Designing a Housing Microfinance Loan Product

Designing a Housing Microfinance Loan Product Features of the Housing Microfinance Loan Product (in Generic Manual)

Outline • A Review – Best Practices & Principles • Objective Framework in Lending • Assessment of Policies & Procedures • Loan Terms and Conditions • Eligibility Criteria • Loan Purpose, Amount & Value • Loan Terms • Loan Repayment • Appropriate Risk Management • Interest Rates, Fees & Charges • Savings Component

A Review: Microfinance Best Practices & Principles • The practices that MFIs follow in providing financial services to low-income clients that have led to success and profit. • Best practices should be reflected from product design stage to implementation, to monitoring, up to collection.

OBJECTIVE FRAMEWORK IN LENDING RISK • 1. Minimize the risks of lending to a client who has no or limited credit history, no business information and no marketable collateral to offer • 2. Minimize the risks associated with high dependence of repayment on future income ( crop success or failure) SERVICE COST 4. Reduce costs of small loans 3. Facilitate enterprising poor people access to credit

USING THE FRAMEWORK: ASSESS LENDING POLICIES AND PROCEDURES When assessing whether a policy or procedure is appropriate or not, ask the following questions: “Will the policy or procedure….. • Increase or reduce my risk of lending to this particular client? • Increase or reduce my cost of lending to this particular client? • Improve and speed up customer service?”

NOTE: The amount of the first loan is not necessarily tailored around what the client needs, but around what the institution is willing to risk with a borrower who offers no collateral, no reliable information, no credit history.

Housing Microfinance loan Product LOAN TERMS AND CONDITIONS • Loan Product Objectives • Eligibility Criteria • Loan Purpose • Loan Amount • Loan Terms • Loan Repayment • Loan Guarantees • Interest, Penalties and Charges • Other Term & Condition: Savings

HMF Loan Terms & Conditions:Eligibility Criteria First time Borrowers: • Existing Microfinance clients • Borrower’s business at least two years in operation. • Multiple, regular sources of income other than the main business • A resident in the community for at least two years • 18-65 years of age • No past due accounts with the bank, other banks and/or other creditors/suppliers (qualify) • Clear from cases at the Barangay or Court • Willingness to pay in frequent installments of capital and interest

HMF Loan Terms & Conditions:Eligibility Criteria Repeat borrowers: • All installments from previous loan made on time or with a delay of not more than three days. • An AO should provide justification for recommending a repeat loan with less than 100% on-time repayment rate.

HMF Loan Terms & Conditions:Loan Purpose • Loans can be used to finance Home Construction, Home and/or lot acquisition, lot acquisition intended for housing cum business, and home improvement/repairs.

HMF Loan Terms & Conditions:Loan Amounts • Loan amounts start small and scale up as the client develops a credit history with the bank • Incremental loan amounts to support incremental home repair or building • Per BSP: Up to P150,000 for home improvement/repairs; Up to P300,000 for house construction and/or lot acquisition – but these all depend on the risk appetite of bank. • Loan increases are not automatic but determined by repayment behavior and cash flow.

HMF Loan Terms & Conditions:Loan Value • Capacity to pay based on household cashflow analysis • Up to 90% of the appraised value in case of REM but can be lower. • Acceptable valuation in cases of usufruct, leases, etc.

HMF Loan Terms & Conditions:Loan Terms • Determined by cashflow. The shorter term, the better, subject to the Bank’s credit policies • BSP’s Circular 678 allows for a maximum of 5 years for home improvements/repairs and up to 15 years for construction or acquisition • MABS recommends shorter maximum term/s • No grace periods

Why Short Term ? • Most micro borrowers have quick cashflow turn around . • The incentives to repayment such as expectation of another loan, only works in short-term loans. • Business and family are intertwined; problems in the family affect repayment. The longer the term, the greater the risk. • Others? ____________________________ _____________________________________

HMF Loan Terms & Conditions:Loan Repayment • Weekly, semi-monthly, monthly installment of capital and interest (frequent amortization) • With savings component • Loan payments should not exceed a reasonable percentage of clients’ income as determined by cash flow analysis.

Why frequent payments? • The risks involved in microfinance lending are largely mitigated by regular payments of principal and interest. • Most micro borrowers are involved in several income generating activities, usually off-farm, that ensure a steady income flow for the household.

HMF Loan Terms & Conditions:Appropriate Risk Management • For House Construction and House & Lot Acquisitions- secure tenure instruments to be used as collateral (see Annex “A” of Generic Manual) for loans over P150,000.00 • Opening of savings account shall be required for clients with no existing savings account • Adequate loan monitoring, collection, control, provisioning which is to be included in the bank’s HMF manual • A lien or mortgage over the house and/or lot to be financed • Mortgage Redemption Insurance (MRI) shall be required to cover against death for loan amounts exceeding P______. • Additional risk cover may be availed from government guarantee programs (for loans exceeding amount P______).

HMF Loan Terms & Conditions:Interest Rates • The interest rate must reflect competition, administrative costs, costs of capital, and loan loss reserves. • Interest rates and other charges should be revised periodically and adjusted according to inflation and/or the cost of capital. • HMF interest rate on loans with term exceeding 6 mos/ 12 mos should be on declining balance.

HMF Loan Terms & Conditions:Fees and charges Fees and other charges can function like interest rates in providing revenue to the banks. • They can be proportional to the size of the loan or fixed, and they can be collected in advance or repeatedly (e.g. at renewal monthly) while a loan is outstanding. • They may appear more acceptable to the borrower if they are linked to specific loan services (e.g. preparation of documents, inspection, etc.).

HMF Loan Terms & Conditions:Savings Components Savings as a feature to attract clients to get a HMF loan. • Require clients to open a savings account to facilitate loan release and loan payment. • Encourage clients to escrow at least 10% of loan principal in their savings account • Establish client-friendly withdrawal policies (such as maintaining equivalent of 30% of principal in savings account with clients able to withdraw the rest anytime) • Encourage clients to save 20%-30% of their net income proceeds in savings and use built-up savings as collateral in place of a co-maker.

END OF PRESENTATION QUESTIONS?

Designing a Housing Microfinance Loan Product