The rapid urbanization of global poverty is contributing significantly to the rise of housing finance on the international development agenda. Seventy percent of the urban housing stock in sub-Saharan Africa, 50 percent in South Asia, and 25 percent in Latin America and the Caribbean are of poor quality, lack basic services of water and sanitation, and are characterized as slums.
In response to the market’s failure to supply affordable housing, USAID seeks to facilitate long-term solutions without distorting markets or displacing the formal financial sector. The hope is that, similar to what has happened in the microfinance industry in the last decade, once donors have provided the initial seed capital or loan guarantees for a few nascent institutions in pioneering markets, the private sector will follow with longer-term financing.
Microfinance for housing (MFH) holds promise for alleviating lack of shelter for the poor, as well as opening a new product area for growth for microfinance institutions. Designed to meet the housing needs of those without access to the banking sector or formal mortgage loans, MFH targets low-income households who wish to expand or improve their dwellings, or to build a home in incremental steps relying on sequential small loans.
MFH is currently being carried out by a range of institutions, including microfinance institutions, commercial banks, and NGOs with a housing mission. Innovative delivery models include partnerships between MFIs and housing NGOs, cooperative housing development, loan underwriting using remittances, and MFI/commercial bank partnerships.
The USAID Microenterprise Development office’s (MD) activities in MFH aim to facilitate the scaling up of more competitive, demand-driven and affordable services for the poor. The learning agenda seeks to better understand the strengths and weaknesses of various types of institutions and delivery models, to better define key roles for donors and practitioners, and to identify potentially replicable models.
Key learning questions include:
- Access to Long-Term Capital. To what extent are supply-side bottlenecks preventing the expansion of housing microfinance, and how can MFIs overcome these bottlenecks?
- Land Tenure Security. What legal structures relating to property rights and forms of tenure can be used to guarantee microfinance for housing?
- Infrastructure. What methodologies and approaches are required for the provision of microfinance for infrastructure?
- Profitability. How profitable is housing microfinance, and how does it compare with other products offered by microfinance institutions?
- Construction Assistance. How expensive is construction assistance and to what extent does such assistance improve the quality of housing and enhance repayment performance? How can construction assistance be designed to best meet client demand?
- Pricing. How can MFIs design client-centered housing products that best meet the intersection of demand, willingness to pay, and affordability?
- Partnerships. What types of partnerships provide synergies that enhance the impact of microfinance for housing? How can these partnerships be scaled up?
- Reaching the Very Poor. How can sustainable, scalable microfinance for housing services be developed to effectively reach the very poor?
- Government-Led Efforts. How can governments develop subsidies that create risk-sharing arrangements aligned with private sector incentives that help increase, rather than replace, private sector participation?
- Remittances. How can MFIs tap remittance flows to help deepen the market for low-income housing microfinance?
- Impact. Do housing loans lead to increased business productivity and enhanced earnings, and what is the true potential impact of housing microfinance on alleviating poverty?
KNOWLEDGE AND PRACTICE
USAID aims to contribute to the growing field of housing microfinance, and to the body of research that disseminates lessons learned from the field. A series of case studies and overview documents that have been produced demonstrate the strengths and weaknesses of various types of institutions and delivery models, and define key roles for donors and practitioners. Research to date includes:
Habitat for Humanity Vietnam: Partnering with MFIs to Improve Housing for the Poor examines the strategic considerations important for MFIs and housing NGOs entering the housing finance market. Housing Finance for the Poor in Morocco: Programs, Policies and Institutions explores various aspects of MFH, including the use of credit enhancements to create confidence in a new market and the establishment of retail platforms and provision of product development and staff training to commercial banks serving slum-dwellers.
Housing Finance for the Poor: El Salvador demonstrates the growth and success of housing microfinance when the financial sector is well-capitalized and competitive, market infrastructure is established, and government subsidies assist the poorest to attain adequate housing.
Housing for the Poor in Kenya: NACHU’s Cooperative Approach illustrates the importance of advocacy and technical services, and provides lessons learned in balancing low interest rates for clients with the ability to access commercial capital to reach a scale commensurate with the immense scope of the low-income housing problem.
Expanding Microfinance for Housing, based largely on the recently published Housing Microfinance: A Guide to Practice (Kumerian Press, 2004), provides a broad overview of the current state of housing microfinance, including recommendations for bringing together urban development strategies, slum upgrading models, and assistance to micro lenders.
Going to Scale with Housing Microfinance: The Role of Commercial Banks examines the current state of commercial bank engagement in the MFH market and analyzes the potential for these institutions to significantly increase the scale of housing microfinance available worldwide.
Maximizing Choice: Diverse Approaches to Housing Microfinance offers a review of varied delivery models, considers strengths and weaknesses of each, and suggests roles for donors in supporting these innovative approaches to addressing the extensive unmet housing demands of the less-developed world.
This year, MD intends to award four to eight cooperative agreements through its Implementation Grant Program (IGP) for innovative pilot projects in housing microfinance. Grantees will participate in a learning network to share and document their experiences, and develop tools and processes that could benefit the broader sector.