proceedings of regional policy dialogue on pro-poor housing finance

United Nations Economic and Social Commission for Asia and the Pacific

United Nations Human Settlements Programme

N a t i o n a l H o u s i n g B a n k , I n d i a ( N H B )

Proceedings of the Regional Policy Dialogue

on Pro-poor Housing Finance 30 to 31 January 2008, New Delhi, India

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Acknowledgements

This report was prepared by Mr. Vishal Goyal and Mr. P.K. Kaul from the National Housing Bank, India and Ms. Natalja Wehmer and Mr. Adnan H. Aliani, United Nations Economic and Social Commission for Asia and the Pacific.

Disclaimer

This report is issued without formal editing.

The designations employed and the presentation of material in this report do not imply the expression of any opinion whatsoever on the part of the secretariat of the United Nations concerning the legal status of any county, territory, city or area or its authorities, or concerning the delimitation of its frontiers or boundaries regarding its economic system or degree of development.

Excerpts may be reproduced without authorization, on condition that the source is indicated.

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TABLE OF CONTENTS

Introduction .......................................................................................................................... 1 Objectives of the Regional Policy Dialogue......................................................... 2 Participation..................................................................................................... 2

Proceedings........................................................................................................................... 2 Inauguration and overview................................................................................. 2 Capital markets................................................................................................. 4 Mortgage and project lending issues ................................................................... 6 Making housing finance accessible to the poor .................................................... 9 Regional actions to promote pro-poor housing finance in Asia and the Pacific...... 12

Conclusions ........................................................................................................................ 13 Annex I: Programme........................................................................................................... 15 Annex II: List of Participants .............................................................................................. 16 Annex III: Presentations...................................................................................................... 18

Address of Dr. Ravi Ratnayake, Director, Poverty and Development Division, UNESCAP................................................. 18 Inaugural Address of Mr. S. Sridhar, Chairman and Managing Director, National Housing Bank, India .......................................................................... 20 Discussion Paper on pro-poor housing finance................................................... 23

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INTRODUCTION

Housing is a basic and fundamental right, since it not only provides shelter and the space for households to live in privacy, security and dignity, but also provides a point of reference through which households can access other services and utilities. Access to housing is a key determinant of urban conditions and of the social status and well-being of households. Therefore, access to adequate housing is essential for the achievement of the Millennium Development Goals.

Housing is a key driver of a countrys economy. More than six hundred industries are linked to housing. It is a labour intensive industry that provides employment to both skilled and unskilled workers. Land and housing market turbulences often translate into capital and labour market turmoil. A well functioning and well governed housing market is crucial not only for providing shelter and security to individual households, particularly to the poor, but is also critical for a countrys macro-economic stability.

Access to housing-finance is limited in countries of Asia and the Pacific. A key reason is that the formal housing finance sector is relatively small in most countries. In addition, the formal banking sector (commercial banks, housing banks, house building finance corporations etc.) prefers lending to those with established credit records and regular incomes to ensure monthly installment payments. The formal sector prefers borrowers with some sort of collateral (e.g. land or the house itself) so loans can be recovered in event of default.

Most poor people do not have formal credit records, regular incomes or collateral. Moreover, they tend to build, improve and expand their houses step by step as and when their incomes permit. They often require a series of small housing loans that they can pay off easily. Processing such small loans is not cost effective for formal housing finance institutions. In response to the formal housing finance institutions inability to reach the poor, many governmental, non-governmental and community-based organizations have added housing finance to their savings and credit schemes. These institutions often rely on social collateral and community-based screening processes to ensure repayment. However, such programmes are often small in scale and reach only a limited number of the poor.

In order to provide access to housing finance to a larger number of the poor, financial and institutional linkages between formal and community/civil society (CSO)-based housing finance institutions need to be strengthened. This would, on the one hand, enable the community-based institutions to increase their coverage. On the other hand, it would enable formal sector institutions to reach markets that were hitherto too risky or altogether inaccessible.

The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and the National Housing Bank, India (NHB) have jointly initiated a programme on Pro-poor Housing Finance that seeks to establish a regional network of formal and community/CSO-based housing finance institutions to promote experience and information exchanges and to undertake joint or collaborative activities. The programme aims to move pro-poor housing finance approaches beyond individual micro-credit schemes to country and regional level financing structures.

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The first activity of the project was the Regional Policy Dialogue on Pro-poor Housing finance. It was held at New Delhi from 30 to 31 January 2008 and was organized by the UNESCAP and NHB.

Objectives of the Regional Policy Dialogue

The objectives of the Dialogue were to:

Identify and discuss critical and emerging issues in housing finance in general and financing housing for the poor in particular.

Discuss the need for information exchange and networking on pro-poor housing finance in the Asia and Pacific Region.

Participation

Participants of the Regional Policy Dialogue included chief executive officers and senior officials from selected governments, housing finance banks and institutions and senior decision-makers from community-based and CSO-based housing finance institutions. Representatives of UNESCAP, UN-HABITAT, the World Bank and USAID also took part. A list of participants is annexed.

PROCEEDINGS

The Regional Policy Dialogue was divided into five sessions. These comprised the inaugural session, three substantive sessions on (i) capital market related issues; (ii) mortgage and project lending related issues; and (iii) making housing finance accessible to the poor. The substantive sessions were followed by a session that discussed possible regional actions to promote pro-poor housing finance in Asia and the Pacific, which, in turn was followed by the concluding session. This section provides brief summary of the presentations made and the discussions that followed.

Inauguration and overview

The inaugural session was chaired by Dr. Ravi Ratnayke, Director, Poverty and Development Division, UNESCAP. Dr. Nagesh Kumar, Director General RIS gave the keynote address. Mr. S. Sridhar, Chairman and Managing Director, NHB, delivered the inaugural address. Dr. Vinita Kumar, Economic Advisor, Ministry of Finance, Government of India and Mr. Shri Gandhi, Regional Director, Reserve Bank of India were present on the occasion.

The Dialogue opened with Mr. P.K Kaul, General Manager, National Housing Bank extending a warm welcome to all the participants. He stressed the importance of creating a mechanism for knowledge and experience sharing among the countries and pointed out that the Dialogue provided an ideal platform for laying the foundation for building of a network of institutions in the area of pro-poor housing finance for the mutual benefit of the institutions as well as the sector.

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Mr. Ravi Ratnayake, Director, Poverty and Development Division, UNESCAP said that housing is a basic human right. Access to legal housing enabled people to access basic services such as electricity, clean drinking water and sanitation. It also provided access to

other public services and programmes, such as education and health care, citizen registration and voting rights. A formal residential address facilitated finding jobs and accessing credit and other financial services. Households, particularly poor households, he said, often used their homes for economic activities such as small manufacturing workshops, retail shops and renting rooms for additional income. Housing was therefore much more than a roof over ones head; it was a major factor in defining a households economic and social status and well-being.

Mr. Ratnayake outlined major reasons for limited access of low-income groups to housing finance. Formal finance institutions did not provide pro-poor housing finance because their normal operations required clients to have established credit records, regular income and collateral all of which most poor people lacked. On the other hand, many non-governmental and community-based organizations had added housing-finance to their micro-finance schemes. However, these schemes operated on too small a scale to make a real difference. In order to reach a greater number of the poor, he stressed, formal and non-governmental/ community-based organizations needed to be linked.

He informed participants that a Meeting of Country Reporters on Pro-poor Housing Finance was taking place back-to-back with the Regional Policy Dialogue, to finalize guidelines for the preparation of country reports on the state-of-art on housing finance in India, Indonesia, Mongolia, Pakistan, Thailand and Sri Lanka. The findings of the country reports would form the basis for discussions at national workshops as well as provide inputs for a comparative regional analysis on housing finance systems with a particular focus on providing housing finance to the poor. Lastly, he thanked the National Housing Bank for hosting the Regional Policy Dialogue and the Country Reporters Meeting.

In his keynote address Dr. Nagesh Kumar, Director-General, Research and Information Systems for Developing Countries (RIS) made a strong case for closer regional cooperation in Asia and the Pacific as the region is emerging as a new centre of gravity for the world

economy. He noted that the Asian crisis of 1997 had been a wake-up call for Asian countries to think and act collectively rather than individually.

Dr. Kumar outlined two important economic trends in Asia. The first trend was the widening deficit in infrastructure supply, which amounted to between US$ 400 to US$ 500 billion, over the next five years in India alone. The second trend was the increasing accumulation of foreign exchange reserves, amounting

to around three trillion dollars for Asia and the Pacific. At present these funds were mostly invested in US treasuries, where they were earning negative returns. He stressed the need to create a powerful regional mechanism which could efficiently utilize the regions foreign exchange reserves for its infrastructure development, including housing finance.

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Mr. S. Sridhar, Chairman and Managing Director of the National Housing Bank delivered the inaugural address. Stressing the importance of housing he said that in recent years housing had emerged at the centre of the development agenda for many countries. He further stated that owning a house promoted financial stability to a household as a house could be monetized or leveraged at times of need.

He also informed the participants the United Nations had highlighted the issue of adequate shelter through inclusion of slums in the Millennium Development Goals. In India, he said, the government had adopted affordable housing for all as the theme of its National Shelter Policy. He emphasized that the issues of availability, affordability, risk mitigation and enabling legal policy framework were vital in this regard. In this context, the reconciliation of the developmental

objectives with the commercial compulsion of the financial sector was also very important. The issue of pro-poor housing finance, particularly in developing countries was quite complex. To make it work at ground level using market based solutions and combining them with the programmes of the state was a great challenge in itself. Internationalization in the form of experience sharing, capacity building and lessons to be learnt from the experiences (both successes and failures) of the others, Mr. Sridhar concluded, would be very useful for moving any pro-poor housing finance initiative forward.

Mr. Sridhars inaugural session was followed by a presentation by Mr. Adnan Aliani, Economic Affairs Officer, Poverty and Development Division, UNESCAP. He presented a conceptual overview of housing finance in Asia and the Pacific and explained the objectives of the regional pro-poor housing finance initiative and outlined the structure of discussions for the three substantive sessions and the session on regional cooperation. His paper and presentation are annexed.

Capital markets

The session was chaired by Dr Ravi Ratnayake. Participants acknowledged that before lending, housing finance institutions needed to raise economical, long term financing from domestic and international capital markets. It was felt that raising funds at a reasonable cost was extremely important for providing housing finance to the poor. To ensure focus discussions were further divided into four sub-categories, namely: constraints and challenges; opportunities; areas of research; and future directions.

Constraints and challenges

In discussing constraints and challenges, the participants identified accessibility to capital markets and cost of raising funds as key problems. They pointed out that there was a lack of understanding about the working of housing finance system by the principal players and insufficient interest in Mortgage Backed Securities (MBS) by investors due to high transaction costs, regulatory issues, lack of title guarantees, lack of reliable rating systems

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etc. Participants noted that capital markets in the region were not well developed and rather volatile and that without credible risk mitigation, including those related to natural disasters, investors would not be interested in long term investments that were necessary for housing finance. They pointed at big information gaps and misconceptions about the recovery of loans from the poor and at the inadequacy of current legal and institutional frameworks for pro- poor housing finance.

Opportunities

Participants said that Asian economies as a whole were currently doing extremely well. Rising incomes were leading to construction booms and housing finance demand could be expected to rise significantly, leading to huge capital market growth potential. Because informal financing mechanisms, such as community-based housing finance schemes and micro-finance institutions (MFIs) were already in place, many opportunities were available for scaling-up. Many such housing-finance institutions had valuable experiences and successes providing housing finance to the poor.

Participants said that in many countries of the Asia-Pacific region, government policies were turning pro-poor and budgetary allocations for housing the poor were increasing. Governments had begun implementing various guarantee programmes for lending to those without stable incomes and providing subsidies. Many governments had established specialized housing finance institutions to run pro-poor programmes and schemes that could establish and assess credibility of the poor, such as contractual housing finance systems or home loan account schemes.

Participants also saw huge potential in securitization, which was still a fairly new concept in most Asian countries. However, they cautioned that although much needed, the creation of functioning secondary markets would be a systemic and complex task. In this regard, the potential of accessing provident and pension funds for financing pro-poor housing and using emerging investment products such as Real Estate Investment Trusts (REITs) and Real Estate Mutual Funds (REMFs) were highlighted.

Participants also pointed out that poor peoples savings were a big untapped sector for pro-poor housing finance. These savings, it was noted could provide access to cheap funds as well as bring rural poor into the financial system.

Areas for research

Recommended research areas included new product development, including market analysis and feasibility studies for such products, profiling of risks, standardization of appraisal

and valuation, understanding income and consumption patterns of the poor, feasibility of developing a database and rating systems for MFIs/NGO-based micro-finance schemes,

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access to international funds and looking at various channels to reach the poor apart from MFIs/NGOs. Participants agreed that there was a big need to increase understanding of low-income finance, both among community-based institutions and formal institutions.

Future actions and directions

Recommendations for future action and direction included scaling up community-based housing finance initiatives, developing adequate guarantee policies so that formal financial institutions would feel more confident and establishing mortgage guarantee corporations with government participation. Participants stressed the importance of creating a more enabling legal environment by establishing financial standards and norms to promote secondary mortgage markets as well as of

setting up transparent and efficient property registration systems.

Participants said more pro-poor government policies, guarantees and subsidies were needed. Larger budgetary allocations to housing agencies for pro-poor housing were suggested, as was the establishment of long-term housing development funds (to be set up at either national or international level) and of specialized pro-poor housing agencies. Participants also felt that there was a need to build capacities of MFIs and NGO/CBO based finance institutions, including promoting financial literacy among the poor.

Mortgage and project lending issues

The Session was chaired by Mr. S. Sridhar. The session started with a presentation of an overview of issues related to mortgage and project lending by Mr. Adnan Aliani. He outlined three major issues, namely, legal and regulatory environment that protects the borrower and allows for reasonable foreclosure laws; transparent land and property registration and information systems; and capacities and tools for administering mortgage finance, particularly risk and credit worthiness assessments

Legal and regulatory environment

Participants noted that foreclosure laws were notoriously difficult to enforce. Even when foreclosures could be enforced, many said houses were often un-saleable and evicting already poor households posed difficult political, social and moral dilemmas. In this context, there was a need to revisit the Prudential/Banking Norms of declaring Non-Performing Assets (NPA) for housing loans related to the poor. They had highly irregular incomes and the norm of declaring NPA in case of interest/principal being overdue for 90 days

was not compatible in case of providing loans to the poor. This required a delicate balance of neither being too strict nor too lenient.

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Many of the Housing Finance Institutions used unethical lending and recovery practices by employing recovery agents. In India, this had resulted in the Reserve Bank of India setting norms with regards to functioning of recovery agents. Participants felt that this kind of protectionism could lead to housing finance institutions emphasizing credit worthiness which may in turn lead to their excluding marginal borrowers. There was need to therefore strike a delicate balance between strictness and flexibility.

Box 1: Selected country experiences in foreclosures Bangladesh Foreclosure law was adequate but its enforcement was poor. Litigation could take a long time, resulting in outstanding debt to such an extent that very few people bid on houses at auctions. The result was that very few repossessed houses were actually sold.

Malaysia

Foreclosure procedure and other proceedings took time. Therefore it was undertaken only in circumstances when people had no ability to pay. Mongolia

Housing finance was very new to Mongolia and therefore foreclosures had not been very successful. The entire judicial process took a long time. Lending institutions were focusing on Borrower Education i.e. borrowers needed to be educated from the very beginning as to terms and conditions of repayment.

Pakistan Even though the foreclosure process could be conducted without the intervention of courts, banks relied on the cash flow of the borrower as primary security. The income of the borrower and the sustainability of the income over longer periods were studied before giving them a loan. The first step in the foreclosure process was the issuance of a notice. Then after 3 months one or two reminders were sent. Then a legal notice was sent and thereafter the name of the defaulters along with balance outstanding of the loan was published in the press. Sixty days grace period was further given after the publication of the names in the press. After which auctions were held.

About fifty percent of the cases were settled before the matter reaching the press as the amount outstanding was usually small compared to the value of the property and the borrowers did not want their names published as defaulters. Most borrowers settled their dues before auctions as most properties at auctions were bought by the land and property mafia who often used strong arm tactics to evict people from the foreclosed properties. Thailand

The foreclosure law and its enforcement were quite reasonable. The court procedure took between three to four months. Before or during the court procedures the borrowers usually worked out a compromise with the lending institutions for restructuring the loan. It was politically difficult to foreclose on the poor. For the poor the preferred approach was to mobilize them into groups and to work out group guarantees instead of traditional collateral. Before the disbursement of housing loans, this required a study their savings and expenditure patterns. This determined the amount of money that could repay as a group and this in turned determined the total amount of housing loan that they could borrow as a group.

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Land and property registration

The efficiency and transparency of land and property registration systems varied from country to country. Thai, Sri Lankan and Mongolian participants said their property registration systems were fairly efficient and therefore there was no need for title insurance. The problem in Mongolia was that cost of registration, which was quite high and prevented some poor households from registering their properties.

Other participants noted that land and property systems in their countries were not efficient. In Indonesia, there were problems with conflicting registration between urban, agricultural and forestry land titles. As cities and towns expanded into agricultural areas, this problem was increasing. Many countries cited similar problems. In Pakistan, the overall property registration system was controlled by different government departments and was therefore not efficient. However, housing societies/cooperatives in cities and towns maintained their own registers and had very safe and reliable systems.

The issue of land information system was discussed extensively by the participants. A pilot project in the province of Punjab, Pakistan was computerizing land record information. There was also a facility of Mortgage Locator where if the house number was entered into the database, the status of the title of the property could be verified. However, the project was facing a lot of difficulties as the land-mafia was preventing correct information from being furnished. In Mongolia, all land registration was done by one central department and accessing accurate information was relatively easy. Given all the problems with land registration and information systems, some participants suggested introducing registration insurance as a risk mitigation mechanism. Participants from Thailand related their experiences in preparing individual city development plans and using joint surveys by local governments and organized poor communities to establish the scale and type of title problems.

Tools and capacities for administering mortgage finance

To avoid defaults, credit scoring of low-income borrowers was seen as important. In this context, the need for studies of consumption and savings patterns of the poor was stressed once again. For easier repayment, it was suggested to structure loans so that payments would be smaller at the start (with the option of using subsidies) and rising over time.

Regarding capacities and tools for administering mortgage finance and in particular risk and credit assessment, South Africas credit scoring mechanism for low-income housing was viewed as an interesting example. Other participants suggested registering mortgages in packages to avoid the high transaction costs of individual registrations. According to some participants, one way to reduce risks in mortgage lending to the poor was linking up with community-based organizations. These organizations could easily assess their members credit worthiness because they practiced

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incremental lending, which allowed their members to build their credit histories. This provided a reliable rating system. However, under this system repayment of bulk loans was dependent on the community based organization which selected individual borrowers and therefore the selection of the organization was very important.

Making housing finance accessible to the poor

This session was chaired by Mr. S. Sridhar and started with a presentation by Mr. Adnan Aliani on the summary of the issues discussed on the previous day. The Summary included the major impediments faced by the formal financial institutions in mortgage and project lending while providing housing loans to the poor. He also outlined key issues for discussion which included approaches and methodologies for lending to the poor; raising funds for on-lending to the poor; linking formal and informal housing finance

institutions; and the role of the government in creating enabling legislative and regulatory environments and providing subsidies.

Group loans versus individual loans

Participants commented repeatedly on the advantages of community-based group lending vis--vis individual lending. One good example of such an approach was the Community Organizations Development Institute (CODI) in Thailand. An analysis of how its processes could be adapted for and replicated in other countries and scaled up to reach the majority of the poor in Asia and the Pacific was suggested. While communities in the CODI approach were based on geographical entities, grouping the poor by professions (e.g. agriculture) was also suggested. Several participants described successful practices of providing housing

finance through cooperatives that took over allocating and administrating the funds.

The approach used by SAIBAN in Pakistan on the other hand, was given as an interesting example that was delivering promising results giving loans to poor people individually. However, it was pointed out that it only worked because the approach provided for strong control over communities. Scaling up this approach was also discussed.

Long-term versus incremental loans

The difficulty of providing long-term loans was discussed as both financial institutions and the poor themselves preferred loans not to exceed seven to eight years, while housing finance often require a loan of 15 years or longer for the installments to be affordable. Giving incremental loans was suggested as one solution to that problem. Representatives from HBFC in Pakistan shared their experience with giving progressive and incremental loans to people in SAIBAN-run schemes, where people were given a sequence of smaller loans,

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starting with US$ 1,000 and this way had the possibility to build up a credit history with the bank.

While this approach could work in smaller towns and in the peripheries of cities, it would not work within large cities or in towns where land was expensive. Land scarcity meant that low-income housing was developed as four to five storey apartments/condominiums that could not be built incrementally. Representatives from Indonesia pointed out that their government had started building basic three to four story structures with some success.

Participants further discussed the idea of progressive installments, where borrowers paid less initially and payments increased as their incomes increased over a 10 to 15 year period. As the income of poor people often fluctuated, it was suggested to introduce special legislation extending the grace period for non-performing loans from several months to one year. Some participants pointed out that group lending allowed flexibility as community groups often charged additional interest to individual borrowers to enable some members to be late in paying their installments at any given time. A related suggestion was to have flexible payment

schedules adjusted to seasons, as the poor often worked in seasonal jobs such as construction or mining.

Funding sources

Participants discussed various funding sources for pro-poor housing finance loans. One suggestion included evolving systems where savings and lending for rich and poor people were combined. Market bonds and small loans from provident funds were also discussed. Issuance of socially responsible bonds and mortgage-based securities was presented as one approach to raising funds in the capital markets for housing the poor.

Representatives from CODI, Thailand said their funds came from the government. However, the demand for these funds was much more than the funds available. Hence CODI has started negotiations with the Government Housing Bank of Thailand. However, a major challenge was ensuring low interest rates and CODI was currently in the process of talking to the government about interest rate subsidies of about 2-3 percent a year. Another option was to re-issue bonds.

The representative from Malaysia explained that his country had just introduced a Housing Trading Guarantee Company, which guaranteed the loans and meant that in order to find out what people could pay, the private sector audited them just like a tax auditor.

Bridging and linking institutions

One main issue discussed throughout the session was how to reach poor communities. Participants

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saw the establishment of bridging and linking institutions positioned between formal lenders and poor communities as a major approach promising success.

Participants pointed out that intermediary institutions that were juristic entities, such as CODI or local governments were needed for bridging functions. It was important to create a sufficient number of such institutions, so that the vast majority of the poor could be reached. Representatives from CODI explained that CODI was a central government organization that encouraged local governments, the communities and NGOs in a town to work together to solve low income housing issues.

Another precondition of successfully lending to the poor as groups was the establishment of real communities rather than just grouping by geographic proximity or similar socio-economic contexts. Thus, for example, the primary aim in instigating saving and credit groups was not for poor people in one area to lend money to each other, but to create a community.

However, participants noted that building up such social capital took time and expertise in

community-building practices and demanded the ability to sustain contact with these poor communities. All of which was beyond the means of most formal housing finance institutions, who therefore found it difficult to reach savings groups directly. So one possibility was to work through federations of saving groups. SPARC in India, for example, worked with the National Slum Dwellers Federation as this provided access to already organized communities regardless of whether SPARC had instigated projects there or not.

The representatives of HBFC in Pakistan shared an interesting new approach they were implementing called the three segment model. They established a social housing bank to take care of funding, a social housing company that would promote the incremental housing approach (taking care of the supply side) and involving NGOs that would receive a 5-10% share in the social housing company and would become the managers of the scheme.

Governments role

The role of Government was a recurring issue. Participants said development policies that clearly defined household, local government, national government and private sector responsibilities were needed. Solutions had to be holistic, including technical, planning/development and cost aspects. Some participants said that government should not be relied upon and investments should be market-based, while others said poor communities could handle a lot of the responsibility themselves.

However, everyone agreed that governments needed to create an enabling legislative

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framework. Governments, they said had an important role in providing land and basic infrastructure and were an important source of funds and subsidies. Local governments could also conduct surveys on what kind of housing was needed in their cities.

When discussing what an enabling legislative environment would have to include, participants said securitization rating systems needed to be introduced. Several participants said tenancy laws needed to be changed because they were unfavourable for landlords/ investors. One participant said the deposit renting system was an interesting option for low-income groups to by-pass tenancy laws. Another idea was to create a condominium act: if tenants paid the rent, they would eventually become flat owners. Others suggested the need for legislation allowing formal housing finance institutions to lend directly to the poor.

Participants agreed that subsidies needed to be designed very carefully with precise target groups in mind. Otherwise, as previous experience showed, the room for abuse would be large. In subsidized rental units, for example, maintenance costs were often still too high for low-income occupants they were intended for. This often resulted in dilapidation of the property or in informal on-lending to income groups the units were not intended for. Representatives from CODI said government subsidies and funds should be used to provide basic infrastructure. Participants pointed out that with decentralization in many countries in the region, local governments now had more money at their disposal and suggested supporting the creation of local government funds for financing housing for the poor.

Participants noted that in urban areas the poor often did not own the land they occupied and land in urban centres was scarce and expensive. The government could therefore give land at discount rates or reserve plots in city centres. Because the poor often settled on the outskirts of existing cities, providing basic infrastructure would also have to be an important government responsibility. The participants also said that pro-poor housing finance mechanisms needed to be combined with measures

that made housing itself cheaper, such as introducing new building technologies and materials or having communities make whatever materials they could themselves and contribute their labour.

Regional actions to promote pro-poor housing finance in Asia and the Pacific

This session was chaired by Dr. Ravi Ratnayake. Mr. Adnan Aliani presented key areas where he thought regional actions were needed to promote pro-poor housing finance in Asia and the Pacific. These included norms and standard setting; creating regional funds and institutions to promote networking, exchange of information and experience and to build capacities of formal and MFI/NGO/CBO based housing finance institutions.

Participants agreed on the need to network and exchange information between formal and MFI/NGO/CBO financial institutions. Consensus was reached to set up a regional network. The role of this regional network would be to link institutions across the entire spectrum of housing finance provision. It would undertake research and analyses of innovative practices in pro-poor housing finance, policy options and frameworks enabling the establishment and successful functioning of wide-spread pro-poor housing finance mechanisms in Asia and the

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Pacific. The regional network would not only allow for a better exchange of information, but would also offer opportunities for collaboration between various housing finance institutions.

Another key function would be training and capacity building at all levels. In addition to virtual communication, participants stressed the importance of face-to-face exchanges. They also saw a need for region-wide advocacy of pro-poor housing finance issues.

It was decided that NHB and UNESCAP would jointly coordinate further exchange and discussions as well as the establishment of the regional network. As a first step, UNESCAP agreed to provide an online discussion forum on

pro-poor housing finance on its website: www.housing-the-urban-poor.net. UNESCAP and NHB were further requested to organize a high-level regional meeting to establish the regional network. The idea of an Asia-Pacific Ministerial Meeting was widely supported in this regard.

CONCLUSIONS

The Concluding session began with Dr. Ravi Ratnayake appreciating the fruitful interactions amongst the participants. He noted that a wide variety of issues had come up for discussions.

He further assured the participants that this was the first of many activities under the UNESCAP project. He thanked the NHB for hosting the Regional Dialogue.

In his concluding address, Mr. S. Sridhar expressed his appreciation on the successful completion of the Dialogue and complimented the participants for their contribution in knowledge sharing. He thanked UNESCAP and its staff for their work in ensuring the success of the Dialogue.

Finally Mr. P.K. Kaul extended a vote of thanks to the chair and all participants. He also thanked the staff of the Taj Ambassador hotel for ensuring that the Dialogue proceeded without technical difficulties.

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Box 2: Summary of conclusions and recommendations1

Discussions at the Regional Policy Dialogue focused on critical and emerging issues in housing finance in Asia and the Pacific. Participants discussed various approaches to make housing finance more accessible to the poor. They agreed that providing large-scale housing finance to low-income groups was a vital emerging issue in Asia and the Pacific. Pre-requisites for succeeding in this immense task included reforming legal and policy frameworks in some countries and capacity building of stakeholders at national and local levels and in-depth research and comparative analysis of pro-poor housing policies, institutions and practices in others. Participants stressed that new ways had to be found to raise funds for housing finance. They agreed that the establishment of secondary markets for housing finance needed to be encouraged across the Asia-Pacific region to make local and international capital available on a large scale. They recommended creating mutual funds and investment trusts and tapping into provident and pension funds as well as into the savings of the poor themselves.

Participants agreed that there also was an important role for government to play in reforming the legal and regulatory environment and in providing funds and subsidies for pro-poor housing finance. In order to establish successful pro-poor housing finance policies and mechanisms, they agreed that innovative approaches were needed.

Based on initial successes by pioneering housing finance institutions in Asia, the need to link formal housing finance institutions (which can raise funds) with NGO/MFI/community-based housing finance mechanisms (which provide sustained access to poor communities) was broadly acknowledged. Participants agreed that it was important to explore alternative approaches. Thus, they were strongly convinced that because individual lending to poor people was fraught with difficulties, one major approach would be lending to poor people in groups in communities who would empower and control their members, provide social collateral and lower loan processing costs for housing finance institutions to competitive rates. Another approach that Participants agreed was proving successful was to combine low-income housing issues into a holistic package that provided incremental loans for incremental development of infrastructure and housing. To proactively promote exchange of experiences, undertake comparative research and to build capacities, the establishment a regional network on pro-poor housing finance consisting of both formal and NGO/MFI/community-based housing finance institutions was strongly supported. UNESCAP and NHB were requested to organize a high-level regional meeting to establish the regional network.

1 As a follow-up to the Regional Policy Dialogue, UNESCAP had created an online discussion group on housing finance, where participants of the Dialogue and other housing-finance practitioners could continue to discuss pro-poor housing finance issues, exchange experiences and provide ideas on the modalities of the planned regional network on pro-poor housing finance. The online discussion forum was open to all and those wishing to register should visit the following link: http://www.housing-the-urban-poor.net/forum/default.asp. Basic instructions for using the online forum can be downloaded from: http://www.housing-the-urban-poor.net/docs/Instructions_Forum.pdf.

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ANNEX I: PROGRAMME

30 January 2008

09:30 10:00 Opening

Welcome address by Mr. P. K. Kaul, General Manager, National Housing Bank, India

Address by Mr. Ravi Ratnayake, Director, Poverty and Development Division, United Nations Economic and Social Commission for Asia and the Pacific

Keynote address by Dr. Nagesh Kumar, Director-General, RIS Welcome address by Mr. S. Sridhar, Chairman and Managing Director

of the National Housing Bank, India (NHB)

10:00 10:30 Coffee break

10:30 11:00 Introduction of participants

11:00 11:30 Conceptual overview of housing finance in Asia and the Pacific

11:30 13:00 Session 1: Capital market related issues

13:00 14:00 Lunch break

14:00 15:00 Session 1: Capital market related issues (continued)

15:00 16:00 Session 2: Mortgage and project lending issues


16:30 17:30 Session 2: Mortgage and project lending issues (continued)

19:00 21:00 Welcome Dinner

31 January 2008

09:00 11:00 Session 3: Making housing finance accessible to the poor


11:30 12:30 Session 4: Need for networking and exchange of information

12:30 13:00 Wrap-up discussions and closing of the Meeting

13:00 14:00 Lunch

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ANNEX II: LIST OF PARTICIPANTS

Bangladesh

Mr. Manjur Ahmed, General Manager, Bangladesh House Building Finance Corporation

India

Dr. Kiran Wadhva, Former Chief Economist and Executive Director, Housing and Urban Development Corporation Ltd.

Ms. Jyoti Macwan, General Secretary, Self Employed Women's Association (SEWA)

R. Bhuvaneshwari, Financial Controller & Company Secretary, Janalakshmi MFI

Satyan Mishra, Managing Director, Drishtee Development and Communication Ltd

Parisila Bhawan, Associate Fellow, National Council of Applied Economic Research

Aseena Viccajee, Systems Manager, Society for Promotion of Area Resource Centres (SPARC)

Om Prakash Mathur, Professor, National Institute of Public Finance and Policy

Andrew Hapke, Manager-Micro Finance, Quiver Infoservices Ltd.

Professor P.V. Indiresan, Former Director Indian Institute of Technology

Indonesia

Dr. Ramalis Subandi, Special Staff for the Minister, State Ministry of Housing

Tito

Another

Malaysia

Mr. Azizi Ali, Senior Vice President, Islamic Business & Securitization, Cagamas Berhad

Mongolia

Ms. Enkhbayar Tsedendorj, Chief Executive Officer, Mongolian Mortgage Corporation

Pakistan

Mr. Sayed Zaigham Mahmood Rizvi, Chairman & Chief Executive, House Building Finance Corporation Ltd.

Mr. Khalid Aftab Khan, General Manager, House Building Finance Corporation Ltd.

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Sri Lanka

Mr. Sunimal Ajit Weerasinha, General Manager, State Mortgage & Investment Bank (SMIB)

Thailand

Ms. Thipparat Noppaladarom, Assistant Director, Community Organizations Development Institute (CODI)

Ms. Samanee Mahattanasomboon, Assistant Director, Community Organizations Development Institute (CODI)

Mr. Ballobh Kritayanavaj, Senior Vice President, Government Housing Bank

International and bilateral organizations

Niraj Verma, Senior Financial Sector Specialist, South Asia Finance & Private Sector Development, World Bank

Rebecca Black, Director, Office of Economic Growth, U.S. Agency for International Development (USAID)

Dr. Xing Quan Zhang, UN-HABITAT Focal Point for Financial Mechanisms and Chief, Urban Finance Section, Human Settlements Financing Division, UN-HABITAT

Organizers

UNESCAP

Mr. Ravi Ratnayake, Director, Poverty and Development Division, UNESCAP

Mr. Adnan H. Aliani, Economic Affairs Officer, Poverty Reduction Section, Poverty and Development Division, UNESCAP

Ms. Natalja Wehmer, Associate Economic Affairs Officer, Poverty Reduction Section, Poverty and Development Division, UNESCAP

NHB

Mr. S. Sridhar, Chairman & Managing Director, National Housing Bank, India

Mr. P.K. Kaul, General Manager, National Housing Bank, India

Mr. Vishal Goyal, Regional Manager, National Housing Bank, India

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ANNEX III: PRESENTATIONS

Address of Dr. Ravi Ratnayake, Director, poverty and Development Division, UNESCAP

It gives me great pleasure to address the opening ceremony of the Regional Policy Dialogue on Pro-poor Housing Finance. As you know this Regional Dialogue is the first of many activities in our regional project on Pro-poor housing finance in Asia and the Pacific.

We, at UNESCAP, give great importance to the issue of housing and housing finance. Housing is a basic human right. It is also a key driver of the economy. Studies in Asia and the Pacific show that multiplier effects of housing spread over 600 other industries. Crises in land and housing markets can trigger crises in capital markets, not only in the country of its origin but also in other countries around the globe.

It has been suggested that one of triggers of the Asian Financial Crisis was speculation in land and property markets, particularly in Thailand, caused by inadequate regulation and management of housing finance market and excess liquidity in financial markets. As you will recall, the Asian financial crisis resulted in a loss of years of developmental gains overnight in countries of South East Asia and triggered considerable human suffering and social unrest.

We may now be threatened by another global financial crisis. This time caused by the exposure of financial institutions around the world to the sub-prime mortgage financing in the United States. How severely this crisis affects the economies of Asia and the Pacific remains to be seen. While I am sure that this will be discussed in the sidelines of this meeting it is not the central topic of todays discussions.

We need to address housing finance because over 500 million people or nearly 45 percent of all urban residents in Asia and the Pacific do not have adequate housing, which is a basic and fundamental right recognized by the United Nations. Housing is also critical is achieving the Millennium Development Goals or MDGs. Access to legal housing enables people to access basic services such as electricity, clean drinking water and sanitation. It also provides access to other public services and programmes, such as education and health care, citizen registration and voting rights. A formal residential address also facilitates finding jobs and accessing credit and other financial services.

Households, particularly poor households, often use parts of their houses for economic activities such as small manufacturing workshops, retail shops and even for renting a room to earn additional income. Housing, therefore, is much more than a roof over ones head it is a major factor in defining a households economic and social status and well-being.

For most people housing is the single most expensive purchase they will ever make. Therefore, only the richest of households can pay up-front for their housing. Housing finance is therefore crucial to improve access to housing, particularly for the poor.

The formal financial institutions prefer lending to those with established credit records and regular income to ensure payment of monthly installments. They also prefer borrowers that have some sort of collateral.

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Most poor do not have formal credit records, regular incomes or collateral. Moreover, the poor tend to build, improve and expand their houses step by step as and when their incomes permit. They often require a series of small housing loans that they can pay off easily. Processing such small loans is not cost effective for formal housing finance institutions.

In response to this apparent inability of formal housing finance institutions to reach the poor, many non-governmental and community-based organizations have added housing finance to their micro-finance schemes. Such schemes are community based or run by governmental and non-governmental micro-finance institutions. Many of these institutions rely on social collateral and community-based screening processes to ensure repayment. Often their loan repayment rates are higher than formal sector banks.

However, such programmes tend to be small in scale and reach only a limited number of the poor. In order to provide access to housing finance to a larger number of the poor, financial and institutional linkages between formal and micro-finance and community-based housing finance institutions need to be strengthened. This would, on the one hand, enable the micro-finance and community-based institutions to increase their coverage and on the other, enable the formal sector institutions reach markets that were hitherto too risky or altogether inaccessible.

Many countries of the region are undertaking reforms aimed at improved housing conditions of the urban poor. To assist the policy makers, researchers, housing finance professionals in formal and community-based sectors, UNESCAP has initiated a regional programme to promote Pro-poor Housing Finance in Asia and the Pacific.

As you know this Regional Policy Dialogue is the first activity of the programme. In partnership with the National Housing Bank of India, we are initiating a regional study of housing finance systems. Under the proposed study, the state of the art in pro-poor housing finance will be documented and analyzed in six countries. These are: India, Indonesia, Mongolia, Pakistan, Sri Lanka and Thailand. A country reporters meeting is being held back-to-back with this Policy Dialogue. The Country Reporters meeting will discuss and finalize the guidelines for preparing reports. I understand some of you are also participating in that meeting.

To refine the outcomes of the country reports and to generate discussions at the country-level, national workshops will also be organized in each of the participating countries. Depending on our ability to raise additional financial resources other countries may be included in this study. We will prepare a comparative analysis, based on the country reports and present it to a regional symposium. The regional symposium will discuss the issue of pro-poor housing finance in greater depth and deliberate on the need for regional mechanisms and structures, including the need for setting up a regional network of formal and community-based housing finance institutions.

This Policy Dialogue, therefore, is primarily a brain-storming session. We have gathered here some of the most eminent housing finance practitioners from the region to discuss the challenges, the opportunities and future directions in housing finance and in particular, financing the housing for the poor.

Lastly, I would like to take this opportunity to thank our partners and hosts, the National Housing Bank of India for co-organizing this meeting. I am sure we will have fruitful discussions and point the way forward on this crucial issue.

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Inaugural Address of Mr. S. Sridhar, Chairman and Managing Director, National Housing Bank, India

I am indeed delighted to be here to add my own welcome, on behalf of National Housing Bank to all the delegates, particularly our overseas friends, to this Regional Policy Dialogue on Pro-poor Housing Finance which will be followed by a meeting of the Country Representatives of 6 countries.

I must compliment UNESCAP, Dr. Ravi Ratnayake, Dr. Yap and Mr. Adnan Aliani for this laudable initiative. I understand that such a regional workshop on Pro-poor housing finance is the first of its kind in two decades. This workshop will kick off a study process which in the next 6 months or so will lead to a clear perspective on the issues concerning housing finance for the poor in the 6 countries that are part of this exercise.

Apart from the findings of the study, in my view, the process of study will probably be equally rewarding. The conclusions and recommendations of this exercise will hopefully be useful for international agencies such as UNESCAP, UN Habitat and national government agencies to take concrete steps to address the issues identified.

Housing as an issue has, in recent years emerged on the centre stage of the development agenda. This is partly due to the basic role of housing in everyday life. Housing is much more than a mere shelter. It becomes the home in all its emotional and psychological dimensions, particularly where there is ownership. It promotes financial stability as house as an asset can be monetized or leveraged in times of need. At another level, housing has caught the attention of national and international policy makers as it has lagged economic growth and linkages between housing and growth are becoming clearer. The inexorable urbanization all over the world and in Asia as well, with shifts in population to the urban areas has naturally led to the issues of shelter. The proliferation of slums constitutes a response of the poor people to the problem of shelter while they address the problem of earning livings in the cities.

The United Nations has highlighted the need to address the issue of adequate shelter for the urban poor in the context of improving the quality of their lives, through inclusion of slums in Millennium Development Goals. Various national governments have formulated policies within the framework of their respective economic policies and having regard to the local conditions. In our own country, India, the Government has adopted Affordable Housing for All as the theme of the National shelter policy. This has been done in the context of the housing boom in India bypassing the poor. Hence the focus on the unserved and the underserved.

While housing and the broader concept of human settlements and habitat have found their place on the development agenda, both at the national and international level, specific action has largely been left to national governments. While many governments have set up or encouraged the formation of institutions to implement different aspects of the national agenda, housing and housing finance for the poor has been in the domain of the government or their designated agencies, almost wholly in the public sector. However, we have not been able to adequately address this aspect due to the large volumes and quantum of resources involving competing demands on the financial resources of governments. Hence, the formal financial system has a major role to play. The reconciliation of the development objectives with the commercial compulsions of the financial sector is a major challenge.

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Four issues arise in this regard. These are availability, affordability, risk mitigation, enabling legal, policy framework. Adequate availability of finance for the poor has always been a challenge in most countries. In India, for instance, whilst mortgage finance has recorded a CAGR of 46.4%, over the period 2000- 2006, the number of accounts, a proxy for number of houses has recorded a CAGR of only 12.6%.This indicates growth is value driven and not volume driven. This, combined with anecdotal evidence can lead to the conclusion that availability of mortgage finance for lower income groups is inadequate. As per Government of India statistics, 99% of the urban housing shortage which is estimated at 24.7 million units is in the lower income segments. Thus how can the poor get access to formal institutional finance for housing is an important issue that the UNESCAP-NHB study would tackle? Fair amount of work in this regard has been done round the world, at UN Habitat, the World Bank, Asian Development Bank ,other international development agencies, which would be useful models. While traditionally the banking system has been the major provider of housing finance, can other segments of the financial system such as the capital markets, micro finance institutions, and community organizations be tapped in a significant and sustained manner? What could be various financial products and investments that can deliver formal finance for housing to the poor? Would the existing system and rules work? Should there be a new financial architecture? These are all issues that come to the fore.

Affordability is the other major concern in designing financial products for the poor. It is so in the case of housing as well, accentuated by the longer tenor required of the housing finance as compared to livelihood or enterprise finance. Affordability covers not only the cost of credit but also cost of the house, as with increasing property prices, the quantum of finance becomes so high as to make a loan on normal commercial terms unaffordable for the poor. There is also the margin money that the beneficiary has to contribute. Is there then a role for the government through subsidy, and if so, in what form and manner? How can such subsidies be best targeted and minimized so that a credit culture can be encouraged? Globally, the issue of financial inclusion is engaging the attention of policy makers. Most governments have adopted a strategy of inclusive economic growth. Housing for the excluded through access to finance which is affordable, is an important element of this strategy.

In this regard, risk mitigation assumes importance in smoothing the flow of institutional finance to the poor. In developing countries, risk mitigation mechanisms are at a nascent stage. In India itself, they are practically absent although in other financial market segments risk mitigation mechanism are working. Mechanism such as mortgage insurance/guaranty, guarantee funds, etc. would need to be put in place. Title indemnity is also another mechanism.

Last but not the least, the role of the State: There is no gainsaying the fact that in any financing or development initiative, the Government has a major role to play. Accordingly, in devising possible solutions to pro-poor housing finance, the Government will need to be present in significant measure. I include other regulating agencies such as the central bank, real estate regulator etc. Their role could be in the form of providing viability gap funding, risk mitigation, addressing land tenure issues, urban and regional planning, fiscal issues, setting up and maintaining reliable property records and database suitable database, ensuring that appropriate legal framework is in place and is enforceable. I am sure that the present study will address these issues in some depth.

In conclusion, the issue of pro-poor housing finance, particularly in developing countries, is quite complex. Making it work at the ground level using market based solutions, combining

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them with the programmes of the State is a major challenge. Obviously, the solutions (and there will have to be a range), will differ from country to country as they will have to be developed in the local context. Further, globalization of housing finance markets has not taken place significantly as far as developing countries are concerned. However, internationalization in the form of experience sharing, capacity building, lessons to be learnt from experiences of others, both successful and not so successful would obviously be useful. In that sense, a network of national HFIs which would interact on an ongoing basis through meetings, mail, joint studies, joint product development, etc. would be invaluable. The contours of such solutions can perhaps be similar and they can be harmonized and synthesized. This initiative of UNESCAP, in which NHB, India has the privilege of being associated, is a commendable effort in this direction and a pioneering one. I think UNESCAP, UN-Habitat, World Bank, other international development agencies, policy makers, bankers, representatives of civil society, and indeed all stakeholders would be interested in the findings of the Study.

I am indeed delighted to inaugurate this kick-off meeting.

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Discussion Paper on pro-poor housing finance2

Introduction

Housing is a basic and fundamental right, since it not only provides shelter and the space for households to live in privacy, security and dignity; it also provides a point of reference through which households can access other services and utilities. Access to housing is a key determinant of urban conditions and of the social status and well-being of the households. Therefore, access to adequate housing is essential for the achievement of the Millennium Development Goals.

Housing is also a key driver of a countrys economy. Over six hundred industries are linked to housing. It is a labour intensive industry that provides employment to both skilled and unskilled workers. Turmoil in the land and housing markets can translate into turmoil in capital and labour markets. A well functioning and well governed housing market is crucial not only to provide shelter and security to individual households, particularly to the poor, but also for macro-economic stability of a country.

Housing, including the cost of land, is an expensive commodity, often costing as much as 9 or 10 times a households annual income. As such it is unlikely that many except the richest of households can be expected to have readily available funding necessary to acquire housing up-front.

Access to adequate housing is a key issue in Asia and the Pacific. Over 500 million people or

2 This paper was prepared by Mr. Adnan H. Aliani, Economic Affairs Officer, UNESCAP

Figure: Costs of Raw and Developed Land compared to monthly incomes

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45 percent of all urban residents of the region live in sub-standard housing, in slums and squatter settlements. With rapid urbanization, globalization and climate change, this figure is likely to increase in the next 15 to 20 years.

One indicator that shows this unaffordability of housing in the region is the fact that compared to other regions of the world, land-to-income ratios are the highest in Asia and the Pacific (See figure).

There are several factors contributing to the high cost of housing in Asia and the Pacific. These include, high costs of land, infrastructure, building materials, poor urban planning etc. While addressing some of these issues is likely to lower the costs of housing, housing will continue to be the single most expensive item that a household purchases and owns. Housing finance is therefore crucial to improve access to housing, particularly for the poor.

However, access to housing finance is limited in countries of Asia and the Pacific. This is because in most countries, the size of the formal housing finance sector is relatively small. Table below shows the size of housing finance systems as a share of GDP in selected Asian emerging markets.

Table: Size of the Housing Finance Sector in selected countries expressed as average mortgage debt over GDP measured over 2001-2005

OECD Mortgage Countries Debt/GDP Australia 61.9 Canada 42.9 Japan 35.7 New Zealand 78.2 Singapore 60.2 United Kingdom 61.5 United States 67.4 Latin America Argentina 1.7 Bolivia 9.5 Brazil 2.6 Chile 14.8 Colombia 10.0 Mexico 9.8 Peru 2.2 Venezuela 0.7

Mortgage Asia Debt/GDP Bangladesh 2.5 China 10.0 India 4.9 Indonesia 2.1 Iran 2.8 Korea 20.8 Malaysia 28.3 Pakistan 0.7 Philippines 6.8 Thailand 15.5 Africa Algeria 1.3 Ghana 0.5 Morocco 7.0 South Africa 22.0 Tunisia 6.0

Source: Warnock, V. C. and Warnock, F. E., Markets and Housing Finance Working Paper 13081, National Bureau of Economic Research, Cambridge Massachusetts, 2007

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Issues in Housing Finance

A household can only afford to buy a house when payments are spread out over a period of years. In general, the longer this period is, the smaller the regular payments are and the more affordable housing is to a greater number of households. In a well functioning housing market, primary housing finance institutions can access reasonably cheap, long term financing and provide it to borrowers, with affordable and relatively stable interest rates.

Issues related to capital markets

Before lending, housing finance institutions must raise economical, long term financing from domestic or international financial markets through securitization in the secondary mortgage markets. Among other things this requires:

Mortgage securitizers who have the capacity and tools for bundling and packaging mortgages into securities and long term investors who are willing to buy these.

Reliable and independent rating systems and vigilant regulations that would inform domestic and foreign investors of their risks and also penalize malfeasance.

Mechanisms for risk mitigation, such as guarantee funds or back-stopping mechanisms to assist financial institutions in terms of temporary liquidity crunches.

Issues related to mortgage and project lending

Once it has access to such funds a housing finance institution must have means to secure adequate information on the borrower, have the ability to value property and have the legal right and ability to secure collateral. Borrowers could be real estate developers asking for project financing or individual households borrowing to buy their house.

Among other things, this requires:

The existence of a conducive legal and regulatory environment, that on the one hand protects the borrower from malpractices by lending institutions and on the other hand, gives the legal right and access to the lender to foreclose on collateral property.

Transparent and accurate land and property information systems to assist the lending institutions appraise the property more accurately

Capacity, tools and information for the lender to determine the creditworthiness of prospective borrowers. Absence of such standardized information often increases the transaction costs and risks of the lending institutions in lending funds to the borrowers, resulting in higher interest rates and other charges.

Issues related to housing finance for the poor

In most countries of Asia and the Pacific, formal housing finance systems have failed to reach the poor, particularly those who do not have regular and stable incomes. There are several barriers that prevent the poor from accessing financing from formal financial institutions.

Among other things these include:

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Lack of formal employment, regular incomes, collateral and formal credit histories. Formal financial institutions therefore consider the poor as high risk or sub-prime borrowers.

High transaction cost per loan for the lending institution. The poor tend to build, improve and expand their houses step by step as and when their incomes permit. They often require a series of small housing loans that they can pay off easily. Processing such small loans is not cost effective for formal housing finance institutions.

Unsuitable procedures and rules. To reduce risks and to increase their ability to recover loans or to repossess properties formal financial institutions require a considerable amount of paperwork, which the poor, with their low levels or sometimes lack of literacy, find intimidating and overwhelming. Acquiring a loan often means several trips to the lending institution during office hours, which the poor, often dependent on daily wages, cannot afford to make.

In response to this apparent inability of formal housing finance institutions to reach the poor, many non-governmental and community-based organizations have added housing finance to their micro-finance schemes. Such schemes are community based or run by governmental and non-governmental micro-finance institutions (MFIs).

They usually rely on:

Social collateral and community-based screening processes to ensure repayment. Often their loan repayment rates are higher than those of formal sector banks.

Small incremental or sequential loans to increase the likelihood of repayment. This also allows borrowers to develop mutual trust and understanding and a credit history with the MFIs.

Keeping their transaction costs low because those screening the borrowers are often from the same community or settlement and know the borrower fairly well.

Very little or no paper work because those offering the loans usually have the same level of literacy, belong to the same community or settlement and rely on social pressure rather than collateral to recover loans

However, such programmes:

Tend to be small in scale and reach only a limited number of the poor

Have relatively short duration of loans and high interest rates

Issues for discussion

Before outlining the issues for discussion at the Regional Policy Dialogue it is important to understand its context and background.

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UNESCAP Regional Programme on Pro-poor Housing Finance

In order to provide access to housing finance to a larger number of the poor, financial and institutional linkages between formal and micro-finance and community-based housing finance institutions need to be strengthened. This would, on the one hand, enable the micro-finance and community-based institutions to increase their coverage and on the other, enable the formal sector institutions reach markets that were hitherto too risky or altogether inaccessible.

To address these issues, UNESCAP has initiated a regional programme on Pro-poor Housing Finance. The objective of the programme is to assist governmental and non-governmental policy makers and operational staff to develop and implement pro-poor housing finance programmes and policies through networking and exchange of experience.

One of the key activities of the programme is a regional study on housing finance systems in Asia and the Pacific. UNESCAP is undertaking this study in partnership with the National Housing Bank of India. Under the proposed study, the state of the art in pro-poor housing finance will be documented and analyzed in six countries by organizations and agencies that have been designated by their national governments. The participating countries are: India, Indonesia, Mongolia, Pakistan, Sri Lanka and Thailand. A country reporters Meeting is being held back-to-back with this Policy Dialogue. The Country Reporters meeting will discuss and finalize the guidelines for preparing the reports.

The drafts of the country reports will be presented and discussed at national workshops in each of the six participating countries. The purpose of convening the national workshops would be to generate discussions at the country-level and to refine the outcomes of the country reports. Once the country reports have been completed, a comparative analysis will be prepared based on the country reports and presented to a regional symposium. The regional symposium will discuss the issue of pro-poor housing finance in greater depth and deliberate on the need for regional mechanisms and structures, including the need for setting up a regional network of formal and community-based housing finance institutions.

Objectives of the regional policy dialogue

As the first activity of the programme, the Regional Policy Dialogue is therefore, primarily a brain-storming meeting to identify and discuss critical and emerging issues in housing finance in general and financing housing for the poor in particular. It will also be a first opportunity to discuss the need for information exchange and networking on pro-poor housing finance.

Substantive sessions and format for discussion

The Regional Policy Dialogue is divided into three substantive sessions as follows:

Session One will focus on issues related to capital markets

Session Two will focus on issues related to mortgage and project lending

Session Three will focus on issues related to housing finance for the poor

Under each session, participants will be requested to discuss opportunities, constraints and challenges, future prospects and directions needed to improve the housing finance situation.

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They would also be requested to identify any best or innovative practices and policies in their countries that address the substantive areas of discussion as well as identify areas where they think future research is required (See Box).

Box: Summary of issues for discussion in each session

Session I: Issues related to capital markets

Session II: Issues related to mortgage and project lending

Session III: Issues related to housing finance for the poor

What are the: Constraints Opportunities and challenges Future prospects/direction

needed Who needs to take action to

improve the situation? Innovative practices/ policies/

programmes of Government/ CSOs/ private sector

Priorities for research











Session on possible regional actions

The final session of the Regional Dialogue will focus on possible regional actions that may be required. These could include issues such as:

Norms/standards/criteria at the regional level

Networking and exchange of information and best practices

Capacity building of participating institutes

Topics for comparative research

proceedings of regional policy dialogue on pro-poor housing finance

Documents