[Working session] What can investors do to encourage housing finance?

  • Deborah BURAND, Director of International Transactions Clinic at New York University School of Law
  • Lucie ASTIER SUCH, Agence Française de Développement (AFD) 
  • Britt GWINNER, International Finance Corporation (former) 
  • Mona KACHHWAHA, Unitus Capital 
  • Vinod KOTHARI, Vinod Kothari Consultants 
  • Claudia ROJAS, Triple Jump – MicroBuild

After a short round of introductions, Deborah BURAND started the session by asking Claudia ROJAS to present the work of MicroBuild and to discuss some of the most relevant things that this fund has demonstrated to date.

Rojas began her presentation by mentioning that MicroBuild was created, together with Habitat for Humanity, not only for financial inclusion but also to demonstrate and show the financial sector the availability and opportunity to scale housing finance initiatives. According to her, the results have been remarkable. This has been one of the most successful Triple Jump ventures in recent years. It has successfully leveraged the capital of the lenders 1.3 times. It has also demonstrated what it intended with its design, which was to achieve social and economic benefits, even during the COVID-19 pandemic. This is the result of a very good selection process. She noted that MFIs were asked to be engaged, have a minimal portfolio, and be very committed to the process. Working with Habitat for Humanity as technical assistance provider was also key to its success.

To this success story, Burand reacted and mentioned that she thinks Triple Jump could have more relevant success stories to share as well. According to Burand, Triple Jump´s experience is also related to the work of Lucie ASTIER SUCH, from the French Development Agency (AFD), who looks at housing finance from an ecosystem point of view. Burand asked Astier Such if technical assistance is necessary or valuable for the design of housing finance programs, and to what extent there is a need for more information flows to potential investor communities.

For Astier Such, there is a current need for technical assistance, as this is key for MFIs to function. AFD has been providing technical assistance in several aspects. A key aspect is to support the design and creation of the housing finance product, there are several types of constructions and MFIs have to build products that are adapted in terms of disbursements but also in terms of the maturity of the clients. Another key aspect is on the beneficiary side, where they have been training clients on how to budget. Astier Such noted that a great example of AFD’s technical assistance has been the linking of MFIs with housing providers to support green housing. There is a large need for how to design an affordable green offering. With respect to the need for information, she clarified that the AFD has been trying to provide data and indicators to show that housing finance can be interesting for MFIs. The AFD has been working with the Centre for Affordable Housing Finance (CAHF) in Africa to understand the market and bring relevant indicators such as cement costs, price of the cheapest house, interest rates and more. Today they count with a dashboard of about 80 indicators. This is a great example, as it helps investors to take decisions.

After the reflections of Rojas and Astier Such, Burand proceeded to ask Britt GWINNER, former member of the International Finance Corporation (IFC), what it would take to make the sector bigger. Gwinner began by mentioning that, in order to scale up, both technical assistance and a good flow of information are required. Investors need to clearly understand the cash flows of the underlying loans, but also the social impact of their investments. The likelihood that borrowers will repay their loans is key from an investor's perspective. Well-informed institutions that understand the economics of the households they are lending to is fundamental in making appropriate loans that will be repaid in the future. This requires data, technical assistance for product design and an investor base already interested in the sector. Scaling up also requires moving from an NGO approach to a business approach which addresses the impact of these investments.

Gwinner added that the main differences between a typical working capital microcredit and a typical microfinance loan are a longer tenure, a different assessment of the client's credit analysis (since home loans are not intended to generate income like typical microcredit ) and lower interest rates. Therefore, the type of financing for home financing must respond to these characteristics. Burand asked how to attract a group of investors to housing microfinance considering these characteristics.

To Burand's question, Gwinner responded that the key to linking investors is to provide a longer tenure for the underlying instrument that backs the bond that the lender issues. By doing so, it is possible to create long-term bonds that are interesting to the market.

For Vinod KOTHARI, the role of securitisation is key. The problem is not the asset class of the micro mortgage lending, but it is the lack of resources, capital and attention by investors what is limiting the sector. For longer tenures of funding and for the informal income segment, securitisation is key to funding mortgages, as it has been for 65% of the mortgages in the US, and about 30% to 40% of the rest of the world. There are three key things that countries need to do to create an efficient ecosystem to increase securitisation of affordable housing: 1) an enabling and ensuring legal system, 2) a tax neutral regime, and  3) a level playing field for off shore investors, since this is how international money flows to securitisation transactions.

For Mona KACHHWAHA, from Unitus Capital, the affordable housing finance market is large, and the lending institutions that focus on it have had a strong growth trajectory. This sector is currently in an evolutionary stage. There is a great need for equity capital, but this capital must be developmental. The mindset of an investor should be one of a long-term partner, focused not only on scaling with products for existing client segments, but also on developing new programmes for other client segments that have not yet been served. There are several forms of housing across the formal-informal spectrum that need to be studied and understood. Customers who can only afford, or only have access to informal titles need more financing support than they get today. She added that investors should encourage companies to take advantage of advances in fintech, and bring them into the affordable housing finance sector. Kachhwaha also emphasised the importance of interacting, and including legislators and regulators to drive the sector forward. Finally, according to her, special attention should be given to female clients, as they are a very important part of the excluded segment, and applying the gender lens on affordable housing finance can be highly impactful.

Burand concluded by highlighting that there are many opportunities for investors to encourage housing finance. The opportunities to boost this sector come from different angles and involving different stakeholders.