managing risk.pdf

Managing Risk and Creating Value with Microfinance69and complying with postloan inspections. The MFI may require that borrowers acquire plans, estimates, and otherconstruction services from a list of recommended service providers. To provide the best technical assistance, MFIsshould rely on staff construction specialists in addition to loan officers. In either case, the best technical assistancecan improve the relationship with the client and the quality of housing construction.Housing microfinance programs will use a variety of means to secure the staff and human resources for technicalassistance, including the following:• Train loan officers in basic construction budgeting and design.• Train construction specialists as loan officers.• Maintain construction specialists in addition to loan officers.• Require that households acquire plans, estimates, and other construction services from a list of recommendedthird parties.Costs and affordabilityInterest rates for business microloans are usually higher than for traditional loans because the associated costsof small short-term loans are higher. Because housing credits are larger and have longer repayment termsthan do business microloans, origination costs are lower. However, other types of risks can emerge, such asterm mismatch and variable interest rates. If the housing loan is not linked to increased production by themicrobusiness, the risk of nonpayment increases. To address these and other risks, MFIs must find differentlong-term funding sources. Most MFIs in developing countries, however, rely on short-term funds fromdeposits. As a result, housing microfinance is more expensive than traditional microcredit.Institutional ChangesTo be able to offer housing microfinance loans, MFIs will need to adapt themselves to the new product.They will need to complete an internal process of building and strengthening capacities before launching thenew product. Most microfinance programs are based on solidarity groups. Housing microfinance providesmore individual lending. The loan officers, therefore, will become multiproduct specialists, with some technicalknowledge required. The mission of the MFI might change because it will no longer provide only businessrelatedloans.The MFI’s lending methodology can also be affected by a decision to add a housing microfinance product.For example, solidarity groups are not normally used because housing loans tend to have larger loan amountsand longer repayment periods. The MFI would need to assess the entire group’s ability to repay the loan. InLatin America, two exceptions to this rule are the infrastructure credits provided by Génesis Empresarial inGuatemala and the land purchase and titling of the Cooperativa Jesús Nazareno in Bolivia. 2SubsidiesSubsidies can provide support for microfinance products. However, for MFIs to reach most households,subsidies are not necessary. Microfinance providers prefer subsidies that provide a small interest-rate rebate2. See Génesis Empresarial, http://www.genesisempresarial.com/, and Cooperativa Jesús Nazareno, http://www.jesus-nazareno.coop/.