Housing in the Microfinance Sphere
According to experts approximately 1.1 billion people, or roughly one-sixth of the world’s population, currently live in inadequate housing conditions in urban areas alone. Such people rarely have access to mortgages, and have little hope of saving enough money to purchase a house outright. As a result, many have turned to a process known as “progressive building” or “progressive housing” in order to address their housing needs. They save enough money to address one housing issue, i.e. building a roof or a floor, or undergoing basic repairs, and upon completion begin to save for another project down the road – a process which can take years or even generations to complete. From a broader perspective, housing finance is viewed as a means for providing shelter, creating jobs, and fueling growth, according to a recent study by McKinsey and Company.
In recent years the world of microfinance has begun to address this issue more diligently, and has been developing various methodologies designed to aid low income families in their search for adequate shelter. Some experts, particularly in Africa, view this as an opportunity for microfinance that includes group loans to purchase land and housing. To this end MFIs have been providing small loans, usually between $500 and $1,500, to poor families to facilitate the expedition of their progressive home building process. Lenders often do not require a title to guarantee the loan – an important innovation given the questionable legal foundations regarding land ownership in many developing countries – and use a variety of methods including requisite prior micro-enterprise success, co-signers, savings groups, mandatory savings requirements, and/or automatic salary deductions to minimize risks. Through a series of loans, borrowers are able to increase the speed of their home completion, and do so at much lower rates than they would had they saved up enough cash to access a traditional mortgage.
The World Bank has been in the forefront of affordable housing for the bottom of the pyramid for the past 15 years, advising governments on policies and systems as well as property rights, lending operations and funding instruments. There have also been some attempts to attract corporate investors to finance housing at the bottom of the pyramid. Most, however, are social or impact investors. For example, Habitat for Humanity International established a US $50 million MicroBuild Fund in 2010 for affordable housing worldwide which provides capital to microfinance institutions to support small loans for housing improvements. In India, Habitat partnered with ASK to support local microfinance institutions offering about $1,000 for home improvements to existing clients of the MFI.
In addition to being beneficial to low income families, housing microloans also appear to be beneficial to many MFIs. They make use of the staff, systems, and knowledge already existing at such institutions, are in high demand, and in many cases become profitable within one year. Mibanco in Peru developed an $11.6 million dollar portfolio in 3 years, and FAMA in Nicaragua dispersed nearly $1 million in one year – programs which Accion has reported as being profitable for both institutions.
Major microfinance players such as Accion International have already begun to take part in the industry, and microloans have been utilized by MFIs in the Dominican Republic, Peru, Nicaragua, El Salvador, Ecuador, Haiti, Paraguay, Mexico, Bolivia, Guatemala and Honduras, among others. Given the high demand, profitability, and the important role which housing plays in public health, and macroeconomic growth, the role of MFIs in the housing industry is likely to continue to grow. SEWA Bank in India has been offering housing finance loans for the past 37 years, particularly for women, for basic home repairs and adding basic housing facilities (e.g. water storage tank, electricity).
Some of the challenges facing housing microfinance are lack of title and lack of security that are often required by regulators; but they need to understand that this is micro housing not home mortgaging. Additionally, municipalities have to address basic infrastructure for residents, including water and sanitation. To meet the immense needs for affordable housing, it has been estimated that there is some US$800 in circulation (including a projected US$100 MicroBuild fund established by Habitat for Humanity, philanthropy and guarantors).
More recently, some experts (such as Jamie Ritchie of Rooftops Canada) have been emphasizing the idea that a model for ‘housing microfinance’ consists of housing support services combined with financial services and community development.
Videos on housing microfinance: