The loan will finance a pilot program to expand mortgage lending for low-income, informally employed Nicaraguans
The Inter-American Development Bank (IDB) today approved a $10 million loan to Banco de Finanzas S.A. (BDF), a leading commercial bank in Nicaragua, to finance a pilot housing project that will pave the way for low-income families working in the informal sector to get access to mortgage financing.
The financing, arranged by the IDB’s Opportunities for the Majority Initiative (OMJ), will allow BDF to improve information about the credit history of potential low-income homebuyers by implementing a rent-to-own program. BDF is expected to extend mortgage loans to an estimated 500 low-income Nicaraguan families over the loan’s 10-year life under the pilot program.
The project, the first of its kind financed by the IDB in the region, seeks to address one of the biggest obstacles facing millions of low-income Latin American families that today struggle to improve their housing conditions: lack of access to financing because they can’t document their income. Clients in the program will rent the selected property for a 24-month period in which a portion of the monthly rental fee will be kept in a savings account that will later constitute the down payment on the home. The completion of timely monthly rental payments during the 24-month period will create a solid client credit information and payment track record, allowing BDF to better access risks and make a decision on the mortgage loan.
“This project represents a breakthrough to overcome the traditional obstacles that prevent low-income clients from gaining access to quality housing solutions: the ability to save for a down payment, and the ability to qualify for a bank mortgage loan,’’ said IDB project team leader Susan Olsen.
The housing sector in Nicaragua, as well as in the rest of Latin America and the Caribbean, is dominated by informality. Informal housing units are self-constructed and progressively built, most without proper land titles or access to public utilities. It is estimated that 20,000 homes are built annually in Nicaragua, with only 3,000 produced and financed through the formal market. A lack of investment in formally constructed housing coupled with constraints in demand due to restricted mortgage lending for low-income families has contributed to an elevated housing deficit, which the government of Nicaragua estimates at 957,000 units.
The program is expected to help spur demand for formally built units with construction costs of less than $20,000, clear land titles, utility connections and full basic infrastructure, attracting increased private sector investment into the low-income housing segment. The program’s value proposition for all private sector actors in the housing market gives it a high potential to reach scale in Nicaragua and elsewhere in the region, according to Olsen.
BDF will be working in alliance with Casa Rápido, Ágil y Fácil Nicaragua S.A. (RAFCASA), a financial services company specializing in the design of financial products for low-income clients. RAFCASA will pre-qualify low-income beneficiaries for the program and provide them with financial literacy training to assist with the BDF mortgage application process. The rent-to-own pilot, which could generate up to an additional $20 million in mortgage loans, represents a strong incursion by BDF in the social housing sector.
“We are confident that this pilot program will pave the way toward home ownership for thousands of Nicaraguan families for whom today owning a modest home is not a possibility, even though they have the income and willingness to pay for a mortgage,” said Juan Carlos Argüello, CEO of BDF.
The Opportunities for the Majority Initiative promotes and finances market-based, sustainable business models that engage companies, local governments and communities in the development and delivery of quality products and services for people at the base of the pyramid in Latin America and the Caribbean.
Founded in 1992, BDF is now the fourth largest bank in Nicaragua with assets of $468 million (close to 10 percent of assets in the banking system) and $45 million in equity, as of December 2011. The bank is well positioned in the different consumer segments of the market, leading the mortgage sector and is increasing its market participation in the corporate segment BDF has presence in the main regions of the country, through 30 branches and 39 ATMs and has positioned itself as a leading brand in the industry, experiencing solid growth in its assets, deposits, and equity.
IDB project team leader