fbpx 51252-001: Finance Sector Development Program | Asian Development Bank

Bhutan: Finance Sector Development Program

Sovereign (Public) Project | 51252-001 Status: Dropped / Terminated

Following on the findings of housing finance consultation work initiated in 2016, the Royal Government of Bhutan (the Government) requested the Asian Development Bank (ADB) to prepare a Housing Finance Sector Development Program to catalyze the development of the sector. Consultations with the Government and other key stakeholders on 15 May 2017 served to lay out the core design features of the program which will help strengthen market-based lending to the sector and build market confidence in underserved segments.

The urban population growth rate in Bhutan is the highest in South Asia and rural-urban migration flows are exerting additional pressures on urban infrastructure and housing supply. This has resulted in stark upward pressure on housing prices and a steep financial burden on middle- and lower-income households in both the homeownership and rental markets.

Project Details

Project Officer
Jurgen F. Conrad South Asia Department Request for information
Country
  • Bhutan
Sector
  • Finance
 
Project Name Finance Sector Development Program
Project Number 51252-001
Country Bhutan
Project Status Dropped / Terminated
Project Type / Modality of Assistance Loan
Technical Assistance
Source of Funding / Amount
Loan: Finance Sector Development Program
concessional ordinary capital resources lending / Asian Development Fund US$ 12.00 million
concessional ordinary capital resources lending / Asian Development Fund US$ 25.00 million
TA: Finance Sector Development Program
Technical Assistance Special Fund US$ 300,000.00
Strategic Agendas Inclusive economic growth
Drivers of Change Gender Equity and Mainstreaming
Private sector development
Sector / Subsector

Finance / Finance sector development - Housing finance

Gender Equity and Mainstreaming Some gender elements
Description

Following on the findings of housing finance consultation work initiated in 2016, the Royal Government of Bhutan (the Government) requested the Asian Development Bank (ADB) to prepare a Housing Finance Sector Development Program to catalyze the development of the sector. Consultations with the Government and other key stakeholders on 15 May 2017 served to lay out the core design features of the program which will help strengthen market-based lending to the sector and build market confidence in underserved segments.

The urban population growth rate in Bhutan is the highest in South Asia and rural-urban migration flows are exerting additional pressures on urban infrastructure and housing supply. This has resulted in stark upward pressure on housing prices and a steep financial burden on middle- and lower-income households in both the homeownership and rental markets.

Low housing affordability and access in Bhutan is a function of existing weaknesses in the housing ecosystem, primarily (i) the underdeveloped housing finance market and services; (ii) high development costs; and (iii) lack of alignment in the policy, legal and regulatory environment to high-level affordable housing policy goals.

ADB''s proposed sector development program will help establish the underlying enabling conditions to facilitate a transition towards a market-driven sustainable housing market. It will focus on strengthening market growth and stability by addressing financing and other core constraints in the ecosystem.

The policy-based loan component of the program will strengthen the enabling environment and support broad-based development of the housing ecosystem. The investment loan component will enhance credit delivery through the establishment of a housing finance entity (HFE). The HFE will convene low-cost and medium- to long-term sources of financing and channel these into housing sector development through onlending to financial institutions to finance mortgage and housing construction loans. The HFE will lower the cost of funds for financial institutions and strengthen their capacity to introduce product segmentation and financing instruments that are better tailored to market demand and borrower risk profiles. In addition, the investment loan will support the introduction of a mortgage guarantee scheme to further reduce risk in the financial system through reduction of credit risk in financial institutions' portfolios and help build market confidence in underserved segments by introducing risk-sharing arrangements.

Project Rationale and Linkage to Country/Regional Strategy

The proposed program supports the Government of Bhutan's development objective under the Five-Year Plan for 2013-2018, namely its strategic thrust for inclusive social development. It entails support to reducing multi-dimensional non-income poverty, which the Gross National Happiness Index measures against thirteen indicators-including (adequate quality) housing. Broadly, the Five-Year Plan (2013-2018) identifies living standards as the second-highest contributor to multi-dimensional poverty in Bhutan. Concurrently, the National Housing Policy (2002) and draft National Human Settlements Policy of Bhutan promote a vision for universal access to safe and affordable housing, which first requires the establishment of a market-driven housing industry.

The Country Partnership Strategy (CPS, 2014-2018) for Bhutan recognizes existing challenges to broad-based and inclusive economic development and high levels of socioeconomic inequality. The private sector remains underdeveloped and dominated by micro, small and medium-sized enterprises, as reflected in the housing sector, and its development is constrained by an underdeveloped financial sector and limited access to finance. The proposed program is consistent with the CPS's support to inclusive economic growth by improving the competitiveness and efficiency of the finance sector (strategic pillar 1, CPS, 2014-2018) and facilitating the development of the housing sector with a strong potential impact on achievement of the Government's social development objectives.

Impact

Standard of living and quality of life of the most vulnerable income groups enhanced

Access to basic shelter for all achieved

Project Outcome
Description of Outcome Access to affordable housing finance for lower- and middle-income households improved
Progress Toward Outcome
Implementation Progress
Description of Project Outputs

Legal and regulatory structures strengthened

Medium- to long-term credit delivery for the housing sector enhanced

Financial instruments tailored to underserved segments developed

Status of Implementation Progress (Outputs, Activities, and Issues)
Geographical Location Nation-wide, Thimphu
Safeguard Categories
Environment FI
Involuntary Resettlement FI-C
Indigenous Peoples FI-C
Summary of Environmental and Social Aspects
Environmental Aspects An environment and social management system will be adopted at the levels of the HFE and participating institutions to manage environmental and social risk exposure.
Involuntary Resettlement The program has been categorized as FI, treated as C-involuntary resettlement (IR) and indigenous peoples (IP)-as both the investment and policy components of the program will not trigger any social safeguards issues. Under the financial intermediary loan (FIL), ADB proceeds will be used strictly in accordance with loan covenants restricting onlending of the HFE to participating financial institutions for category FI-C-IR and IP projects.
Indigenous Peoples The program has been categorized as FI, treated as C-IR and IP-as both the investment and policy components of the program will not trigger any social safeguards issues. Under the FIL, ADB proceeds will be used strictly in accordance with loan covenants restricting onlending of the HFE to participating financial institutions for category FI-C-IR and IP projects.
Stakeholder Communication, Participation, and Consultation
During Project Design Key stakeholders of the program are urban residents, market participants (financial institutions, construction and small-scale housing developers), and government (both national entities and local government). A market analysis will be conducted as part of program preparatory work to inform the design of the intervention and targeting. This will include consultations with market participants and a representative sample of households across income groups, to determine affordability thresholds and granular demand-supply gap in housing stock and affordability.
During Project Implementation

A Transaction Technical Assistance (TRTA) project will support implementation of the proposed sector development program and serve to build the capacity of the HFE and mortgage guarantee facility. The TRTA will address deficiencies identified in the financial management assessment of these entities and participating financial institutions, and help implement their institutional development plans.

Furthermore, regular consultation with key stakeholders will help fine-tune the intervention during implementation and ensure effective targeting of the program intervention and policy actions to improve the housing ecosystem

Responsible ADB Officer Jurgen F. Conrad
Responsible ADB Department South Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, SARD
Executing Agencies
Ministry of Finance
Royal Government of Bhutan
Thimphu, Bhutan
Attention: Director
Timetable
Concept Clearance 31 May 2019
Fact Finding 24 Jun 2019 to 28 Jun 2019
MRM 31 Jul 2019
Approval -
Last Review Mission -
Last PDS Update 11 Sep 2017

Project Data Sheets (PDS) contain summary information on the project or program. Because the PDS is a work in progress, some information may not be included in its initial version but will be added as it becomes available. Information about proposed projects is tentative and indicative.

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