. He noted that the Asian crisis of 1997 had been a
wake-up call for Asian countries to think and act collectively
rather than individually.
Dr. Kumar outlined two important economic trends in Asia. The
first trend was the widening deficit in infrastructure supply,
which amounted to between US$ 400 to US$ 500 billion, over the next
five years in India alone. The second trend was the increasing
accumulation of foreign exchange reserves, amounting
to around three trillion dollars for Asia and the Pacific. At
present these funds were mostly invested in US treasuries, where
they were earning negative returns. He stressed the need to create
a powerful regional mechanism which could efficiently utilize the
regions foreign exchange reserves for its infrastructure
development, including housing finance.
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Mr. S. Sridhar, Chairman and Managing Director of the National
Housing Bank delivered the inaugural address. Stressing the
importance of housing he said that in recent years housing had
emerged at the centre of the development agenda for many countries.
He further stated that owning a house promoted financial stability
to a household as a house could be monetized or leveraged at times
of need.
He also informed the participants the United Nations had
highlighted the issue of adequate shelter through inclusion of
slums in the Millennium Development Goals. In India, he said, the
government had adopted affordable housing for all as the theme of
its National Shelter Policy. He emphasized that the issues of
availability, affordability, risk mitigation and enabling legal
policy framework were vital in this regard. In this context, the
reconciliation of the developmental
objectives with the commercial compulsion of the financial
sector was also very important. The issue of pro-poor housing
finance, particularly in developing countries was quite complex. To
make it work at ground level using market based solutions and
combining them with the programmes of the state was a great
challenge in itself. Internationalization in the form of experience
sharing, capacity building and lessons to be learnt from the
experiences (both successes and failures) of the others, Mr.
Sridhar concluded, would be very useful for moving any pro-poor
housing finance initiative forward.
Mr. Sridhars inaugural session was followed by a presentation by
Mr. Adnan Aliani, Economic Affairs Officer, Poverty and Development
Division, UNESCAP. He presented a conceptual overview of housing
finance in Asia and the Pacific and explained the objectives of the
regional pro-poor housing finance initiative and outlined the
structure of discussions for the three substantive sessions and the
session on regional cooperation. His paper and presentation are
annexed.
Capital markets
The session was chaired by Dr Ravi Ratnayake. Participants
acknowledged that before lending, housing finance institutions
needed to raise economical, long term financing from domestic and
international capital markets. It was felt that raising funds at a
reasonable cost was extremely important for providing housing
finance to the poor. To ensure focus discussions were further
divided into four sub-categories, namely: constraints and
challenges; opportunities; areas of research; and future
directions.
Constraints and challenges
In discussing constraints and challenges, the participants
identified accessibility to capital markets and cost of raising
funds as key problems. They pointed out that there was a lack of
understanding about the working of housing finance system by the
principal players and insufficient interest in Mortgage Backed
Securities (MBS) by investors due to high transaction costs,
regulatory issues, lack of title guarantees, lack of reliable
rating systems
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etc. Participants noted that capital markets in the region were
not well developed and rather volatile and that without credible
risk mitigation, including those related to natural disasters,
investors would not be interested in long term investments that
were necessary for housing finance. They pointed at big information
gaps and misconceptions about the recovery of loans from the poor
and at the inadequacy of current legal and institutional frameworks
for pro- poor housing finance.
Opportunities
Participants said that Asian economies as a whole were currently
doing extremely well. Rising incomes were leading to construction
booms and housing finance demand could be expected to rise
significantly, leading to huge capital market growth potential.
Because informal financing mechanisms, such as community-based
housing finance schemes and micro-finance institutions (MFIs) were
already in place, many opportunities were available for scaling-up.
Many such housing-finance institutions had valuable experiences and
successes providing housing finance to the poor.
Participants said that in many countries of the Asia-Pacific
region, government policies were turning pro-poor and budgetary
allocations for housing the poor were increasing. Governments had
begun implementing various guarantee programmes for lending to
those without stable incomes and providing subsidies. Many
governments had established specialized housing finance
institutions to run pro-poor programmes and schemes that could
establish and assess credibility of the poor, such as contractual
housing finance systems or home loan account schemes.
Participants also saw huge potential in securitization, which
was still a fairly new concept in most Asian countries. However,
they cautioned that although much needed, the creation of
functioning secondary markets would be a systemic and complex task.
In this regard, the potential of accessing provident and pension
funds for financing pro-poor housing and using emerging investment
products such as Real Estate Investment Trusts (REITs) and Real
Estate Mutual Funds (REMFs) were highlighted.
Participants also pointed out that poor peoples savings were a
big untapped sector for pro-poor housing finance. These savings, it
was noted could provide access to cheap funds as well as bring
rural poor into the financial system.
Areas for research
Recommended research areas included new product development,
including market analysis and feasibility studies for such
products, profiling of risks, standardization of appraisal
and valuation, understanding income and consumption patterns of
the poor, feasibility of developing a database and rating systems
for MFIs/NGO-based micro-finance schemes,
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access to international funds and looking at various channels to
reach the poor apart from MFIs/NGOs. Participants agreed that there
was a big need to increase understanding of low-income finance,
both among community-based institutions and formal
institutions.
Future actions and directions
Recommendations for future action and direction included scaling
up community-based housing finance initiatives, developing adequate
guarantee policies so that formal financial institutions would feel
more confident and establishing mortgage guarantee corporations
with government participation. Participants stressed the importance
of creating a more enabling legal environment by establishing
financial standards and norms to promote secondary mortgage markets
as well as of
setting up transparent and efficient property registration
systems.
Participants said more pro-poor government policies, guarantees
and subsidies were needed. Larger budgetary allocations to housing
agencies for pro-poor housing were suggested, as was the
establishment of long-term housing development funds (to be set up
at either national or international level) and of specialized
pro-poor housing agencies. Participants also felt that there was a
need to build capacities of MFIs and NGO/CBO based finance
institutions, including promoting financial literacy among the
poor.
Mortgage and project lending issues
The Session was chaired by Mr. S. Sridhar. The session started
with a presentation of an overview of issues related to mortgage
and project lending by Mr. Adnan Aliani. He outlined three major
issues, namely, legal and regulatory environment that protects the
borrower and allows for reasonable foreclosure laws; transparent
land and property registration and information systems; and
capacities and tools for administering mortgage finance,
particularly risk and credit worthiness assessments
Legal and regulatory environment
Participants noted that foreclosure laws were notoriously
difficult to enforce. Even when foreclosures could be enforced,
many said houses were often un-saleable and evicting already poor
households posed difficult political, social and moral dilemmas. In
this context, there was a need to revisit the Prudential/Banking
Norms of declaring Non-Performing Assets (NPA) for housing loans
related to the poor. They had highly irregular incomes and the norm
of declaring NPA in case of interest/principal being overdue for 90
days
was not compatible in case of providing loans to the poor. This
required a delicate balance of neither being too strict nor too
lenient.
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Many of the Housing Finance Institutions used unethical lending
and recovery practices by employing recovery agents. In India, this
had resulted in the Reserve Bank of India setting norms with
regards to functioning of recovery agents. Participants felt that
this kind of protectionism could lead to housing finance
institutions emphasizing credit worthiness which may in turn lead
to their excluding marginal borrowers. There was need to therefore
strike a delicate balance between strictness and flexibility.
Box 1: Selected country experiences in foreclosures Bangladesh
Foreclosure law was adequate but its enforcement was poor.
Litigation could take a long time, resulting in outstanding debt to
such an extent that very few people bid on houses at auctions. The
result was that very few repossessed houses were actually sold.
Malaysia
Foreclosure procedure and other proceedings took time. Therefore
it was undertaken only in circumstances when people had no ability
to pay. Mongolia
Housing finance was very new to Mongolia and therefore
foreclosures had not been very successful. The entire judicial
process took a long time. Lending institutions were focusing on
Borrower Education i.e. borrowers needed to be educated from the
very beginning as to terms and conditions of repayment.
Pakistan Even though the foreclosure process could be conducted
without the intervention of courts, banks relied on the cash flow
of the borrower as primary security. The income of the borrower and
the sustainability of the income over longer periods were studied
before giving them a loan. The first step in the foreclosure
process was the issuance of a notice. Then after 3 months one or
two reminders were sent. Then a legal notice was sent and
thereafter the name of the defaulters along with balance
outstanding of the loan was published in the press. Sixty days
grace period was further given after the publication of the names
in the press. After which auctions were held.
About fifty percent of the cases were settled before the matter
reaching the press as the amount outstanding was usually small
compared to the value of the property and the borrowers did not
want their names published as defaulters. Most borrowers settled
their dues before auctions as most properties at auctions were
bought by the land and property mafia who often used strong arm
tactics to evict people from the foreclosed properties.
Thailand
The foreclosure law and its enforcement were quite reasonable.
The court procedure took between three to four months. Before or
during the court procedures the borrowers usually worked out a
compromise with the lending institutions for restructuring the
loan. It was politically difficult to foreclose on the poor. For
the poor the preferred approach was to mobilize them into groups
and to work out group guarantees instead of traditional collateral.
Before the disbursement of housing loans, this required a study
their savings and expenditure patterns. This determined the amount
of money that could repay as a group and this in turned determined
the total amount of housing loan that they could borrow as a
group.
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Land and property registration
The efficiency and transparency of land and property
registration systems varied from country to country. Thai, Sri
Lankan and Mongolian participants said their property registration
systems were fairly efficient and therefore there was no need for
title insurance. The problem in Mongolia was that cost of
registration, which was quite high and prevented some poor
households from registering their properties.
Other participants noted that land and property systems in their
countries were not efficient. In Indonesia, there were problems
with conflicting registration between urban, agricultural and
forestry land titles. As cities and towns expanded into
agricultural areas, this problem was increasing. Many countries
cited similar problems. In Pakistan, the overall property
registration system was controlled by different government
departments and was therefore not efficient. However, housing
societies/cooperatives in cities and towns maintained their own
registers and had very safe and reliable systems.
The issue of land information system was discussed extensively
by the participants. A pilot project in the province of Punjab,
Pakistan was computerizing land record information. There was also
a facility of Mortgage Locator where if the house number was
entered into the database, the status of the title of the property
could be verified. However, the project was facing a lot of
difficulties as the land-mafia was preventing correct information
from being furnished. In Mongolia, all land registration was done
by one central department and accessing accurate information was
relatively easy. Given all the problems with land registration and
information systems, some participants suggested introducing
registration insurance as a risk mitigation mechanism. Participants
from Thailand related their experiences in preparing individual
city development plans and using joint surveys by local governments
and organized poor communities to establish the scale and type of
title problems.
Tools and capacities for administering mortgage finance
To avoid defaults, credit scoring of low-income borrowers was
seen as important. In this context, the need for studies of
consumption and savings patterns of the poor was stressed once
again. For easier repayment, it was suggested to structure loans so
that payments would be smaller at the start (with the option of
using subsidies) and rising over time.
Regarding capacities and tools for administering mortgage
finance and in particular risk and credit assessment, South Africas
credit scoring mechanism for low-income housing was viewed as an
interesting example. Other participants suggested registering
mortgages in packages to avoid the high transaction costs of
individual registrations. According to some participants, one way
to reduce risks in mortgage lending to the poor was linking up with
community-based organizations. These organizations could easily
assess their members credit worthiness because they practiced
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incremental lending, which allowed their members to build their
credit histories. This provided a reliable rating system. However,
under this system repayment of bulk loans was dependent on the
community based organization which selected individual borrowers
and therefore the selection of the organization was very
important.
Making housing finance accessible to the poor
This session was chaired by Mr. S. Sridhar and started with a
presentation by Mr. Adnan Aliani on the summary of the issues
discussed on the previous day. The Summary included the major
impediments faced by the formal financial institutions in mortgage
and project lending while providing housing loans to the poor. He
also outlined key issues for discussion which included approaches
and methodologies for lending to the poor; raising funds for
on-lending to the poor; linking formal and informal housing
finance
institutions; and the role of the government in creating
enabling legislative and regulatory environments and providing
subsidies.
Group loans versus individual loans
Participants commented repeatedly on the advantages of
community-based group lending vis--vis individual lending. One good
example of such an approach was the Community Organizations
Development Institute (CODI) in Thailand. An analysis of how its
processes could be adapted for and replicated in other countries
and scaled up to reach the majority of the poor in Asia and the
Pacific was suggested. While communities in the CODI approach were
based on geographical entities, grouping the poor by professions
(e.g. agriculture) was also suggested. Several participants
described successful practices of providing housing
finance through cooperatives that took over allocating and
administrating the funds.
The approach used by SAIBAN in Pakistan on the other hand, was
given as an interesting example that was delivering promising
results giving loans to poor people individually. However, it was
pointed out that it only worked because the approach provided for
strong control over communities. Scaling up this approach was also
discussed.
Long-term versus incremental loans
The difficulty of providing long-term loans was discussed as
both financial institutions and the poor themselves preferred loans
not to exceed seven to eight years, while housing finance often
require a loan of 15 years or longer for the installments to be
affordable. Giving incremental loans was suggested as one solution
to that problem. Representatives from HBFC in Pakistan shared their
experience with giving progressive and incremental loans to people
in SAIBAN-run schemes, where people were given a sequence of
smaller loans,
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starting with US$ 1,000 and this way had the possibility to
build up a credit history with the bank.
While this approach could work in smaller towns and in the
peripheries of cities, it would not work within large cities or in
towns where land was expensive. Land scarcity meant that low-income
housing was developed as four to five storey
apartments/condominiums that could not be built incrementally.
Representatives from Indonesia pointed out that their government
had started building basic three to four story structures with some
success.
Participants further discussed the idea of progressive
installments, where borrowers paid less initially and payments
increased as their incomes increased over a 10 to 15 year period.
As the income of poor people often fluctuated, it was suggested to
introduce special legislation extending the grace period for
non-performing loans from several months to one year. Some
participants pointed out that group lending allowed flexibility as
community groups often charged additional interest to individual
borrowers to enable some members to be late in paying their
installments at any given time. A related suggestion was to have
flexible payment
schedules adjusted to seasons, as the poor often worked in
seasonal jobs such as construction or mining.
Funding sources
Participants discussed various funding sources for pro-poor
housing finance loans. One suggestion included evolving systems
where savings and lending for rich and poor people were combined.
Market bonds and small loans from provident funds were also
discussed. Issuance of socially responsible bonds and
mortgage-based securities was presented as one approach to raising
funds in the capital markets for housing the poor.
Representatives from CODI, Thailand said their funds came from
the government. However, the demand for these funds was much more
than the funds available. Hence CODI has started negotiations with
the Government Housing Bank of Thailand. However, a major challenge
was ensuring low interest rates and CODI was currently in the
process of talking to the government about interest rate subsidies
of about 2-3 percent a year. Another option was to re-issue
bonds.
The representative from Malaysia explained that his country had
just introduced a Housing Trading Guarantee Company, which
guaranteed the loans and meant that in order to find out what
people could pay, the private sector audited them just like a tax
auditor.
Bridging and linking institutions
One main issue discussed throughout the session was how to reach
poor communities. Participants
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saw the establishment of bridging and linking institutions
positioned between formal lenders and poor communities as a major
approach promising success.
Participants pointed out that intermediary institutions that
were juristic entities, such as CODI or local governments were
needed for bridging functions. It was important to create a
sufficient number of such institutions, so that the vast majority
of the poor could be reached. Representatives from CODI explained
that CODI was a central government organization that encouraged
local governments, the communities and NGOs in a town to work
together to solve low income housing issues.
Another precondition of successfully lending to the poor as
groups was the establishment of real communities rather than just
grouping by geographic proximity or similar socio-economic
contexts. Thus, for example, the primary aim in instigating saving
and credit groups was not for poor people in one area to lend money
to each other, but to create a community.
However, participants noted that building up such social capital
took time and expertise in
community-building practices and demanded the ability to sustain
contact with these poor communities. All of which was beyond the
means of most formal housing finance institutions, who therefore
found it difficult to reach savings groups directly. So one
possibility was to work through federations of saving groups. SPARC
in India, for example, worked with the National Slum Dwellers
Federation as this provided access to already organized communities
regardless of whether SPARC had instigated projects there or
not.
The representatives of HBFC in Pakistan shared an interesting
new approach they were implementing called the three segment model.
They established a social housing bank to take care of funding, a
social housing company that would promote the incremental housing
approach (taking care of the supply side) and involving NGOs that
would receive a 5-10% share in the social housing company and would
become the managers of the scheme.
Governments role
The role of Government was a recurring issue. Participants said
development policies that clearly defined household, local
government, national government and private sector responsibilities
were needed. Solutions had to be holistic, including technical,
planning/development and cost aspects. Some participants said that
government should not be relied upon and investments should be
market-based, while others said poor communities could handle a lot
of the responsibility themselves.
However, everyone agreed that governments needed to create an
enabling legislative
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framework. Governments, they said had an important role in
providing land and basic infrastructure and were an important
source of funds and subsidies. Local governments could also conduct
surveys on what kind of housing was needed in their cities.
When discussing what an enabling legislative environment would
have to include, participants said securitization rating systems
needed to be introduced. Several participants said tenancy laws
needed to be changed because they were unfavourable for landlords/
investors. One participant said the deposit renting system was an
interesting option for low-income groups to by-pass tenancy laws.
Another idea was to create a condominium act: if tenants paid the
rent, they would eventually become flat owners. Others suggested
the need for legislation allowing formal housing finance
institutions to lend directly to the poor.
Participants agreed that subsidies needed to be designed very
carefully with precise target groups in mind. Otherwise, as
previous experience showed, the room for abuse would be large. In
subsidized rental units, for example, maintenance costs were often
still too high for low-income occupants they were intended for.
This often resulted in dilapidation of the property or in informal
on-lending to income groups the units were not intended for.
Representatives from CODI said government subsidies and funds
should be used to provide basic infrastructure. Participants
pointed out that with decentralization in many countries in the
region, local governments now had more money at their disposal and
suggested supporting the creation of local government funds for
financing housing for the poor.
Participants noted that in urban areas the poor often did not
own the land they occupied and land in urban centres was scarce and
expensive. The government could therefore give land at discount
rates or reserve plots in city centres. Because the poor often
settled on the outskirts of existing cities, providing basic
infrastructure would also have to be an important government
responsibility. The participants also said that pro-poor housing
finance mechanisms needed to be combined with measures
that made housing itself cheaper, such as introducing new
building technologies and materials or having communities make
whatever materials they could themselves and contribute their
labour.
Regional actions to promote pro-poor housing finance in Asia and
the Pacific
This session was chaired by Dr. Ravi Ratnayake. Mr. Adnan Aliani
presented key areas where he thought regional actions were needed
to promote pro-poor housing finance in Asia and the Pacific. These
included norms and standard setting; creating regional funds and
institutions to promote networking, exchange of information and
experience and to build capacities of formal and MFI/NGO/CBO based
housing finance institutions.
Participants agreed on the need to network and exchange
information between formal and MFI/NGO/CBO financial institutions.
Consensus was reached to set up a regional network. The role of
this regional network would be to link institutions across the
entire spectrum of housing finance provision. It would undertake
research and analyses of innovative practices in pro-poor housing
finance, policy options and frameworks enabling the establishment
and successful functioning of wide-spread pro-poor housing finance
mechanisms in Asia and the
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13
Pacific. The regional network would not only allow for a better
exchange of information, but would also offer opportunities for
collaboration between various housing finance institutions.
Another key function would be training and capacity building at
all levels. In addition to virtual communication, participants
stressed the importance of face-to-face exchanges. They also saw a
need for region-wide advocacy of pro-poor housing finance
issues.
It was decided that NHB and UNESCAP would jointly coordinate
further exchange and discussions as well as the establishment of
the regional network. As a first step, UNESCAP agreed to provide an
online discussion forum on
pro-poor housing finance on its website:
www.housing-the-urban-poor.net. UNESCAP and NHB were further
requested to organize a high-level regional meeting to establish
the regional network. The idea of an Asia-Pacific Ministerial
Meeting was widely supported in this regard.
CONCLUSIONS
The Concluding session began with Dr. Ravi Ratnayake
appreciating the fruitful interactions amongst the participants. He
noted that a wide variety of issues had come up for
discussions.
He further assured the participants that this was the first of
many activities under the UNESCAP project. He thanked the NHB for
hosting the Regional Dialogue.
In his concluding address, Mr. S. Sridhar expressed his
appreciation on the successful completion of the Dialogue and
complimented the participants for their contribution in knowledge
sharing. He thanked UNESCAP and its staff for their work in
ensuring the success of the Dialogue.
Finally Mr. P.K. Kaul extended a vote of thanks to the chair and
all participants. He also thanked the staff of the Taj Ambassador
hotel for ensuring that the Dialogue proceeded without technical
difficulties.
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14
Box 2: Summary of conclusions and recommendations1
Discussions at the Regional Policy Dialogue focused on critical
and emerging issues in housing finance in Asia and the Pacific.
Participants discussed various approaches to make housing finance
more accessible to the poor. They agreed that providing large-scale
housing finance to low-income groups was a vital emerging issue in
Asia and the Pacific. Pre-requisites for succeeding in this immense
task included reforming legal and policy frameworks in some
countries and capacity building of stakeholders at national and
local levels and in-depth research and comparative analysis of
pro-poor housing policies, institutions and practices in others.
Participants stressed that new ways had to be found to raise funds
for housing finance. They agreed that the establishment of
secondary markets for housing finance needed to be encouraged
across the Asia-Pacific region to make local and international
capital available on a large scale. They recommended creating
mutual funds and investment trusts and tapping into provident and
pension funds as well as into the savings of the poor
themselves.
Participants agreed that there also was an important role for
government to play in reforming the legal and regulatory
environment and in providing funds and subsidies for pro-poor
housing finance. In order to establish successful pro-poor housing
finance policies and mechanisms, they agreed that innovative
approaches were needed.
Based on initial successes by pioneering housing finance
institutions in Asia, the need to link formal housing finance
institutions (which can raise funds) with NGO/MFI/community-based
housing finance mechanisms (which provide sustained access to poor
communities) was broadly acknowledged. Participants agreed that it
was important to explore alternative approaches. Thus, they were
strongly convinced that because individual lending to poor people
was fraught with difficulties, one major approach would be lending
to poor people in groups in communities who would empower and
control their members, provide social collateral and lower loan
processing costs for housing finance institutions to competitive
rates. Another approach that Participants agreed was proving
successful was to combine low-income housing issues into a holistic
package that provided incremental loans for incremental development
of infrastructure and housing. To proactively promote exchange of
experiences, undertake comparative research and to build
capacities, the establishment a regional network on pro-poor
housing finance consisting of both formal and
NGO/MFI/community-based housing finance institutions was strongly
supported. UNESCAP and NHB were requested to organize a high-level
regional meeting to establish the regional network.
1 As a follow-up to the Regional Policy Dialogue, UNESCAP had
created an online discussion group on housing finance, where
participants of the Dialogue and other housing-finance
practitioners could continue to discuss pro-poor housing finance
issues, exchange experiences and provide ideas on the modalities of
the planned regional network on pro-poor housing finance. The
online discussion forum was open to all and those wishing to
register should visit the following link:
http://www.housing-the-urban-poor.net/forum/default.asp. Basic
instructions for using the online forum can be downloaded from:
http://www.housing-the-urban-poor.net/docs/Instructions_Forum.pdf.
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15
ANNEX I: PROGRAMME
30 January 2008
09:30 10:00 Opening
Welcome address by Mr. P. K. Kaul, General Manager, National
Housing Bank, India
Address by Mr. Ravi Ratnayake, Director, Poverty and Development
Division, United Nations Economic and Social Commission for Asia
and the Pacific
Keynote address by Dr. Nagesh Kumar, Director-General, RIS
Welcome address by Mr. S. Sridhar, Chairman and Managing
Director
of the National Housing Bank, India (NHB)
10:00 10:30 Coffee break
10:30 11:00 Introduction of participants
11:00 11:30 Conceptual overview of housing finance in Asia and
the Pacific
11:30 13:00 Session 1: Capital market related issues
13:00 14:00 Lunch break
14:00 15:00 Session 1: Capital market related issues
(continued)
15:00 16:00 Session 2: Mortgage and project lending issues
16:00 16:30 Coffee break
16:30 17:30 Session 2: Mortgage and project lending issues
(continued)
19:00 21:00 Welcome Dinner
31 January 2008
09:00 11:00 Session 3: Making housing finance accessible to the
poor
11:00 11:30 Coffee break
11:30 12:30 Session 4: Need for networking and exchange of
information
12:30 13:00 Wrap-up discussions and closing of the Meeting
13:00 14:00 Lunch
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16
ANNEX II: LIST OF PARTICIPANTS
Bangladesh
Mr. Manjur Ahmed, General Manager, Bangladesh House Building
Finance Corporation
India
Dr. Kiran Wadhva, Former Chief Economist and Executive Director,
Housing and Urban Development Corporation Ltd.
Ms. Jyoti Macwan, General Secretary, Self Employed Women's
Association (SEWA)
R. Bhuvaneshwari, Financial Controller & Company Secretary,
Janalakshmi MFI
Satyan Mishra, Managing Director, Drishtee Development and
Communication Ltd
Parisila Bhawan, Associate Fellow, National Council of Applied
Economic Research
Aseena Viccajee, Systems Manager, Society for Promotion of Area
Resource Centres (SPARC)
Om Prakash Mathur, Professor, National Institute of Public
Finance and Policy
Andrew Hapke, Manager-Micro Finance, Quiver Infoservices
Ltd.
Professor P.V. Indiresan, Former Director Indian Institute of
Technology
Indonesia
Dr. Ramalis Subandi, Special Staff for the Minister, State
Ministry of Housing
Tito
Another
Malaysia
Mr. Azizi Ali, Senior Vice President, Islamic Business &
Securitization, Cagamas Berhad
Mongolia
Ms. Enkhbayar Tsedendorj, Chief Executive Officer, Mongolian
Mortgage Corporation
Pakistan
Mr. Sayed Zaigham Mahmood Rizvi, Chairman & Chief Executive,
House Building Finance Corporation Ltd.
Mr. Khalid Aftab Khan, General Manager, House Building Finance
Corporation Ltd.
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17
Sri Lanka
Mr. Sunimal Ajit Weerasinha, General Manager, State Mortgage
& Investment Bank (SMIB)
Thailand
Ms. Thipparat Noppaladarom, Assistant Director, Community
Organizations Development Institute (CODI)
Ms. Samanee Mahattanasomboon, Assistant Director, Community
Organizations Development Institute (CODI)
Mr. Ballobh Kritayanavaj, Senior Vice President, Government
Housing Bank
International and bilateral organizations
Niraj Verma, Senior Financial Sector Specialist, South Asia
Finance & Private Sector Development, World Bank
Rebecca Black, Director, Office of Economic Growth, U.S. Agency
for International Development (USAID)
Dr. Xing Quan Zhang, UN-HABITAT Focal Point for Financial
Mechanisms and Chief, Urban Finance Section, Human Settlements
Financing Division, UN-HABITAT
Organizers
UNESCAP
Mr. Ravi Ratnayake, Director, Poverty and Development Division,
UNESCAP
Mr. Adnan H. Aliani, Economic Affairs Officer, Poverty Reduction
Section, Poverty and Development Division, UNESCAP
Ms. Natalja Wehmer, Associate Economic Affairs Officer, Poverty
Reduction Section, Poverty and Development Division, UNESCAP
NHB
Mr. S. Sridhar, Chairman & Managing Director, National
Housing Bank, India
Mr. P.K. Kaul, General Manager, National Housing Bank, India
Mr. Vishal Goyal, Regional Manager, National Housing Bank,
India
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18
ANNEX III: PRESENTATIONS
Address of Dr. Ravi Ratnayake, Director, poverty and Development
Division, UNESCAP
It gives me great pleasure to address the opening ceremony of
the Regional Policy Dialogue on Pro-poor Housing Finance. As you
know this Regional Dialogue is the first of many activities in our
regional project on Pro-poor housing finance in Asia and the
Pacific.
We, at UNESCAP, give great importance to the issue of housing
and housing finance. Housing is a basic human right. It is also a
key driver of the economy. Studies in Asia and the Pacific show
that multiplier effects of housing spread over 600 other
industries. Crises in land and housing markets can trigger crises
in capital markets, not only in the country of its origin but also
in other countries around the globe.
It has been suggested that one of triggers of the Asian
Financial Crisis was speculation in land and property markets,
particularly in Thailand, caused by inadequate regulation and
management of housing finance market and excess liquidity in
financial markets. As you will recall, the Asian financial crisis
resulted in a loss of years of developmental gains overnight in
countries of South East Asia and triggered considerable human
suffering and social unrest.
We may now be threatened by another global financial crisis.
This time caused by the exposure of financial institutions around
the world to the sub-prime mortgage financing in the United States.
How severely this crisis affects the economies of Asia and the
Pacific remains to be seen. While I am sure that this will be
discussed in the sidelines of this meeting it is not the central
topic of todays discussions.
We need to address housing finance because over 500 million
people or nearly 45 percent of all urban residents in Asia and the
Pacific do not have adequate housing, which is a basic and
fundamental right recognized by the United Nations. Housing is also
critical is achieving the Millennium Development Goals or MDGs.
Access to legal housing enables people to access basic services
such as electricity, clean drinking water and sanitation. It also
provides access to other public services and programmes, such as
education and health care, citizen registration and voting rights.
A formal residential address also facilitates finding jobs and
accessing credit and other financial services.
Households, particularly poor households, often use parts of
their houses for economic activities such as small manufacturing
workshops, retail shops and even for renting a room to earn
additional income. Housing, therefore, is much more than a roof
over ones head it is a major factor in defining a households
economic and social status and well-being.
For most people housing is the single most expensive purchase
they will ever make. Therefore, only the richest of households can
pay up-front for their housing. Housing finance is therefore
crucial to improve access to housing, particularly for the
poor.
The formal financial institutions prefer lending to those with
established credit records and regular income to ensure payment of
monthly installments. They also prefer borrowers that have some
sort of collateral.
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19
Most poor do not have formal credit records, regular incomes or
collateral. Moreover, the poor tend to build, improve and expand
their houses step by step as and when their incomes permit. They
often require a series of small housing loans that they can pay off
easily. Processing such small loans is not cost effective for
formal housing finance institutions.
In response to this apparent inability of formal housing finance
institutions to reach the poor, many non-governmental and
community-based organizations have added housing finance to their
micro-finance schemes. Such schemes are community based or run by
governmental and non-governmental micro-finance institutions. Many
of these institutions rely on social collateral and community-based
screening processes to ensure repayment. Often their loan repayment
rates are higher than formal sector banks.
However, such programmes tend to be small in scale and reach
only a limited number of the poor. In order to provide access to
housing finance to a larger number of the poor, financial and
institutional linkages between formal and micro-finance and
community-based housing finance institutions need to be
strengthened. This would, on the one hand, enable the micro-finance
and community-based institutions to increase their coverage and on
the other, enable the formal sector institutions reach markets that
were hitherto too risky or altogether inaccessible.
Many countries of the region are undertaking reforms aimed at
improved housing conditions of the urban poor. To assist the policy
makers, researchers, housing finance professionals in formal and
community-based sectors, UNESCAP has initiated a regional programme
to promote Pro-poor Housing Finance in Asia and the Pacific.
As you know this Regional Policy Dialogue is the first activity
of the programme. In partnership with the National Housing Bank of
India, we are initiating a regional study of housing finance
systems. Under the proposed study, the state of the art in pro-poor
housing finance will be documented and analyzed in six countries.
These are: India, Indonesia, Mongolia, Pakistan, Sri Lanka and
Thailand. A country reporters meeting is being held back-to-back
with this Policy Dialogue. The Country Reporters meeting will
discuss and finalize the guidelines for preparing reports. I
understand some of you are also participating in that meeting.
To refine the outcomes of the country reports and to generate
discussions at the country-level, national workshops will also be
organized in each of the participating countries. Depending on our
ability to raise additional financial resources other countries may
be included in this study. We will prepare a comparative analysis,
based on the country reports and present it to a regional
symposium. The regional symposium will discuss the issue of
pro-poor housing finance in greater depth and deliberate on the
need for regional mechanisms and structures, including the need for
setting up a regional network of formal and community-based housing
finance institutions.
This Policy Dialogue, therefore, is primarily a brain-storming
session. We have gathered here some of the most eminent housing
finance practitioners from the region to discuss the challenges,
the opportunities and future directions in housing finance and in
particular, financing the housing for the poor.
Lastly, I would like to take this opportunity to thank our
partners and hosts, the National Housing Bank of India for
co-organizing this meeting. I am sure we will have fruitful
discussions and point the way forward on this crucial issue.
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20
Inaugural Address of Mr. S. Sridhar, Chairman and Managing
Director, National Housing Bank, India
I am indeed delighted to be here to add my own welcome, on
behalf of National Housing Bank to all the delegates, particularly
our overseas friends, to this Regional Policy Dialogue on Pro-poor
Housing Finance which will be followed by a meeting of the Country
Representatives of 6 countries.
I must compliment UNESCAP, Dr. Ravi Ratnayake, Dr. Yap and Mr.
Adnan Aliani for this laudable initiative. I understand that such a
regional workshop on Pro-poor housing finance is the first of its
kind in two decades. This workshop will kick off a study process
which in the next 6 months or so will lead to a clear perspective
on the issues concerning housing finance for the poor in the 6
countries that are part of this exercise.
Apart from the findings of the study, in my view, the process of
study will probably be equally rewarding. The conclusions and
recommendations of this exercise will hopefully be useful for
international agencies such as UNESCAP, UN Habitat and national
government agencies to take concrete steps to address the issues
identified.
Housing as an issue has, in recent years emerged on the centre
stage of the development agenda. This is partly due to the basic
role of housing in everyday life. Housing is much more than a mere
shelter. It becomes the home in all its emotional and psychological
dimensions, particularly where there is ownership. It promotes
financial stability as house as an asset can be monetized or
leveraged in times of need. At another level, housing has caught
the attention of national and international policy makers as it has
lagged economic growth and linkages between housing and growth are
becoming clearer. The inexorable urbanization all over the world
and in Asia as well, with shifts in population to the urban areas
has naturally led to the issues of shelter. The proliferation of
slums constitutes a response of the poor people to the problem of
shelter while they address the problem of earning livings in the
cities.
The United Nations has highlighted the need to address the issue
of adequate shelter for the urban poor in the context of improving
the quality of their lives, through inclusion of slums in
Millennium Development Goals. Various national governments have
formulated policies within the framework of their respective
economic policies and having regard to the local conditions. In our
own country, India, the Government has adopted Affordable Housing
for All as the theme of the National shelter policy. This has been
done in the context of the housing boom in India bypassing the
poor. Hence the focus on the unserved and the underserved.
While housing and the broader concept of human settlements and
habitat have found their place on the development agenda, both at
the national and international level, specific action has largely
been left to national governments. While many governments have set
up or encouraged the formation of institutions to implement
different aspects of the national agenda, housing and housing
finance for the poor has been in the domain of the government or
their designated agencies, almost wholly in the public sector.
However, we have not been able to adequately address this aspect
due to the large volumes and quantum of resources involving
competing demands on the financial resources of governments. Hence,
the formal financial system has a major role to play. The
reconciliation of the development objectives with the commercial
compulsions of the financial sector is a major challenge.
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21
Four issues arise in this regard. These are availability,
affordability, risk mitigation, enabling legal, policy framework.
Adequate availability of finance for the poor has always been a
challenge in most countries. In India, for instance, whilst
mortgage finance has recorded a CAGR of 46.4%, over the period
2000- 2006, the number of accounts, a proxy for number of houses
has recorded a CAGR of only 12.6%.This indicates growth is value
driven and not volume driven. This, combined with anecdotal
evidence can lead to the conclusion that availability of mortgage
finance for lower income groups is inadequate. As per Government of
India statistics, 99% of the urban housing shortage which is
estimated at 24.7 million units is in the lower income segments.
Thus how can the poor get access to formal institutional finance
for housing is an important issue that the UNESCAP-NHB study would
tackle? Fair amount of work in this regard has been done round the
world, at UN Habitat, the World Bank, Asian Development Bank ,other
international development agencies, which would be useful models.
While traditionally the banking system has been the major provider
of housing finance, can other segments of the financial system such
as the capital markets, micro finance institutions, and community
organizations be tapped in a significant and sustained manner? What
could be various financial products and investments that can
deliver formal finance for housing to the poor? Would the existing
system and rules work? Should there be a new financial
architecture? These are all issues that come to the fore.
Affordability is the other major concern in designing financial
products for the poor. It is so in the case of housing as well,
accentuated by the longer tenor required of the housing finance as
compared to livelihood or enterprise finance. Affordability covers
not only the cost of credit but also cost of the house, as with
increasing property prices, the quantum of finance becomes so high
as to make a loan on normal commercial terms unaffordable for the
poor. There is also the margin money that the beneficiary has to
contribute. Is there then a role for the government through
subsidy, and if so, in what form and manner? How can such subsidies
be best targeted and minimized so that a credit culture can be
encouraged? Globally, the issue of financial inclusion is engaging
the attention of policy makers. Most governments have adopted a
strategy of inclusive economic growth. Housing for the excluded
through access to finance which is affordable, is an important
element of this strategy.
In this regard, risk mitigation assumes importance in smoothing
the flow of institutional finance to the poor. In developing
countries, risk mitigation mechanisms are at a nascent stage. In
India itself, they are practically absent although in other
financial market segments risk mitigation mechanism are working.
Mechanism such as mortgage insurance/guaranty, guarantee funds,
etc. would need to be put in place. Title indemnity is also another
mechanism.
Last but not the least, the role of the State: There is no
gainsaying the fact that in any financing or development
initiative, the Government has a major role to play. Accordingly,
in devising possible solutions to pro-poor housing finance, the
Government will need to be present in significant measure. I
include other regulating agencies such as the central bank, real
estate regulator etc. Their role could be in the form of providing
viability gap funding, risk mitigation, addressing land tenure
issues, urban and regional planning, fiscal issues, setting up and
maintaining reliable property records and database suitable
database, ensuring that appropriate legal framework is in place and
is enforceable. I am sure that the present study will address these
issues in some depth.
In conclusion, the issue of pro-poor housing finance,
particularly in developing countries, is quite complex. Making it
work at the ground level using market based solutions,
combining
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22
them with the programmes of the State is a major challenge.
Obviously, the solutions (and there will have to be a range), will
differ from country to country as they will have to be developed in
the local context. Further, globalization of housing finance
markets has not taken place significantly as far as developing
countries are concerned. However, internationalization in the form
of experience sharing, capacity building, lessons to be learnt from
experiences of others, both successful and not so successful would
obviously be useful. In that sense, a network of national HFIs
which would interact on an ongoing basis through meetings, mail,
joint studies, joint product development, etc. would be invaluable.
The contours of such solutions can perhaps be similar and they can
be harmonized and synthesized. This initiative of UNESCAP, in which
NHB, India has the privilege of being associated, is a commendable
effort in this direction and a pioneering one. I think UNESCAP,
UN-Habitat, World Bank, other international development agencies,
policy makers, bankers, representatives of civil society, and
indeed all stakeholders would be interested in the findings of the
Study.
I am indeed delighted to inaugurate this kick-off meeting.
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23
Discussion Paper on pro-poor housing finance2
Introduction
Housing is a basic and fundamental right, since it not only
provides shelter and the space for households to live in privacy,
security and dignity; it also provides a point of reference through
which households can access other services and utilities. Access to
housing is a key determinant of urban conditions and of the social
status and well-being of the households. Therefore, access to
adequate housing is essential for the achievement of the Millennium
Development Goals.
Housing is also a key driver of a countrys economy. Over six
hundred industries are linked to housing. It is a labour intensive
industry that provides employment to both skilled and unskilled
workers. Turmoil in the land and housing markets can translate into
turmoil in capital and labour markets. A well functioning and well
governed housing market is crucial not only to provide shelter and
security to individual households, particularly to the poor, but
also for macro-economic stability of a country.
Housing, including the cost of land, is an expensive commodity,
often costing as much as 9 or 10 times a households annual income.
As such it is unlikely that many except the richest of households
can be expected to have readily available funding necessary to
acquire housing up-front.
Access to adequate housing is a key issue in Asia and the
Pacific. Over 500 million people or
2 This paper was prepared by Mr. Adnan H. Aliani, Economic
Affairs Officer, UNESCAP
Figure: Costs of Raw and Developed Land compared to monthly
incomes
0
0.2
0.4
0.6
0.8
1
1.2
Africa LatinAmerica
ArabStates
Asia &the Pacific
Rat
io o
f 1 m
2 of l
and/
m
onth
ly h
ouse
hold
in
com
e
Raw LandDeveloped Land
Source: UN HABITAT, Global Report on Human Settlements, Nairobi
2003
-
24
45 percent of all urban residents of the region live in
sub-standard housing, in slums and squatter settlements. With rapid
urbanization, globalization and climate change, this figure is
likely to increase in the next 15 to 20 years.
One indicator that shows this unaffordability of housing in the
region is the fact that compared to other regions of the world,
land-to-income ratios are the highest in Asia and the Pacific (See
figure).
There are several factors contributing to the high cost of
housing in Asia and the Pacific. These include, high costs of land,
infrastructure, building materials, poor urban planning etc. While
addressing some of these issues is likely to lower the costs of
housing, housing will continue to be the single most expensive item
that a household purchases and owns. Housing finance is therefore
crucial to improve access to housing, particularly for the
poor.
However, access to housing finance is limited in countries of
Asia and the Pacific. This is because in most countries, the size
of the formal housing finance sector is relatively small. Table
below shows the size of housing finance systems as a share of GDP
in selected Asian emerging markets.
Table: Size of the Housing Finance Sector in selected countries
expressed as average mortgage debt over GDP measured over
2001-2005
OECD Mortgage Countries Debt/GDP Australia 61.9 Canada 42.9
Japan 35.7 New Zealand 78.2 Singapore 60.2 United Kingdom 61.5
United States 67.4 Latin America Argentina 1.7 Bolivia 9.5 Brazil
2.6 Chile 14.8 Colombia 10.0 Mexico 9.8 Peru 2.2 Venezuela 0.7
Mortgage Asia Debt/GDP Bangladesh 2.5 China 10.0 India 4.9
Indonesia 2.1 Iran 2.8 Korea 20.8 Malaysia 28.3 Pakistan 0.7
Philippines 6.8 Thailand 15.5 Africa Algeria 1.3 Ghana 0.5 Morocco
7.0 South Africa 22.0 Tunisia 6.0
Source: Warnock, V. C. and Warnock, F. E., Markets and Housing
Finance Working Paper 13081, National Bureau of Economic Research,
Cambridge Massachusetts, 2007
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25
Issues in Housing Finance
A household can only afford to buy a house when payments are
spread out over a period of years. In general, the longer this
period is, the smaller the regular payments are and the more
affordable housing is to a greater number of households. In a well
functioning housing market, primary housing finance institutions
can access reasonably cheap, long term financing and provide it to
borrowers, with affordable and relatively stable interest
rates.
Issues related to capital markets
Before lending, housing finance institutions must raise
economical, long term financing from domestic or international
financial markets through securitization in the secondary mortgage
markets. Among other things this requires:
Mortgage securitizers who have the capacity and tools for
bundling and packaging mortgages into securities and long term
investors who are willing to buy these.
Reliable and independent rating systems and vigilant regulations
that would inform domestic and foreign investors of their risks and
also penalize malfeasance.
Mechanisms for risk mitigation, such as guarantee funds or
back-stopping mechanisms to assist financial institutions in terms
of temporary liquidity crunches.
Issues related to mortgage and project lending
Once it has access to such funds a housing finance institution
must have means to secure adequate information on the borrower,
have the ability to value property and have the legal right and
ability to secure collateral. Borrowers could be real estate
developers asking for project financing or individual households
borrowing to buy their house.
Among other things, this requires:
The existence of a conducive legal and regulatory environment,
that on the one hand protects the borrower from malpractices by
lending institutions and on the other hand, gives the legal right
and access to the lender to foreclose on collateral property.
Transparent and accurate land and property information systems
to assist the lending institutions appraise the property more
accurately
Capacity, tools and information for the lender to determine the
creditworthiness of prospective borrowers. Absence of such
standardized information often increases the transaction costs and
risks of the lending institutions in lending funds to the
borrowers, resulting in higher interest rates and other
charges.
Issues related to housing finance for the poor
In most countries of Asia and the Pacific, formal housing
finance systems have failed to reach the poor, particularly those
who do not have regular and stable incomes. There are several
barriers that prevent the poor from accessing financing from formal
financial institutions.
Among other things these include:
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26
Lack of formal employment, regular incomes, collateral and
formal credit histories. Formal financial institutions therefore
consider the poor as high risk or sub-prime borrowers.
High transaction cost per loan for the lending institution. The
poor tend to build, improve and expand their houses step by step as
and when their incomes permit. They often require a series of small
housing loans that they can pay off easily. Processing such small
loans is not cost effective for formal housing finance
institutions.
Unsuitable procedures and rules. To reduce risks and to increase
their ability to recover loans or to repossess properties formal
financial institutions require a considerable amount of paperwork,
which the poor, with their low levels or sometimes lack of
literacy, find intimidating and overwhelming. Acquiring a loan
often means several trips to the lending institution during office
hours, which the poor, often dependent on daily wages, cannot
afford to make.
In response to this apparent inability of formal housing finance
institutions to reach the poor, many non-governmental and
community-based organizations have added housing finance to their
micro-finance schemes. Such schemes are community based or run by
governmental and non-governmental micro-finance institutions
(MFIs).
They usually rely on:
Social collateral and community-based screening processes to
ensure repayment. Often their loan repayment rates are higher than
those of formal sector banks.
Small incremental or sequential loans to increase the likelihood
of repayment. This also allows borrowers to develop mutual trust
and understanding and a credit history with the MFIs.
Keeping their transaction costs low because those screening the
borrowers are often from the same community or settlement and know
the borrower fairly well.
Very little or no paper work because those offering the loans
usually have the same level of literacy, belong to the same
community or settlement and rely on social pressure rather than
collateral to recover loans
However, such programmes:
Tend to be small in scale and reach only a limited number of the
poor
Have relatively short duration of loans and high interest
rates
Issues for discussion
Before outlining the issues for discussion at the Regional
Policy Dialogue it is important to understand its context and
background.
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UNESCAP Regional Programme on Pro-poor Housing Finance
In order to provide access to housing finance to a larger number
of the poor, financial and institutional linkages between formal
and micro-finance and community-based housing finance institutions
need to be strengthened. This would, on the one hand, enable the
micro-finance and community-based institutions to increase their
coverage and on the other, enable the formal sector institutions
reach markets that were hitherto too risky or altogether
inaccessible.
To address these issues, UNESCAP has initiated a regional
programme on Pro-poor Housing Finance. The objective of the
programme is to assist governmental and non-governmental policy
makers and operational staff to develop and implement pro-poor
housing finance programmes and policies through networking and
exchange of experience.
One of the key activities of the programme is a regional study
on housing finance systems in Asia and the Pacific. UNESCAP is
undertaking this study in partnership with the National Housing
Bank of India. Under the proposed study, the state of the art in
pro-poor housing finance will be documented and analyzed in six
countries by organizations and agencies that have been designated
by their national governments. The participating countries are:
India, Indonesia, Mongolia, Pakistan, Sri Lanka and Thailand. A
country reporters Meeting is being held back-to-back with this
Policy Dialogue. The Country Reporters meeting will discuss and
finalize the guidelines for preparing the reports.
The drafts of the country reports will be presented and
discussed at national workshops in each of the six participating
countries. The purpose of convening the national workshops would be
to generate discussions at the country-level and to refine the
outcomes of the country reports. Once the country reports have been
completed, a comparative analysis will be prepared based on the
country reports and presented to a regional symposium. The regional
symposium will discuss the issue of pro-poor housing finance in
greater depth and deliberate on the need for regional mechanisms
and structures, including the need for setting up a regional
network of formal and community-based housing finance
institutions.
Objectives of the regional policy dialogue
As the first activity of the programme, the Regional Policy
Dialogue is therefore, primarily a brain-storming meeting to
identify and discuss critical and emerging issues in housing
finance in general and financing housing for the poor in
particular. It will also be a first opportunity to discuss the need
for information exchange and networking on pro-poor housing
finance.
Substantive sessions and format for discussion
The Regional Policy Dialogue is divided into three substantive
sessions as follows:
Session One will focus on issues related to capital markets
Session Two will focus on issues related to mortgage and project
lending
Session Three will focus on issues related to housing finance
for the poor
Under each session, participants will be requested to discuss
opportunities, constraints and challenges, future prospects and
directions needed to improve the housing finance situation.
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They would also be requested to identify any best or innovative
practices and policies in their countries that address the
substantive areas of discussion as well as identify areas where
they think future research is required (See Box).
Box: Summary of issues for discussion in each session
Session I: Issues related to capital markets
Session II: Issues related to mortgage and project lending
Session III: Issues related to housing finance for the poor
What are the: Constraints Opportunities and challenges Future
prospects/direction
needed Who needs to take action to
improve the situation? Innovative practices/ policies/
programmes of Government/ CSOs/ private sector
Priorities for research
What are the: Constraints Opportunities and challenges Future
prospects/direction
needed Who needs to take action to
improve the situation? Innovative practices/ policies/
programmes of Government/ CSOs/ private sector
Priorities for research
What are the: Constraints Opportunities and challenges Future
prospects/direction
needed Who needs to take action to
improve the situation? Innovative practices/ policies/
programmes of Government/ CSOs/ private sector
Priorities for research
Session on possible regional actions
The final session of the Regional Dialogue will focus on
possible regional actions that may be required. These could include
issues such as:
Norms/standards/criteria at the regional level
Networking and exchange of information and best practices
Capacity building of participating institutes
Topics for comparative research