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LESSONS:

Housing Finance Project

sector: Finance | country: Viet Nam, Socialist Republic of

1. Careful poverty analysis, a proper demand and supply analysis for housing, better selection criteria, as well as more pro-poor loan procedures and flexibility in the loan size, term, and use would have enhanced the inclusiveness and beneficial impacts of the project. Given the targeted low-income segment and limited institutional capacity, such projects should not be overly complex in design and difficult to implement. Having a variable interest rate on the loan did not help. Fixed interest rates are more appropriate and preferred by low-income and poor borrowers. The spread levied by some of the participating financial institutions (PFIs) over their borrowing rate from the State Bank of Viet Nam (Housing Finance Facility) was high. The project’s capacity building component provided for development of hedging instruments to enable PFIs to offer fixed-rate housing subloans. Hedging is practically nonexistent in Viet Nam. Further, given the weak institutional capacity, consulting support should be properly phased out over the implementation period of the project. Because consulting support ceased in 2006, component C was not fully utilized. More flexible instruments and such product design innovations as graduated-payment mortgages, flexible repayment arrangements, and multipurpose loans might be considered to suit such type of borrowers. In parallel, encouraging financial discipline among low-income borrowers is also important.

2. There are perceptions among some government agencies in Viet Nam that the interest rate should be much lower than market rates and be subsidized. Rather than focusing solely on the financing side, the complex issue of housing for the urban poor also needs to be looked at from the viewpoint of supply side constraints and the willingness of lenders to consider this an appropriate business line. Targeted subsidies that are separate from financing also need to be considered. Again, access to credit is more important than is providing interest rate subsidies. In every part of the developed and developing world, housing for low-income and poor people includes subsidies in some form as part of national social policy. Such schemes together with interest rate subsidies are plausible so long as the lending institutions continue to receive subsidies from the government.

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