linking remittances to housing - microfinance

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Linking Remittances to Housing Microfinance

Washington DC

Romi Bhatia

February 2008

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Linking Remittances to Asset Building:

1. MFIC Business Model

2. Phase 1: Program Launch: USA – El Salvador

3. Phase 2: Operational Challenges & Program Redesign

4. Client Profile

5. Phase 3: Growth & Expansion

6. Externalities

MFIC’s experience in providing transnational mortgage loans to Salvadorian immigrants in USA

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Serving Transnational Families

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Our Remittance Distribution Network

In USA:

9 Alante Financial retail branches in the Washington DC region and Delaware

In Latin America:

Network of 23 Financial Institutions in over 10 countries

Global Expansion:Partnership with UAE Exchange to expand remittance network to 90 worldwide in 2008

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Programa de Operaciones Internacionales

Phase 1: Program Launch in El Salvador

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Program Objective:

Provide an option for immigrants in USA to channel their remittances to build assets by providing transnational mortgage loans.

Pilot Program:

Launched in September 2006 in El Salvador

Two Microfinance Institution (MFI) Partners:

1. Apoyo Integral de S.V.

2. Sociedad Cooperativa de Ahorro y Crédito (AMC)

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Benefits of MFIC-MFI relationship

1. Increase in remittance volume through formal channels and provide an option for the use of remittances beyond consumption.

2. Facilitate purchase of property/investment in a business from the U.S.

3. Cross-selling of other products and services to both the immigrant customer in the U.S. and family members in the home country

4. Rapid growth and added mix of a secured loan portfolio for MFIs

5. Access to a large immigrant customer base in the U.S.

Pilot Program Structure:Risk Sharing: MFIC and MFI partner share 50% of all risk and revenues for each transnational mortgage loan

Market Clientele: Un/Underbanked Salvadorian immigrants in the Washington DC region (primarily Alante Financial clients)

Loan Underwriting: Pre-approval process by MFIC but ultimate loan decision made by financial institution. Policies and procedures to be determined through experience

IT Infrastructure: Utilize existing ARIAS remittance platform and develop a system to manage information flow.

Role and Responsibilities:

MFIC – Alante Financial(in the U.S.)

1. Loan interview & credit analysis2. Verifications and processing 3. Loan administration and collections

Financial Institution(in El Salvador)

1. Property Appraisal/ Business evaluation

2. Evaluation of co-borrower (if applicable)

3. Loan documentation and disbursement

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Transnational Loan Product

Purpose of Loans:

Home/Land Purchase (construction, home improvement) Investment in an existing business Educational expenses

Main Characteristics:

Loan Size: $8,000 - $40,000 USD Loan Term: 10 – 15 yearsCollateral: Property /Business Assets in El SalvadorInterest Rate: 12 – 16% (determined by MFIs)

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Programa de Operaciones Internacionales

Phase 2: Operational Challenges & Program Redesign

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Pilot Program Outcome: (9-month period)

7 Transnational Loan brokered with outstanding loan portfolio of $132,300.

118 applications taken, 29 loan applications denied; 82 clients ineligible

What has worked? In-depth credit analysis MFI rural presence in El Salvador Client Demand for T-loan product

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…..what has not worked?

#1. Unbalanced Risk Management Structure #2. Underwriting Policy challenges#3. Lack of I.T. Infrastructure#4. Insufficient support structure to promote

new loan product #5. Mismatch in Client and Lender Expectations

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50 – 50: 50% risk and revenue sharing scheme difficult to implement

Legal enforcement: No legal action permitted in the U.S. in case of client default

#1 Unbalanced Risk Management Structure

#2 Underwriting Policy Challenges

Potential Conflicts of Interest: Differing assessments on level of credit risk of loan clients

Assessment of Legal Risk: Should undocumented immigrants be eligible for this loan?

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#3 Lack of I.T. Infrastructure

No loan brokering softwareModifications to ARIAS remittance platform requiredLoan administration very time consuming

#4 Insufficient Support Structure

New product requires significant upfront costsMFIs need dedicated loan officer to manage cross-border mortgage loansNeed for an incentive systemMFIs need capacity building training

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#5 Mismatch in Client – Lender Expectations

Broker-Lender Model: Revised business model to reflect proper roles and responsibilities

Fee for service: Revenue allocation based on fee for services; lender retains all loan revenues but also accepts all loan risk

Program enhancement: implementation of a web- based brokering software system; capacity building trainings, etc.

Program Redesign

Discrepencies in appraisals Unbanked clients do not possess credit historyClients may lack key information on value of property/viability of a business investment

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Programa de Operaciones Internacionales

Client Profile

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Client Profile: Maria Echeverria

Client Profile: 40-year-old Salvadorian came to the US in the midst of the Civil War in 1985. An Alante loan and remittance customer for one and a half years.Financial Standing: monthly income = $2,015, expenses = $1,420; disposable income (after T-loan) =20% (~$415)Average Monthly Remittance: $150.00 (to assist relative)Loan Request: $30,000Purpose of Loan: Purchase of land to build house and farm in the future

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Client Profile: Maria Echeverria

Property Appraisal: $13,164.50Renegotiated Sales price: $20,000Approved loan Amount: $13,000 USDCircumstances: Integral was willing to lend $13K so Alante Financial restructured Maria’s existing loan to provide her with $5K. With her savings, Maria contributed $2k in order to complete financing. Loan processed and disbursed in 10 days due to urgency of seller.

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Programa de Operaciones Internacionales

Phase 3: Growth and Expansion

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Streamline loan processing time Add additional lenders to offer loan clients more financing optionsImplement USAID partial credit guaranteeAggressively market loan productDevelop brokering software customized for cross-border mortgage loans…..do MORE Transnational Loans!

Growth and Expansion

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Externalities(+) (~) (-)

Outcome of immigration debate

MFIC’s growth and expansion to other states in the U.S.

MFI partners building capacity; dealing with increased market competition

Political and economic shocks in the country of origin of loan clients

Potential recession and high unemployment in the U.S., especially in the construction industryAvailability of capital for

Tier 2 and 3 MFIs

Increased financial inclusion of immigrants both in the U.S. and their family members in the home country.

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The MFIC Team

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Programa de Operaciones Internacionales

www.mfi-corp.com

www.ariasfs.com

www.alantefinancial.com

Thank You!Romi Bhatia

Vice President, International Operations

rbhatia@mfi-corp.com