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MARCH 2015 Summary: Housing Microfinance in South Asia

Core Content

This document presents a SmartLesson on the implementation of housing microfinance (HMF) products, focusing on the experiences of Aadhar Housing Finance Private Ltd. in India. It outlines the key considerations and strategies for microfinance institutions (MFIs) looking to enter the housing finance market, emphasizing the importance of understanding customer demand, conducting thorough market assessments, and building institutional capacity.

Main Authors and Contributors

• Friedemann Roy: Global Product Lead for IFC Housing Finance Advisory Services, with extensive experience in banking, housing finance, and microfinance across over 50 countries.
• Shilpa Rao: Former Associate Operations Officer at IFC, involved in seven housing finance projects in India with microfinance institutions and housing finance companies.
• Sachin Bansal: Former Operations Officer at IFC, managed 10 projects in South Asia related to microfinance, payments, and financial awareness.

Key Points of the Document

Why Enter the Housing Microfinance Business?

• Mission Alignment: HMF aligns with the mission of microfinance by addressing the housing needs of low-income groups.
• Market Opportunity: Rising demand in South Asia presents a significant opportunity for MFIs to enhance profitability and sustainability.
• Customer Benefits: HMF clients tend to be lower credit risks and more satisfied, contributing to better productivity and quality of life.

Lessons Learned: DOs and DON'Ts

DOs

1. Understand Customer Demand Patterns

   • Income and title status affect creditworthiness.
   • Housing needs vary between improvement, extension, and appliance purchase.
   • Loan amounts depend on location, with urban areas typically requiring higher amounts.

2. Conduct Detailed Market Assessments

   • Identify target clientele and effective demand.
   • Assess the enabling environment and competitive landscape.
   • Use findings to design appropriate HMF products.

3. Assess Institutional Readiness

   • Ensure management support and board involvement.
   • Evaluate financial and operational performance.
   • Secure long-term funding and sufficient staff resources.

4. Build Staff Capacity and Incentive Systems

   • Train staff on credit assessment and construction knowhow.
   • Appoint a dedicated project manager ("product champion").
   • Align incentives for group lending and HMF products.

5. Consider Introducing Housing Support Services (HSS)

   • HSS includes technical information, professional services, and CTA/engineering advisory.
   • These services help clients improve their homes independently.
   • Market research is essential to determine customer preferences and willingness to pay.

6. Scale Up After Pilot Experience

   • Test HMF products through a pilot before nationwide rollout.
   • Adjust loan sizes, down payments, and disbursement methods based on feedback.
   • Explore different scaling models, such as organic growth or partnerships with larger banks.

DON'Ts

1. Underestimate Regulatory Uncertainty

   • Ambiguous regulations can hinder implementation.
   • In India, there are restrictions on non-income-generating loans, including HMF.
   • Conduct a thorough legal review during market assessment.

2. Fail to Upgrade Internal Systems and Processes

   • HMF requires changes in credit appraisal, documentation, and loan-use checks.
   • Implement systems for monthly repayments and delinquency management.

3. Neglect Responsible Lending and Customer Protection

   • Ensure clear disclosure of loan terms.
   • Establish efficient grievance-handling mechanisms.
   • Incorporate credit bureau reporting and ethical staff training.

Conclusion

The document concludes that MFIs with a rigorous yet flexible approach to HMF implementation have achieved success and are leading in the market. It stresses the importance of market research, internal capability assessment, and the appointment of a dedicated HMF product champion. Continuous product refinement and performance monitoring are also essential to maintain a competitive edge in the housing finance sector.

Key Figures and Data

• Aadhar's Portfolio: US$ 102.5 million as of June 30, 2014.
• Loan Size Range: US$ 800 to US$ 3,000.
• Loan Tenor: 24 to 60 months.
• Interest Rates: 22% to 24% in India.
• Customer Income: 80% of Aadhar’s customers earn less than US$ 550 per month.

Appendices

• Figure 1: Illustration of Market Segmentation (Source: Friedemann Roy).
• Photos: Show Rahees Mohammed and his family in their new home, as well as a client of Ujjivan Microfinance Pvt. Ltd. in New Delhi.