Financing Hurricane-resistant Home Improvement Loans Throughout the Eastern Caribbean

This paper was prepared in July 1999 by the Cooperative Housing Foundation (CHF) for the USAID/OAS Caribbean Disaster Mitigation Project, based on CHF's experiences with hurricane-resistant home improvement loan programs in the Caribbean and with low-income home mortgage lending throughout the world.

Over the past three years, the USAID/OAS Caribbean Disaster Mitigation Project (CDMP) has been testing a home improvement lending program for below median income families. This program  was designed to assist families with access to credit and technical assistance for the upgrading of their homes to withstand future hurricane forces.

The technical package for the hurricane-resistant building techniques has been developed, the manuals published and key people and craftsman trained in Dominica, St. Lucia and Antigua. This technical package is based on the work originally undertaken in Jamaica and upgraded under the CDMP. The technical portion has been extensively reviewed and is appropriate for Caribbean conditions. Technical materials are also available on the CDMP web site at http://www.oas.org/en/cdmp/publist.html.

The hurricane resistant upgrades by themselves are not excessively expensive (averaging between US$500 and US$700), the materials are generally available in local markets and individuals with average construction skills can do the work properly. Even people not trained in carpentry but who have basic "handyman" skills can complete the work if they receive some supervision/training and they follow the instructions in the technical manual and appropriate minimum standards for safer housing.

Under the CDMP, test loans were implemented with OAS providing some capital ($10,000), with CHF providing $82,000 and NRDF St. Lucia obtaining loan capital from several sources.

Issues

The pending financial issues are:

• Client Demand
• Affordability for below median income families
• Availability of credit funds to Micro-Finance Institutions (MFI) in sufficient volume and at an feasible cost of capital

Client Demand

The experience in St. Lucia, Antigua, Dominica and Belize indicates:

• Very few families will take a loan for the sole purpose of strengthening their home's resistance to future hurricanes, even though they concede its importance and the near inevitability that future storms will batter their homes.
• Many families expressed the desire for loans for "home improvements" and they do not mind including the hurricane resistant technology in the cost of home improvements.
• Most loan applicants want to undertake substantial improvements to their homes so the demand is for loans ranging from US$2,000 to $15,000 and for loan periods of 5 to 15 years.
• There is extensive demand  for home improvement  loans (possibly several thousand per country) in the above range.

Affordability for below median income families

The pilot projects have demonstrated that many low-income families would appreciate having access to home improvement loans; however, they do not have the reliable income to support loans large enough to complete all of the necessary improvements at one time. Efforts to assist such families in a progressive home upgrading manner (a series of two to three small, short-term loans to complete construction sequentially) have not been sufficiently tested. Pilot project participants were reluctant to test the progressive lending model because of the perception that the administrative costs of such loans are too high.

Families with incomes at or above the median levels have demonstrated strong demand for larger more comprehensive home improvement loans. At this level of income, loans of US$2,000 to $15,000 meet the needs of most borrowers.

Availability and cost of capital

The pilot programs demonstrated that a number of National Development Foundations and Credit Unions have the administrative capacity to process and handle the Hurricane Resistant Home Improvement Loans. After receiving some initial technical assistance, these organizations have successfully included hurricane resistant construction technical assistance in the planning and estimating stages of the loans.

An analysis of pilot loans (and a similar program in Belize) indicates that the retail lenders, whether they are NDFs, credit unions or charitable organizations, need a spread (the difference between the cost of capital and lending rate offered to borrowers) of at least 6% to cover the cost of managing hurricane resistant home improvement loans. This is accurate at least in the initial phase when a retail lender is disbursing small numbers of loans.

Depending on operational expenses and applicable loan terms, a portfolio of at least US$400,000 is needed to make the entire process sustainable. Larger loans with lower interest rates may require additional capital and processing fees to supplement the reduced loan reflows and maintain a sufficient capital fund for new loans.

The retail lenders participating in the pilot programs are generally of the mind that their loan interest cannot be significantly higher that the rates offered by the various formal banks (currently 10 – 12%). Therefore, they need to access capital at a cost of 4 - 5%  to conduct a Hurricane Resistant Home Improvement Lending Program.

During the pilot phase, CDMP provided grant funding for start-up costs and training to the project partners in St. Lucia and Dominica. CHF has made its loan capital available initially at 4% and later  at 5% with a 9-month grace period on repayments. NRDF of St. Lucia succeeded in accessing some government insurance funds at 5%. Pilot operations are now ongoing also in Antigua and Barbuda, and St. Kitts and Nevis.

Further Discussion Points

CDMP has effectively assembled the technical resources needed to make it possible for all houses in the Caribbean to resist all but the most powerful hurricanes. The people of the Caribbean have indicated a preference for such techniques to be incorporated into a more comprehensive home improvement program. Families are interested and willing to take loans to finance their home upgrades, and with appropriate lending methods, families at and above median income levels can afford to carry the loans.

Estimated Aggregate Demand

With such a demand, the final question is how can the retail lending institutions such as NDFs, credit unions, and microfinance organizations access sufficient capital at the affordable rate of 4 to 5%?

Possible Sources Funding

• Caribbean Development Bank: The CDB has provided funds for hurricane resistant home improvements through the National Development Bank in St. Kitts and Nevis using concessionary housing funds.
• National Development Banks: The various National Development Banks may be persuaded to pass on the savings by on-lending their own funds at concessionary rates.
• Pension Funds: St. Lucia has been able to access pension funds at 5%.
• Governments: National government appropriations can be used to establish guarantee funds to leverage commercial bank funds.
• Private Insurance Sector: Linkages between any of the above organizations and the private insurance sector can be established to leverage funds at the 4 to 5% rate.
• Commercial Banks: With a potential market of US$120 M, a diversified customer base, and profitable market interest rates, commercial banks may be willing to provide additional resources.