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The Implementation of Contract Savings Systems in Emerging Economies - Features, Recommendations and Examples. Presentation by Dr. Friedemann Roy, Association of Private Bausparkassen, Berlin at World Bank Seminar (11 March 2003).

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The Implementation of Contract Savings Systems in Emerging Economies - Features, Recommendations and Examples

Presentation by Dr. Friedemann Roy, Association of Private Bausparkassen, Berlin

at World Bank Seminar (11 March 2003)


When should governments encourage the implementation of contract savings schemes
When should governments encourage the implementation of Contract Savings Schemes?

High default ratios/

foreclosures sales

Low “official”

savings ratios

Affordability

Ill-functioning

legal conditions

Difficulty to obtain

a second mortgage-lien

Restricted lending to

private sector


Conclusion
Conclusion Contract Savings Schemes?

  • Under these economic circumstances, access to credit is difficult, especially for low and middle income groups.

  • A complementary tool is needed to fill this gap and to make housing affordable.


How do Contract Savings Schemes (CSS) work? Contract Savings Schemes?

Allocation fund

Savings

Loans

t

€ 60,000 - € 50,000

€ 40,000 - € 50,000

lifetime of contract (e.g. € 100,000)

Customer saves

and earns interest

(40 - 50 % of

contract amount)

Notification of

bausparkasse

Repayment of loan with interest rate fixed on conclusion of the contract


How do CSS work?: the allocation system Contract Savings Schemes?

Inflow of funds

Redemption payments

Savings

Termination of contract

Loans

Deposits

Outflow of funds


Conclusion a sound financing structure for a home
Conclusion: a sound financing structure for a home Contract Savings Schemes?

50 % Mortgage

30 % Bauspar funds

20 % Down-payment

= 100 % of the purchase price


Conclusion financial perspective of contract savings systems
Conclusion: financial perspective of Contract Savings Systems

  • Option component: right but no obligation to call a loan at pre-specified terms.

    • Loan is below market rate.

    • Interest rates are fixed over whole lifetime of contract.

    • No underwriting process to receive loan proceeds.


Specific features of Contract Savings Systems in emerging economies

Legal conditions

Credit risk

Sound liquidity management in view of volatile inflation rates

Agency risk

Attractiveness


Recommendations for managing the implementation of CSS in emerging economies

Credit risk

Customer builds up creditworthiness over time

Default rate of bausparkassen industry:

0.02% of entire loan portfolio


Recommendations for managing the implementation of CSS in emerging economies

Agency risk

Specialised institutions?


Recommendations for managing the implementation of CSS in emerging economies

Attractiveness

Stable and viable institutions managing CSS 

tight regulation, experienced international support


Recommendations for managing the implementation of CSS in emerging economies

Sound liquidity management in view of volatile inflation rates

Legal conditions

Inflation rate < 10 %

Maintain short and consistent waiting periods

Clearly define waiting period


Recommendations for managing the implementation of CSS in emerging economies

Sound liquidity management in view of volatile inflation rates

Legal conditions

Duration of savings period

Require a reserve fund to meet future loan demand

Introduce regulatory body

Flexible contract management


Recommendations for managing the implementation of CSS in emerging economies

Social housing programmes

The role of subsidies

Government support for

housing construction financing

Objective: support development of private market (start-up effects) and improvement of the nation’s social goals


Recommendations design of a subsidy scheme
Recommendations: design of a subsidy scheme emerging economies

  • Provide realistic estimate of housing demand.

  • Continue to focus on macroeconomic and housing reforms.

  • Helping to overcome the liquidity constraint of borrowers.

  • Consider specific target groups to assist those in need of a subsidy.

  • Link subsidies to the use of funds for housing purposes.


Implementation of css in emerging economies examples
Implementation of CSS in emerging economies - examples emerging economies

Central and eastern Europe

  • Slovakia.

  • Czech Republic.

  • Hungary.

  • Croatia.

  • Envisaged in Romania.

    Asia:

  • India (BHW in joint venture with Birla Home Finance).

  • China (Schwäbisch Hall in joint venture with China Construction Bank).


Bausparen in the czech republic
Bausparen in the Czech Republic emerging economies

Bausparen has existed since 1993

About 4.5 mio. Czechs have concluded a bauspar-contract.

Every second house under construction is financed through bauspar-funds.

Funds are used for renovation/modernisation (39%), construction (17%), the purchase of a home (39%) and miscellaneous

building activities (10%).

Housing expenditures =

18% - 19% of income


Czech Republic: correlation between granted bauspar-loans and construction activities

  • Since 1995, the number of dwellings built has doubled.

  • In 2000, the government spent CZK 5 billion on subsidies. Bausparkassen granted loans for CZK 17.4 billion.


Bausparen in slovakia
Bausparen in Slovakia and construction activities

About 60 % of the Bauspar customers

conclude a new contract

after completion

of the previous contract

Bausparen has existed since 1992

1.5 mio. Slovakian citizens have concluded a bauspar contract (every fourth person)

Funds are used for renovation/modernisation (37%), construction (23%) and purchase of home (40%)



Slovakia: correlation between public spending and granted bauspar-loans

  • In 2001, the subsidies have lead to a financing volume of the bauspar industry of € 381.9 Mio.

  • Since 1997, the subsidy amount has been reduced by 34 %. However, the volume of bauspar-loans has risen by 87 %.


Conclusion: a sound and functioning housing bauspar-loans

finance system

Own funds stabilise financing structure

Better access to credit

Buffer in case of difficulties

Capacity and willingness to repay loan increases

Housing affordability rise

CSS helps to develop housing finance system by supplementing other Models


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