SPECIAL FOCUS
fraud or corruption amongst SHB staff who
can demand bribes for allocating the scarce
resources. Often, a portion of the state
subsidies end up supporting the SHB itself
for its operational costs and/or financial
losses incurred.
SHBs can become obstacles to the growth of
housing finance markets. This is particularly
prevalent where the SHB has preferential
access to subsidies, which prevents the private
sector from competing in this market. It may
also introduce market distortions by being
able to offer products which the private sector
cannot match (i.e. it “crowds out” the private
sector). Such offerings tend to be unsustainable,
however, due to low profitability and a poor
track record in managing credit risk. This
promotes “market creep” by the SHB into the
middle-income market in direct competition
with private sector lenders.
SHB SAFEGUARDS
Before creating an SHB, government should
determine what type of “market failure” is
constraining the market government needs to
stimulate. If this is due to structural deficiencies
and not the existence of more profitable and
easier lines of business, an SHB will stunt rather
than foster the development of housing supply
or macroeconomic conditions.
If government intends the SHB to be a
“market maker”, then its design should meet
some critical conditions to ensure it efficiently
fulfils its social and economic purposes. The
design must also include an exit strategy, once
government’s objectives have been met.
Preconditions for creating a good SHB:
• Good governance, including strong corporate
governance principles and insulation
from short-term political interference.
Management and the board should be
accountable and independent and the SHB
should be subject to oversight by the banking
(prudential) regulator.
• Autonomy of funding. The SHB must be able
to access savings through a retail deposittaking network and/or wholesale funding via
capital markets. If such facilities do not exist,
it will be entirely dependent on state support,
which could lead to abuse and market
distortions, and to inefficiencies (constrained
lending volumes and funding uncertainty).
• Alignment of corporate interest with market
development, separating subsidies from
finance. An SHB’s success is defined by its
contribution to overall market development
and providing finance to underserved
categories of housing need, while at the same
time achieving self-sustainability both in
terms of financial results (i.e. profitability,
good loan credit management) and funding
(i.e. raising new funds for sustained lending).
In Thailand, the SHB has been operating on
a commercial basis without any dependence
upon state financial support. Its leadership
in low - income housing reflects its strategic
position as compared to private sector
lenders.
POLICY ALTERNATIVES
Given the dismal performance of SHBs in most
instances, some preferred policy alternatives
include:
• Credit extension by market contract
or regulatory dictate. This refers to the
regulatory framework within which housing
credit is extended to borrowers, and by whom
(e.g. the Community Reinvestment Act in the
US). This legislation directed certain financial
institutions to extend housing credit within
the communities in which they provided
other financial services or raised retail
deposits, provided such credit was based on
normal commercial lending principles. This
created a sub-prime market in the US, with
catastrophic implications for homeowners
and lenders. Another example is an early
Nigerian model (terminated in 1993) where
5 to 6% of total lending by a bank had to be
in housing.
• A better approach is to recognise lending
constraints in the relevant housing markets
and then, through contractual arrangements,
have a social contract with lenders to serve
lower income groups (e.g. in South Africa,
the Financial Sector Charter of 2004, or
the Social Contract between multiple
stakeholders and the Department of Human
Settlements in 2005, revitalised in 2014, or
the Memorandum of Understanding between
commercial banks and the Department of
Human Settlements in 1995).
• Second tier institutions. Here, government
supports second tier lenders by providing
liquidity facilities or a market conduit (e.g.
Malaysia, Jordan and in South Africa, where
wholesale funds are made available to
alternative lenders operating in urban or
rural areas).
• Public-private partnerships, whereby the
government makes a strategic investment
in, or initially supports, dedicated housing
finance companies. This promotes a
combination of private sector governance
and managerial efficiency with government
policy goals (e.g. the HDFC in the country,
the biggest mortgage bank in India, which
now operates as an autonomous, fully-fledged
private sector bank).
• “Double bottom line” (social and commercial),
whereby entities take business-based solutions
RATIONE