COLOMBIA: Improving Access to Housing Finance for Low-income and Informally Employed Segments
The housing finance market in Colombia remains underdeveloped; the situation is especially acute for low-income salaried households and those employed in the informal sector. In 2013, the market depth was 4.5 percent of GDP (Col$28.6 trillion, or US$15 billion), noticeably lower than in Chile (20 percent) and in Mexico (11 percent), for comparison. Housing finance represented about 10 percent of banks’ credit portfolios. With rapid population growth and urbanization exacerbating the housing shortage, an estimated 35–40 percent* of the population is in need of affordable housing.
The low-income households and those employed in the informal sector are particularly challenged in accessing bank financing for two reasons. First, would-be buyers are unable to accumulate sufficient savings to meet the 15–20 percent down payment required for a mortgage. Second, lenders have only a limited ability to assess income and repayment capacities and to accurately estimate the credit risk of informally employed borrowers.
With 60 percent of Colombians working informally and over 40 percent of families paying rent, filling this accessibility gap has become a major development challenge. Therefore, increasing access to affordable, sustainable housing finance is a critical priority of the Colombian government.
In April 2013, the Fondo Nacional del Ahorro (FNA; National Savings Fund), a state-owned development bank, approached FIRST for TA. The FNA administers public and private sector employee savings and provides housing finance; it has 1.6 million affiliates and a 16 percent share in the housing finance market. This assistance was to address the two major challenges affecting the expansion of housing finance for low-income individuals and the informally employed: namely, (i) to support lenders in better assessing the creditworthiness of informal workers and (ii) to help low-income applicants overcome the barrier of a 15–20 percent down payment.
This TA, delivered by the World Bank, supported the FNA in five efforts:
• Reviewing its financial and institutional capacity to assess the challenges to expansion of housing finance in a sustainable and efficient way
• Assessing its suitability to develop an appropriate suite of products for informal households and low-income employees
• Designing a credit score system for informal workers and low-income formal employees
• Developing and piloting the implementation of a residential leasing product for informally employed and low-income formally employed households
• Disseminating these outputs to relevant stakeholders
In July 2014, the government issued Decree 1058 to allow banks to use the proposed residential leasing with savings products. In October 2015, the FNA launched the Arriendo Social (Social Rent), which was developed on the basis of the project’s results. The FNA opted to launch the residential leasing product without the savings component. To fund this program, the FNA created a special purpose vehicle of Col$400 billion (US$150 million). Within the first two months following the launch, the FNA received over 1,500 applications. In addition, the proposed credit-scoring methodology informed the FNA’s new credit score system for informal workers and low-income individuals applying for the FNA’s housing finance products.
As a public development bank, the FNA was an ideal partner to act as a market maker by introducing new products to the financial markets and promoting innovation in housing finance. There is large potential for replicating these outputs, as many countries face similar challenges of improving access to housing finance for low-income and informally employed people.
*8. According to the National Census of 2005, the last conducted. A more recent estimate suggests 20–25 percent.