Nordic Consulting Group
Key Issues in Housing Microfinance
NBBL
Erlend Sigvaldsen
Oslo, March 2010
Nordic Consulting Group
Abbreviations
ADB Asian Development Bank
BDS Business Development Services
BRAC Bangladesh Rural Advancement Committee
BRI Bank Rakyat Indonesia
CGAP Consultative Group to Assist the Poor
FSDT Financial Sector Deepening Trust
FUNHAVI Foundation for Habitat and Housing
GNI Gross National Income
HFHT Habitat for Humanity Tanzania
MFI Microfinance Institution
MIS Management Information System
MTR Mid-Term Review
NACHU National Cooperative Housing Union
NGO Non-governmental Organisation
NOK Norwegian Kroner
PAR Portfolio at Risk
SLRF Shelter Loan Revolving Fund
SME Small and Medium Enterprises
ToR Terms of Reference
USD United States Dollar
WAT Women’s Advancement Trust
WID Women in Development
Table of contents
1 Introduction 5
2 What is Housing Microfinance? 7
2.1 Aspects of Housing Microfinance 8
2.2 Institutions involved in HMF 12
2.3 NBBL Partners: WAT and NACHU 17
2.3.1 NACHU 17
2.3.2 WAT Human Settlement Trust (WAT) 20
3 Selected Key Issues 23
3.1 Varied Backgrounds: No Two Cities are Alike 24
3.2 The Institution: Is Housing or Finance the Add-on? 30
3.3 Technical Assistance: How Much Advice is Advisable? 35
3.4 The Microfinance Link 39
3.4.1 Microfinance and Scale 40
3.4.2 MFI Challenges 41
4 Summary Reflections 43
4
Key Issues in HMF
Nordic Consulting Group
1 Introduction
The cities of the world are expanding fast – about half of the world’s population now live in one.[1] Most of this increase happens in cities in the developing world, being responsible for 95 per cent of the world’s urban population growth. These urban conglomerates add an average of 5 million new urban residents every month.
This poses massive challenges to politicians, planners and simply everyone living in a city. One that lies at the core is evidently housing. Where will all these 5 million extra a month live? Under what roofs – if any – will they sleep, make breakfast and their children do their homework?
Most, if not all, start their careers as urban dwellers as citizens of sprawling slums, possibly sharing a small room with distant relatives if they are lucky. This is decidedly not the best environment for getting out of the tentacles of poverty. Slum housing is bad for health, limits educational and economic opportunity, and act as a perpetuator of poverty. It is estimated that about 1 billion people now live in inadequate housing in urban areas alone (United Nations Centre for Human Settlements).
How to provide affordable and decent housing to the world’s poor has so far eluded policymakers. Or rather, providing it on a large scale has proved elusive. There are in fact a number of smaller initiatives that tries to pioneer different approaches to building and financing low cost, reasonable housing. Several of these involve techniques and methodologies that are often termed as “microfinance”. Indeed, an increasing number of microfinance institutions (MFI) offer loans for housing, as a response to an intense client demand for such products. The desire to improve housing tends to be on top of the agenda for many, many poor people when trying to husband meagre resources.
Not all of these low cost housing financing efforts are successful, and all face additional challenges to the ones that the MFI’s normally meet. At the same time, a number of highly interesting financial inventions are underway in several parts of the world. Maybe it is time to look closer at a few of the lessons learnt in Housing Microfinance (HMF) so far, and what we might want to focus on to improve this tool further.
NBBL and Housing Microfinance
NBBL has for a number of years been involved with the international challenge of developing affordable housing for the poor. Of several initiatives, two in particular are interesting for the insights they offer regarding the use of microfinance techniques. The two are WAT Human Settlement Trust (WAT) in Tanzania, and National Housing Cooperative (NACHU) in Kenya.
The two have different backgrounds and identities. WAT is an NGO (from 1989) that got into low income housing gradually through advocacy for gender equality, property ownership, and inheritance rights. It is very much a rights-based institution, and is today recognised as one out of only a handful of institutions working directly with low income housing development in Tanzania.
NACHU, on the other hand, is incorporated under Kenya’s cooperative law. It is open to membership from all types of housing cooperatives, and does not have a very defined “target group” in the donor sense of the word. Its prime responsibility is to further and support member interests, and has seen good growth particularly the last 4-5 years.
Both organisations started using microfinance techniques in earnest around 2004. WAT with a small experimental fund called Shelter Loan Revolving Fund (SLRF) funded by donors, and NACHU with a combination of donor funds and member savings. It has been a tricky experience for both, and the SLRF is being closed down. The lessons gathered under the SLRF are, however, brought into the design of a new programme financed by the Financial Sector Deepening Trust (FSDT) in Tanzania. For NACHU, a key challenge as been the post election violence in 2007 when possibly as much as a third of their loan portfolio was affected. Fortunately, the situation has improved substantially since then.
In relation to microfinance, one common feature of WAT and NACHU is that they are housing institutions – not microfinance companies. They have added finance as an extra “product” in addition to what can broadly be described as community, advocacy and advisory activities. As will be discussed in more detail below, this is a particularly challenging type of HMF operation. Introducing financial thinking and discipline in heterogeneous, socially oriented organisations has proved a complex and difficult undertaking. Does that mean that HMF is best done by already existing MFIs? Not necessarily, as the housing organisations bring special knowledge and understanding of low income housing to the market that many MFIs lack. This is one of several issues that we will try to explore further in this report.
The Objective of the Report
The main objective of this report is to generally improve understanding of HMF and the issues involved, and relate these to the experiences that NBBL has had so far in this market. It is not intended to encompass all challenges and discuss every minute detail of the intricacies of housing microfinance. Rather, we intend to “cherry-pick” some of the most pertinent and interesting issues within the theme that we believe are worth more than a second glance. In doing that, the experiences from other HMF efforts will be used in addition to the examples of WAT and NACHU.
First the report will briefly and selectively discuss HMF in general terms. Then it will look at some very specific HMF issues, before finally reflecting about the much vaunted status of “best practice”. Can best practice in HMF be determined as “easily” as it has been done for mainstream microfinance?
2 What is Housing Microfinance?
The fundamental rationale for housing microfinance is – not unsurprisingly – the same as for microfinance, namely that the traditional banking system fails to provide adequate services to the poor. Banks do not find this group of clients creditworthy, and have no methodology in place to serve the market profitably. Compared to alternative uses of their money, they find this particular segment as too risky.
Finance for housing is by no means a private banking matter only, and a number of countries in the developing world have established different forms of government “Housing Banks”, often with support from donors. Very few of these have been able to make any notable impact in the low-end market, and many are either excessively bureaucratised, or simply bankrupt.
With housing being one of the most prioritised items in the life of human beings, other ways of financing a house was bound to be tried. Microfinance is one “technology” that seems to offer scope to reach deeper and broader than traditional financing mechanisms have done.
There are a few basic differences between HMF and classic MF, however. One is obviously that MF typically funds a productive activity that will generate income, while HMF does not necessarily do that (there are exceptions to both). This is normally believed to increase the repayment risk.
The other is that housing often carries added external risk, for instance regarding land and tenure security and indeed the building process itself. While classic MF normally funds a well known activity that is easy for a bank officer to understand and check, HMF involves a number of added issues that increase the complexity of the assessment process. Groups are less well placed to provide collective collateral in HMF than in MF. Thus, all other things equal, HMF can be more risky and more costly to administer than MF. The presence of other challenges than the pure financial tempts a number of institutions to add other services to the credit.
However, as we will return to below, there is a very good “technical fit” between one particular type of HMF and MF, namely progressive house building. Poor people tend to build their houses in small steps, with whatever resources they have managed to save at any stage. This type of step-wise credit demand can more easily be addressed by classic MF methodology than the building of a full new house.
HMF has clearly received an impetus from the meteoric rise of MF these last 10-15 years. MFIs all over the world face demand from their clients for housing loans – and many has responded with specifically tailored products. Other MFIs silently accept that normal MF loans are diverted to housing. From their side, rights based NGOs and other institutions working with housing for the poor have taken up HMF as an added service to their normal community work. As a third group, new institutions are established with a view of specialising in HMF and related products.
The most prominent characteristic of the current HMF market is thus the diversity of institutions, products and methodologies. There is no such thing as an accepted blue print for replication - and there probably never will be due to the great variety of housing markets and their challenges.
2.1 Aspects of Housing Microfinance
Given the great diversity, clearly defining HMF is not straightforward. In literature[2], two definitions are used, either a product centred definition (all types of financial services for housing purposes using MF methodologies), or an institution based definition (all services that is provided by an MFI for housing). The last may thus include services that are not necessarily microfinance in nature, but are still provided by MFIs.
Less technical, CGAP described HMF simply as “ … loans to low income people for renovation or expansion of an exiting home, construction of a new home, land acquisition and basic infrastructure.”[3] This is perhaps a more intuitive - product centred - definition, and one that facilitates further discussions of key characteristics of HMF.
One of the key “dividing lines” in HMF is between smaller loans for gradual home improvements and basic infrastructure like pit-latrines, and larger loans for new-building and more comprehensive infrastructure (like connecting to mains for sewage, water and electricity.)
Home Improvements
Many MFIs started early with financing houses – even though they may not have realised it. Some of the MF loan would often find its way to a new window, a tin roof, or to concrete slabs for a new sanitary room, without this being the official purpose of the loan. As many studies have pointed out, this is how the poor normally build their homes - in small portions as resources become available. Thus, a new loan – from any provider - would also be used for such housing improvements when the time was deemed right by the house owner.
Indeed, this is still how much of the current HMF is done, called microfinance, but in reality used for housing. Studies have indicated that possibly as much as 15-20% of MFI business lending is used for housing.[4] It then takes little methodological adaptation to make these MF products into slightly more specialised HMF products, which a number of MFIs indeed have done. Amounts are small, terms and repayments similar to MF, and collateral conditions roughly the same. Given that such a loan would not provide immediate income, MFIs would often apply a “good client” requirement. This could for instance be a condition of unblemished repayment record for a number of years, or a certain level of savings.
This “first generation” of HMFs was thus developed in and from existing MFIs. These products have later been refined to housing needs in many forms, increasing loan amounts and adapting terms, and also taken up by institutions that were not initially doing finance. The key, however, is that these loans were directed at improving an existing house – and did not involve the whole process of securing land, attaching infrastructure and building a completely new home. They are feasible within the current organisational framework of most well performing MFIs.
Construction of new homes
The distinction between the home improvement and the new-building is in fact more blurred than and not as distinct as the above may imply. The reason is that many construct their homes gradually and in phases, i.e. home improvement in somewhat larger scale and over longer periods. First a family may “settle” an area, then build a tin shed, then possibly build a foundation, add a new roof, add a new room etc. Thus, traditional microfinance technologies may still constitute the basic framework for a long term new-building.
However, the bigger the loans and the more complex the construction, the more HMF starts to differ from classic MF. The amounts involved simply cannot be repaid within the standard MF period of a year, and longer terms are required. For an MFI, two particular risks arise. The first is borrower delinquency as experience indicates that this risk increases with the term of the MF loan, and the second is the MFI’s own funding risk. Many MFIs themselves borrow funds at terms not longer than possibly 2- 3 years. It is then highly risky to lend this out for 5 years – interest rates may change or the credit line may be withdrawn.