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The Implementation of Contract Savings Systems in
Emerging Economies - Features, Recommendations
and Examples
Presentation by Dr. Friedemann Roy, Association
of Private Bausparkassen, Berlin at World Bank
Seminar (11 March 2003)
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When should governments encourage the
implementation of Contract Savings Schemes?
High default ratios/ foreclosures sales
Low official savings ratios
Affordability
Ill-functioning legal conditions
Difficulty to obtain a second mortgage-lien
Restricted lending to private sector
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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.

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How do Contract Savings Schemes (CSS) work?
Allocation fund
Savings
Loans
t
60,000 - 50,000
40,000 - 50,000
lifetime of contract (e.g. 100,000)
Customer saves and earns interest (40 - 50 of
contract amount)
Notification of bausparkasse
Repayment of loan with interest rate fixed on
conclusion of the contract
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How do CSS work? the allocation system
Inflow of funds
Savings
Redemption payments
Termination of contract
Loans
Deposits
Outflow of funds
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Conclusion a sound financing structure for a home
50 Mortgage
30 Bauspar funds
20 Down-payment
100 of the purchase price
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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.

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Specific features of Contract Savings Systems in
emerging economies
Legal conditions
Credit risk
Sound liquidity management in view of volatile
inflation rates
Agency risk
Attractiveness
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Recommendations for managing the implementation
of CSS in emerging economies
Credit risk
Customer builds up creditworthiness over time
Default rate of bausparkassen industry 0.02 of
entire loan portfolio
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Recommendations for managing the implementation
of CSS in emerging economies
Agency risk
Specialised institutions?
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Recommendations for managing the implementation
of CSS in emerging economies
Attractiveness
Stable and viable institutions managing CSS ?
tight regulation, experienced international
support
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Recommendations for managing the implementation
of CSS in emerging economies
Sound liquidity management in view of volatile
inflation rates
Legal conditions
Inflation rate lt 10
Maintain short and consistent waiting periods
Clearly define waiting period
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Recommendations for managing the implementation
of CSS in emerging economies
Sound liquidity management in view of volatile
inflation rates
Legal conditions
Duration of savings period
Require a reserve fund to meet future loan demand
Introduce regulatory body
Flexible contract management
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Recommendations for managing the implementation
of CSS in emerging economies
Social housing programmes
The role of subsidies
Government support for housing construction
financing
Objective support development of private market
(start-up effects) and improvement of the
nations social goals
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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.

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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).

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Bausparen in the Czech Republic
Bausparen has existed since 1993
About 4.5 mio. Czechs have concluded a
bauspar-contract.
Every second house under construction is financed
through bauspar-funds.
Funds are used for renovation/modernisation
(39), construction (17), the purchase of a home
(39) and miscellaneous building activities
(10).
Housing expenditures 18 - 19 of income
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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.

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Bausparen in Slovakia
About 60 of the Bauspar customers conclude a
new contract after completion of the previous
contract
Bausparen has existed since 1992
1.5 mio. Slovakian citizens have concluded a
bauspar contract (every fourth person)
Funds are used for renovation/modernisation
(37), construction (23) and purchase of home
(40)
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Slovakia development of number of flats being
started and finished
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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 .

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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
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