Loan Performance of Contractual Savings for Housing

We argue that the combination of a loan with a mandatory saving period as a precondition for loan approval can be used as a mechanism to improve the creditworthiness of the pool of borrowers. This result is based on the argument that the personal creditworthiness of a borrower is strongly correlated with his ability to save on a regular basis. Using in house data of a large German CSH supplier we estimate a Cox Proportional Hazard Model to show that default rates of CSH contracts are in fact lower than those of comparable loans. This effect remains after controlling for other information on the creditworthiness of the borrower.