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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.
SavingsAllocation fund
Loans
t
lifetime of contract (e.g. € 100,000)
How do Contract Savings Schemes (CSS) work?
Customer saves and earns interest
(40 - 50 % 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
LoansDeposits
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
0
5000
10000
15000
20000
25000
30000
1995 1996 1997 1998 1999 2000
Dw
elli
ng
s co
mp
lete
d
0
2
4
6
8
10
12
14
16
18
20
bau
spar
-lo
ans
in C
ZK
bil
lio
n
Dwellings: constructioncompleted per year
Volume of bauspar-loansper year (in billion Koruna)
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 1992
1.5 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
0
3000
6000
9000
12000
15000
18000
1994 1995 1996 1997 1998 1999 2000 2001
Started
Finished
Linear(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 € 381.9 Mio. • Since 1997, the subsidy amount has been reduced by 34 %. However, the volume of bauspar-loans has risen by 87 %.
0
50
100
150
200
250
300
1994 1995 1996 1997 1998 1999 2000
Pu
blic s
pen
din
g in
Mio
. E
UR
0
100
200
300
400
500
600
Bau
sp
ar
loan
s in
Mio
. E
UR
Granted bausparloans per year
Public spendingon bausparsubsidy per year
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