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

1. 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)

2. 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

3. Conclusion • 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.

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

5. How do CSS work?: the allocation system Inflow of funds Redemption payments Savings Termination of contract Loans Deposits Outflow of funds

6. Conclusion: a sound financing structure for a home 50 % Mortgage 30 % Bauspar funds 20 % Down-payment = 100 % of the purchase price

7. 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.

8. 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

9. 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

10. Recommendations for managing the implementation of CSS in emerging economies Agency risk Specialised institutions?

11. Recommendations for managing the implementation of CSS in emerging economies Attractiveness Stable and viable institutions managing CSS  tight regulation, experienced international support

12. 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

13. 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

14. 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

15. Recommendations: design of a subsidy scheme • 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.

16. Implementation of CSS in emerging economies - examples 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).

17. Bausparen in the Czech Republic 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

18. 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.

19. Bausparen in Slovakia 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%)

20. Slovakia: development of number of flats being started and finished

21. 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 %.

22. Conclusion: a sound and functioning housing 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