RURAL HOUSING LOAN FUND

12th Annual Workshop

16 & 17 October 2008
Some Thoughts on
Responsible Finance

Joachim Bald
Responsible Credit ?
 Renewed debate raging in development finance
circles and the general public on responsible credit.
(KfW conference Jan 08, Pocantico Declaration …)
 Only three years after the Year of Microcredit,
people are asking the unthinkable: can
microfinance be a bad thing?
 Has the famous Banco Compartamos in Mexico
degenerated from a rock star of microfinance to a
dressed-up loan sharking operation?
 The only business that thrives in many depressed
US rust-belt communities are Pay-Day Loan
Stores: $500 at 300% p.a., forever.
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Responsible Credit ?

In Depth December 13, 2007

Yunus Blasts Compartamos

The Nobel Prize-winning microfinance
pioneer refuses to mention the words
"Compartamos" and "microfinance" in the
same breath.

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Sub-Prime Mortgages
 Interest-only, 125% LTV, no-income verification,
bad credit ok, introductory “teaser” installments.
 Making the American dream possible for low-
income communities?
 Or the mother of abusive lending practices?
 9 - 10% of all US single family homes with a
mortgage are currently in serious arrears or some
stage of the foreclosure process.
 Is the South African FSC driving us into our very
own sub-prime mortgage dilemma?

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Housing Microfinance
 How is housing microfinance different from sub-
prime home mortgages?
 Could housing microfinance be the anti-dote that
can save us from a sub-prime mortgage crisis in
South Africa?
 If done right, housing microfinance can be the
responsible credit answer for the 90% of
households in South Africa who do not have the
income to sustain a conventional mortgage even
on the most basic “affordable” costing in the
R250,000 range.

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Housing MF Done Right
 How is what RHLF retail partners do different from
microlending at African Bank, Capitec and Blue
Financial Services etc.?
 The big guys have done customer surveys and
they believe they can claim that much of their loans
also go towards developmental purposes: housing,
small business and education.
 Mainstream microlenders are taking these
arguments to the development banks asking for
concessionary funding. With success: IFC, FMO …

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Housing MF Done Right?

In Depth November 29, 2007

Can Greed Save Africa?

…
Early last year Blue Financial secured $15 million from insurance giant AIG. The
deal gave AIG a 23% stake in Blue and two board seats - and gave Blue the
imprimatur of a Wall Street titan. …

Blue has also turned its equity into a critical component of its lending process. It
uses the cachet of its AIG stake and surging stock price to coax cheap capital
from development banks like International Finance Corporation and the
Netherlands Development Finance Co. FMO. "Our equity investors give us
leverage," says David van Niekerk, Blue's 34-year-old founder and CEO. "All of a
sudden, knocking on doors has become a hell of a lot easier. You have to play
that trump card." ….
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Housing MF Done Right?
Institutional Compliance with Responsible Lending Best Practices
Criteria Weights (+, ++, +++)
Transparency and Disclosure: Advertising +
Transparency and Disclosure: Pre-Contractual and Contractual Disclosure
- Amount of Credit
- Total Cost of Credit
- Installment +++
- APR / Effective Rate
- Payment schedule
- Arrears charges and penalties
Non-Discrimination / Equal Opportunity Lending +
Affordability Review and Avoidance of Over-Indebtedness +++
Right of withdrawal +
Linked Transactions +
Early Repayment ++
Credit Database Access and Data Privacy +
Obligations of Credit Intermediaries +
Refraining from Unfair Contract Terms ++
Treatment of Non-Performing Credit Agreements
- Moderation on contractual late fees, penalties, and legal collection charges +++
- In duplum rule
- Fair debt collection practices
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Housing MF Done Right?
Value for Money

Effective annual cost to the consumer may generally not exceed five times the
wholesale interbank rate or government debt yield in that currency and for the +++
corresponding maturity or interest rate fixing period.

Loan Use and Certain Product Features – “Bonus Points”

Developmentally preferable loan uses, e.g.:
- Home improvement and incremental home building
- Education expenses & school fees ++
- serious emergencies (e.g. medical, death, natural disaster, crime, job loss)

Beneficial contract features, e.g.:

- Fixed rate loan agreements (combined with penalty free right to prepay)
- Elimination of foreign exchange rate risk for the borrower
- Installment loans preferable over revolving short-term credit ++
- Longer loan tenors with lower monthly installments
- Cost of credit reductions for well-paying repeat borrowers