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Cablegate: Application for Opic Finance: Domenia Credit

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A


1. This is the Embassy-USAID/Romania's response to OPIC Action
Request dated June 16, 2005.

2. Summary: The Mission believes the addition of resources to
expand mortgage lending in the country is essential for long-
term sustainable growth in the industry. Currently, the legal
framework for the primary market is strong on fundamentals.
Reform of administration and registration is slow but proceeding
and non-judicial foreclosure is an accepted principle, which was
tested by the micro-lending activity and found to work
reasonably well. The creation of the secondary mortgage market
is in an incipient phase. With USAID technical assistance, a
Mortgage Legislative Package has been developed waiting for
Parliament's approval. It may be concluded that from the
legal/regulatory point of view, no real barriers impede Domenia
Credit's growth, and the development of the secondary mortgage
market will create new opportunities in the longer term. End

Establishment of Domenia Credit
3. In 2000, USAID proposed to establish a sustainable finance
company that would increase the access to mortgage loans to
Romanian citizens. In September 2001 the Romanian Mortgage and
SME Program was launched as a joint effort between Shorebank
Advisory Services (SAS) and the Romanian-American Enterprise
Fund (RAEF) with grant funding from USAID in the amount of $1.5
million for start-up costs. SAS provided management support and
staffing, while RAEF provided the initial SEED capital of $3
million to the new company. During the start-up phase, RAEF,
SAS, and USAID acted as anchor investors that provided the
needed credibility for other investors that came later-on and
invested in this company, as well as mitigated the start-up
risk. This allowed the company to further develop by attracting
new sources of capital by itself.

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Current Status of Housing and Mortgages in Romania
--------------------------------------------- ------
4. A successful middle class is emerging, comprised of business
owners, professionals and entrepreneurs, who have relatively
high and stable sources of income, from $400 to $800 a month.
Many of these people wished to build, buy a house or an
apartment, or upgrade their current residences. The mortgage
market is a relatively new industry, but is very attractive to
investors as it is rapidly expanding and providing high profit
margins. Moreover, the Romanian market displays tremendous
growth potential. Based on the experience of the other
transition economies, we may infer that the potential growth of
the market within the next 5 years is over 7% of the GDP (which
would imply a $7 billion over the next 5 years). The risk of
mortgage loans is very low, as it has both strong collateral -
the house itself - and strong morale value, as Romanians always
have traditionally valued homeownership.

5. High entry barriers, however, make this sector difficult for
smaller finance companies to enter and compete in the market.
The competition has continued to increase. With the exception
of two mortgage companies, only banks offer mortgage loan
products, which vary in terms of interest rate, procedures,
paper work, documents required, and time to process and approve
the credit, utilization fees, initial payment, and conditions to
be met by borrowers. One element that delayed mortgage market
growth was limited access to long-term resources. The situation
has been improved beginning in 2003, when banks had access to
longer-term financing from EBRD and outside financing from
international financial markets. The other issue faced by the
banking system that impedes mortgage lending growth is the
bureaucratic procedures required by the National Bank of
Romania's requirements.

6. After a slow start in 2001, the mortgage portfolio of
banking system doubled in the following two years, to around
$200 million in 2002, and $400 million in 2003. Based on the
latest National Bank of Romania's report, the mortgage market at
the end of April 2005 reached $1.34 billion. It is believed
that growth might have been even higher if existing lenders
would have had greater access to long term capital.

Domenia Credit
7. Domenia Credit's vision is to become a leader on the
mortgage market and the first company to offer secondary
mortgage market services to banks by issuing mortgage-backed
securities and bonds, therefore differentiating its services
from its very strong competitors, the banks, which offer
mortgage products, among other banking services.

8. The loan products, underwriting and processing procedures,
and technology that were developed by Domenia Credit, were made
available to other mortgage lenders in Romania in an effort to
standardize the mortgage products and prepare the basis for the
secondary mortgage market's development. Due to its top
management active involvement in legislation improvement for
both primary and secondary mortgage markets, the company has
obtained its recognition as having a professional and
knowledgeable team. Domenia's lending products cover all
surface related to residential property finance: home
acquisition, home improvement and home finishing, home
construction and acquisition of land for construction purposes.
The size of its outstanding portfolio was $15.7 million at the
end of April 2005; the weighed average term to maturity was
11.09 years; and the average loan size was $26,600. By the end
of April, 2005, Domenia's lending portfolio was arrears free,
with a 0% default rate.

9. Until 2003, Domenia was active only in Bucharest. In 2004
it opened branches in Timisoara and Cluj, and early 2005 in
Iasi. Currently, Domenia is considering opening a branch in
Constanta. The only factor that impeded more rapid geographic
expansion is the capital available for lending. On March 2005
Domenia Credit moved its headquarters to a new, larger location
in Bucharest. The company has a strong team of professionals,
young, dynamic, very well trained, offering professional
financial services. Currently, Domenia Credit employs 46
people, out of which 15 are loan officers. Domenia Credit knows
that its human resources are a key competitive advantage,
therefore, twice per year, devotes to its young loan officers
thorough training programs.

10. The company has not yet reached the break-even point.
Based on its projections, this will be attained by the end of
calendar year 2006 at $77 million. Domenia also projects that
in October or November of this year, it will need new funds to
keep up with the strong demand. Therefore, it is critical to
assure funds for Domenia's expansion plans.

11. Domenia Credit is well positioned on the mortgage market
due to its two key elements that differentiate its services from
its competitors: speed and excellent financial consulting.
Because of these factors, the company succeeded to maintain a
higher interest rate than the market's average. Its experts are
known throughout the industry to provide excellent services to
potential clients and they continue to assist them, even if they
are not eligible for Domenia's mortgage products. However, this
advantage will eventually be eliminated as more competition
enters the market. The company faces the following threats: (i)
Increased competition in the market that forces the company to
differentiate its services from its competition; and (ii)
Limited resources that will be completely lent by November 2005.

Romanian-American Enterprise Fund
12. The Romanian-American Enterprise Fund (RAEF) is a private
U.S. corporation whose mission is to promote free enterprise and
entrepreneurship in Romania through investments in and loans to
small and medium size enterprises. Established by the President
and the U.S. Congress in 1994, RAEF is capitalized by a $61
million grant from USAID. RAEF was actively involved in seeking
additional capital for Domenia, it has a seat on Domenia's
Board, and it is the main engine pushing Domenia's development,
its expansion of operations in new regions of Romania, and
actively supporting its growth.


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