Presentation by Dr. Friedemann Roy, Association of Private Bausparkassen, Berlin at World Bank Seminar (11 March 2003) The Implementation of Contract Savings Systems in Emerging Economies - Features, Recommendations and Examples

When should governments encourage the implementation of Contract Savings Schemes? Affordability High default ratios/ foreclosures sales Ill-functioning legal conditions Restricted lending to private sector Low “official” savings ratios Difficulty to obtain a second mortgage-lien

Conclusion Under these economic circumstances, access to credit is difficult, especially for low and middle income groups. A complementary tool is needed to fill this gap and to make housing affordable.

Savings Allocation fund Loans t lifetime of contract (e.g. € 100,000) How do Contract Savings Schemes (CSS) work? Customer saves and earns interest ( % of contract amount) € 40,000 - € 50,000 € 60,000 - € 50,000 Notification of bausparkasse Repayment of loan with interest rate fixed on conclusion of the contract

How do CSS work?: the allocation system Inflow of funds Outflow of funds SavingsRedemption payments Loans Deposits Termination of contract

Conclusion: a sound financing structure for a home 50 % Mortgage 30 % Bauspar funds 20 % Down-payment = 100 % of the purchase price

Conclusion: financial perspective of Contract Savings Systems Option component: right but no obligation to call a loan at pre-specified terms. – Loan is below market rate. – Interest rates are fixed over whole lifetime of contract. – No underwriting process to receive loan proceeds.

Credit risk Attractiveness Legal conditions Agency risk Sound liquidity management in view of volatile inflation rates Specific features of Contract Savings Systems in emerging economies

Credit risk Customer builds up creditworthiness over time Default rate of bausparkassen industry: 0.02% of entire loan portfolio Recommendations for managing the implementation of CSS in emerging economies

Specialised institutions? Agency risk Recommendations for managing the implementation of CSS in emerging economies

Stable and viable institutions managing CSS  tight regulation, experienced international support Attractiveness Recommendations for managing the implementation of CSS in emerging economies

Sound liquidity management in view of volatile inflation rates Inflation rate < 10 % Maintain short and consistent waiting periods Clearly define waiting period Legal conditions Recommendations for managing the implementation of CSS in emerging economies

Sound liquidity management in view of volatile inflation rates Duration of savings period Require a reserve fund to meet future loan demand Introduce regulatory body Legal conditions Recommendations for managing the implementation of CSS in emerging economies Flexible contract management

Social housing programmes Government support for housing construction financing Objective: support development of private market (start-up effects) and improvement of the nation’s social goals The role of subsidies Recommendations for managing the implementation of CSS in emerging economies

Recommendations: design of a subsidy scheme Provide realistic estimate of housing demand. Continue to focus on macroeconomic and housing reforms. Helping to overcome the liquidity constraint of borrowers. Consider specific target groups to assist those in need of a subsidy. Link subsidies to the use of funds for housing purposes.

Implementation of CSS in emerging economies - examples Central and eastern Europe Slovakia. Czech Republic. Hungary. Croatia. Envisaged in Romania. Asia: India (BHW in joint venture with Birla Home Finance). China (Schwäbisch Hall in joint venture with China Construction Bank).

Bausparen in the Czech Republic Bausparen has existed since 1993 Funds are used for renovation/modernisation (39%), construction (17%), the purchase of a home (39%) and miscellaneous building activities (10%). Every second house under construction is financed through bauspar-funds. About 4.5 mio. Czechs have concluded a bauspar-contract. Housing expenditures = 18% - 19% of income

Czech Republic: correlation between granted bauspar-loans and construction activities Since 1995, the number of dwellings built has doubled. In 2000, the government spent CZK 5 billion on subsidies. Bausparkassen granted loans for CZK 17.4 billion.

Bausparen in Slovakia Bausparen has existed since mio. Slovakian citizens have concluded a bauspar contract (every fourth person) About 60 % of the Bauspar customers conclude a new contract after completion of the previous contract Funds are used for renovation/modernisation (37%), construction (23%) and purchase of home (40%)

Slovakia: development of number of flats being started and finished

Slovakia: correlation between public spending and granted bauspar-loans In 2001, the subsidies have lead to a financing volume of the bauspar industry of € Mio. Since 1997, the subsidy amount has been reduced by 34 %. However, the volume of bauspar-loans has risen by 87 %.

Conclusion: a sound and functioning housing finance system Own funds stabilise financing structure Better access to credit Buffer in case of difficulties Capacity and willingness to repay loan increases Housing affordability rise CSS helps to develop housing finance system by supplementing other Models