managing risk.pdf

74 Chapter 5 - Progressive Housing Microfinance: One Room at a Time• Basic information on household income and expenses• Business income and cost information for microbusiness operators• Conditions and amount of existing informal and formal debt• Potential demand for microloans by loan size and type, collateral, interest, and term• Savings• Bank and nonbank financial services used by the household• Condition of home: number of people in house, type of home, roof type, kitchen, bathroom, bedrooms,other rooms, and improvements performed over past five years• Need and potential for home improvement and other real estate investmentThe market analysis will result in estimates of the potential effective demand for various products and, combinedwith other data, the client’s capacity to repay. In general, housing microfinance lenders use affordability ratiossimilar to those of traditional mortgage finance. The MFI should also assess the types of housing improvementsthe potential clientele are contemplating. It is also important to understand how such clientele have financedhome improvements in the past. In addition, the MFI should assess whether the target clients are willing toborrow the funds and under what conditions (such as interest rate, maturity, grace period, and lump sum orinstallment payments).Step 2: Assess the MFIFurther, the assessment should include a review of the MFI, its mission, and its capacities. Given that a housingprogram is different from other credit programs, the MFI should assess whether such a program is consistentwith its mission and goals, and whether it has the capacity (financial and human) to launch and maintain anew product. The MFI should consider whether redirecting financial and human capital from other areas tohousing is the best use of resources, given the need for technical assistance and the other differences describedpreviously.Step 3: Develop a loan productAfter completing a market assessment and making the commitment to a housing loan program, the MFI shouldbegin designing the appropriate loan product. The goal of this process should be to develop an affordable andresponsive loan product while ensuring the MFI’s long-term financial viability. This design includes the interestrates, loan repayment period, technical assistance, and an assessment of the real effective return.The repayment period largely drives credit risk—usually more than the payment amount. Best practice callsfor repayment terms between 1 and 10 years—with an average of between 2 and 5 years—and small loanamounts. Low- and middle-income households can commit to monthly payments for short periods. In fact,the lowest middle-income families prefer to commit to the shortest repayment period possible.The effective rate of return for these small amounts and short repayment periods results in relatively highreturns for the MFI, as much as 27 percent in Latin America. However, this apparently excessive return isnecessary to ensure the MFI’s financial viability. The return is very likely to decline as competition grows withmore lenders entering the market.The new product will also affect the MFI’s organizational structure, management, capacities, and cost structure,among others. For example, the MFI should decide whether it would be more efficient to train a few specialiststaff members to manage housing loans, or to train all staff members as generalists. The MFI will need to