This paper considers the various causes of default among housing microloan clients borrowing from South Africa’s various housing microfinance (HMF) lenders. Through the data and analysis, the paper substantiates the dire need for a dramatically more fundamental overhaul of the entire HML market, including targeting a poorer and larger segment of the population that has been barely serviced thus far, radically changing lending methodologies, and seriously altering the mandates and modus operandi of the wholesale finance organizations, as well as policy and other support institutions.
In 2004, the FinMark Trust, together with the Rural Housing Loan Fund, National Housing Finance Corporation, Transunion Credit Bureau and Development Bank of Southern Africa, commissioned research into the causes of default among low income housing loan clients.
The research, undertaken in 2006, found:
- HML Lenders generally target clients earning between R4000 – R7500. This puts them in direct competition with banks, retail lenders and other financial services providers, which are extending both housing and other finance lower down the income pyramid. Credit cards and personal loans, often at or under the Usury Act ceiling rate of interest, and replete with loyalty programmes and affinity offers, and variable terms and conditions, predominate in this market.
- HML Lenders do not have the systems and processes necessary to compete effectively with other financial service providers in this market. Few of the HML Lenders included in the study follow what have been called the “12 Pillars of Micro Lending”. At best, HML lenders have developed various backroom functions including products, administrative systems and processes, collection methodologies and payment mechanisms. Few have addressed the detailed issues relating risk management. In addition, few have developed a distinctive brand and strategy, notwithstanding their exclusive focus on housing.
- In the context of extremely strong competition for the best clients, and inadequate approaches to managing the riskiest clients, HML Lenders face a fundamental conundrum. The research found that:
- HML borrowers are more likely to default where monthly instalments exceed 40% of income (more than 35% of HML borrowers have monthly instalments that exceed this threshold)
- Clients with no judgements absolutely perform better than those who do (13% of the HML borrower client base has at least one judgement against them).
- Past credit behaviour predicts future credit behaviour – the lack of any significant skew in the data points, relating to CCA accounts and judgements, represent the clearest correlations of any variables used in the analysis vis-à-vis credit risk profile. (More than half of HML borrowers are in the 4 riskiest categories, in respect of CCA profiles.)
- HML borrowers are 20% more likely to default on their micro loan, than they are to default on their credit card, store card, cell phone account, etc. (At least 20% of existing HML borrowers have a credit card; 29% of HML borrowers have or had a retail card; and 23% of them have now and use both a store card and a retail card)
- HML borrowers become 20% more likely to default after they have received a housing micro loan – another indicator of how close HML borrowers are to the precipice of over- indebtedness.
In summary, the data and analysis substantiate the dire need for a dramatically more fundamental overhaul of the entire HML market, including targeting a poorer and larger segment of the population that has been barely serviced thus far, radically changing lending methodologies, and seriously altering the mandates and modus operandi of the wholesale finance organisations, as well as policy and other support institutions.