Evaluation of the low-income shelter program Sri Lanka

Mid-term evaluation covers the period 1987-7/94. In late 1988, prior to any borrowing under Phase IV, USAID/SL suspended the program after the Government of Sri Lanka (GOSL) announced that it would repay housing loans that had been made to low-income borrowers on food stamp assistance from a philanthropic government account, an announcement which was misinterpreted by borrowers in other income categories, who almost universally ceased repaying their loans. After discussions with the GOSL, the Mission concluded that the GOSL's action was a short-term political move rather than a change in policy, and Phase IV was reactivated in March, 1991. Since then, a number of impressive accomplishments have been achieved. The Central Bank of Sri Lanka (CBSL), which is the implementing agency for the loan component, has approved 42,196 loans, all originated by the eight lending institutions participating in the program, for a value of Rs 420 million. Borrowers have uniformly been below median wage, as required. In addition, the National Housing Development Authority (NHDA), which is implementing the grant component, has made 76,055 grants totaling Rs 213 million. These figures exceed targets for both loans and grants. On the institutional and policy front, the objective of developing market rate lending policies and programs has been achieved; all the institutions participating in the program are making only market rate loans and (except for NHDA) are achieving virtually full loan recovery rates. The objective of rationalizing the public sector has been partially achieved. On the positive side, the public sector is now making grants or providing subsidies only to families who are too poor to borrow; all others must obtain financing at market rates. On the negative side, the NHDA is still making housing loans (at market rates), instead of just providing grants and involving itself in policy matters. Finally, little progress has been made in developing housing finance instruments and procedures. These instruments must be in place before the end of 1995, as both USAID and the Asian Development Bank -- the two principal sources of external financing -- will probably wind up their programs by that time. One of the major problems encountered by the project has been the inability of the GOSL to allocate sufficient funds to the CBSL to make disbursements for the approved loans; to date, only RS 150 million has been reimbursed to lending institutions, leaving unmet disbursements of Rs 270 million. The other major problem is the bureaucratic process through which the loans must be approved. The present CBSL procedure increases loan administration costs and discourages many private sector borrowers from increasing their participation. However, since the CBSL must comply with the Monetary Act, it is unlikely that this problem can be mitigated significantly. Lessons learned are as follows. (1) USAID housing programs, using HG funds, are capable of reaching large numbers of poor (especially rural) families by granting very small loans to creditworthy borrowers as well as grants to families at the subsistence level. (2) Low-income families are able to borrow for housing at market rates and repay those loans if the lender is a profit-oriented institution that enforces repayment. (3) Rural families, including those in small towns, are just as capable in carrying debt successfully for housing purposes as are urban families. (4) Private sector financial institutions are unlikely to play more than a token role in the granting of housing loans for low-income families unless loan origination and loan administration costs are lowered. (5) Since high loan origination and administration costs in Sri lanka will prevent some lenders from making mortgage loans for low-income families, the ability of lenders to tap outside sources for long-term housing finance will be limited.