Housing microfinance (HMF) is primarily the provision of unsecured microcredit, but may include other related financial services—such as access to savings, remittances, and micro-insurance—to meet the demand of low-income households to repair or improve their existing homes or build their own homes incrementally one loan at a time. These loans may also require mandatory savings or serialized assets and other collaterals. Credit assessment is similar to the cash flow analysis and character investigation processes applicable to unsecured small business loans to individual entrepreneurs. The process often includes documentation to verify residence, a list of building materials to be purchased or that have already been saved by the borrower, and an estimate for specialized labor. Character investigation may also include questions on the borrower’s social capital to enhance the incremental building process: social networks, contacts with NGOs or building materials suppliers, and free skills available to the household that can support the self-builder.
Recognizing that the low-income housing finance market is highly segmented and must be met with a variety of generally unsecured product solutions, housing microfinance is increasingly recognized as a way to reach low-income individuals typically excluded from housing finance markets. While micro-mortgages are important product considerations in countries such as India, Peru, Mexico, Kenya and the Philippines, unsecured housing micro loans appeal to a wider potential market further down the economic pyramid, even when households have secure access to land but do not want to use it (if formal title is available) as collateral because for fear of losing a family asset. Housing microfinance does not include construction finance or project finance, or multi-purpose consumer loans. Housing microfinance is a dedicated, conscious form of unsecured end-user finance that leverages the savings and the “sweat equity” of the borrower often working through a mutual self-help partnership with a master builder or a building materials supplier.
Not surprisingly, the development trajectory of housing microfinance varies widely across countries and local housing markets. Housing microfinance dates back as early as 1962, when organizations such as CHF International designed microfinance products specifically for housing in several African and Central American markets. As microfinance sectors have matured, microfinance institutions (MFIs) have sought to expand their portfolio of credit products beyond group-based microenterprise loans to include loans for agriculture, for consumption, and for housing due in part to an increasingly competitive market and to address the “productive” housing needs of informal entrepreneurs, e.g. the development of rental units or increased space for home-based enterprises. Housing microfinance, supported in particular by organizations such as ACCION, has a long history in Latin America, where institutions such as MiBanco of Peru have demonstrated that the seemingly high risks of underwriting unsecured housing loans need not prevent HMF from becoming a core product of mature MFIs, banks and cooperatives. With consolidation and transformation, MFI banks in particular are developing significant housing portfolios across the globe.
As mentioned above, the distinguishing feature of housing microloans is that they are primarily unsecured and terms may range from six months to three years. Sizes tend to be larger than microenterprise loans, and group members are often less comfortable co-guaranteeing these loans because of their size and the potential unanticipated impact on the group members. Research conducted by Bankable Frontier Associates and other organizations seems to suggest many microfinance institutions see HMF as a niche product designed to enhance customer satisfaction and promote retention. This is especially true where competition among microfinance institutions is strong, as MFIs often compete based not only on price but also on the quality and scope of services they are able to provide to their customers.
The following country cases demonstrate that the supply of housing finance from commercial and state sources truly matters. Growth in HMF provision is taking off but may be stymied if the supply of wholesale finance falters, or if MFIs are unable to manage loans for individuals
The Central Bank’s (BSP) approval in early 2010 of a new housing microfinance product as well as complementary generic policies and procedures has had a catalytic effect on housing finance in the Philippines. This regulatory support derived from market research, product development and generic policies and procedures developed by the Rural Bankers Association with support from the USAID-funded MABS program, Mercy Corps and Bankable Frontier Associates. About 55 rural banks across the Philippines are now rolling out HMF loans in a significant way, fueled in part by continued high levels of inflows of remittances and improvement in the economy. The total loan portfolio of these private banks is taking off and has already surpassed government’s own housing microloan program initiated more than two years ago. At the moment, these rural banks have sufficient liquidity and are better-positioned relative to other types of microfinance institutions in the Philippines for issuing HMF loans to end-users. A recent trend of consolidation in the rural banking sector may also enable more rural banks to expand their HMF lending operations, as new equity and subordinated debt bolsters the sector. Nevertheless, the rural banks’ housing portfolios are growing very fast in value and they will be looking for new forms of liquidity from both commercial and development sources.
In Mexico, the Sociedad Hipotecaria Federal (SHF), a state-run institution that is a key player in the country’s mortgage market, is driving a large share of HMF lending activity and plans to step up its wholesale lending to MFIs. SHF is a wholesale lending institution that provides funding for home improvement loans through a network of microfinance institutions, banks, consumer lenders and cajas. In 2010, SHF projects that it will finance over 250,000 end-user loans targeted at end-users outside of the social security system earning between 3-9 monthly minimum wages (USD $5,500-$16,000 annual income). The recent contraction of the Mexican mortgage market and consolidation within the microfinance sector—both caused, in part, by the 2008 global financial crisis—have presented SHF, as an apex lender, with the opportunity to catalyze further housing microfinance lending in Mexico. SHF has faced criticism for slow disbursements of loans and subsidies in the past, but with support from the World Bank and others SHF should play a major leadership role in HMF in Mexico for years to come.
India’s economy continues to expand rapidly, and the backlog for formal turn-key housing is huge, especially in tier 2 and tier 3 cities.This market will be served by both specialized housing finance companies, which have a track record in providing micro-mortgages, and some commercial banks, e.g. ICICI and Axis, which have shown considerable interest in this market. But the ability and interest of these institutions to assess the affordability levels of households that depend on informal sources of income may be limited. Moreover, only a small portion of Indians that are signing up for turnkey housing opportunities will actually get the opportunity to buy what is available. The National Housing Bank is playing a catalytic role in both the supply of wholesale finance to HFCs for micro-mortgages, and it is now beginning to explore ways to support MFIs to begin individual lending. NHB has made wholesale HMF loans to 22 MFIs worth about $25 million. This initial step may be the first foray into a massive market that will enable MFIs to begin making larger, individual housing loans to more urban households than what MFIs are generally used to. In parallel, the Reserve Bank of India is supporting the opening of individual bank accounts across the country through correspondent banking and the innovative use of technology promoted by companies like FINO. In time, and with the roll-out of a Universal ID system, credit assessment on individuals may be made easier and setting the stage for increased housing microfinance.
|2016||Housing Microfinance (HMF) Business Models: Three Case Studies||Phillip de Jager|
|2016||Financial Capability Building Practices in India||Jayshree Venkatesan|
|2015||Global Microscope 2015||The Economist Intelligence Unit|
|2015||Six Randomized Evaluations of Microcredit: Introduction and Further Steps||Abhijit Banarjee, Dean Karlan and Jonathan Zinman|
|2014||Benchmarking the Financial Performance, Growth, and Outreach of Greenfield Microfinance Institutions in Sub-Saharan Africa||Robert Cull, Sven Harten, Ippei Nishida and Greta Bull|
|2014||Microfinance Banana Skins 2014 - Facing Reality||Centre for the Study of Financial Innovation|
|2014||The Art of the Responsible Exit in Microfinance Equity Sales||Daniel Rozas|
|2013||Microfinance in Myanmar Sector Assessment||Eric Duflos|
|2013||State of Housing Microfinance in Africa||Michael Kihato|
|2013||The New Microfinance Handbook: A Financial Market System Perspective||Joanna Ledgerwood, Julie Earne and Candace Nelson (eds)|
|2012||Room for Development: Housing Markets in Latin America and the Caribbean - Executive Summary||Inter - American Development Bank|
|2012||Channeling Cash Flows Towards A New Business Model for Low-Income Savings Mobilization||Guy Stuart|
|2012||Revised Regulatory and Supervisory Guidelines for Microfinance Banks (MFBs) in Nigeria||Central Bank of Nigeria|
|2012||Standards for Social Performance Management in Lending||Social Performance Task Force|
|2012||Rebuilding a Stronger Microfinance Sector in India||Vijay Mahajan|
|2012||The Practice of Corporate Governance in Microfinance Institutions||Council of Microfinance Equity Funds|
|2011||Over-Indebtedness of Microborrowers in Ghana||Jessica Schicks|
|2011||Latest Findings from Randomized Evaluations of Microfinance||Jonathan Bauchet|
|2011||Fingerprinting to reduce risky borrowing||Abdul Latif Jameel Poverty Action Lab|
|2011||Microfinance as a Development and Poverty Reduction Policy: Is It Everything It’s Cracked Up to Be?||Milford Bateman|
|2011||The Ouster of Muhammad Yunus: Can Politics Destroy Grameen Bank?||Knowledge@Wharton|
|2010||Housing Micro-Loan Credit Policies & Procedures; Approved by the Central Bank of the Phillipines for Rural Banks||Bankable Frontiers|
|2010||Microfinance activities and the Core Principles for Effective Banking Supervision||Basel Committee|
|2010||Home Asset Loan Financing: HALF||David A. Smith|
|2010||2010 WAEMU Microfinance Analysis & Benchmarking Report||Microfinance Information Exchange|
|2010||Housing Micro-Loan Credit Policies & Procedures||Bankable Frontiers|
|2009||Microfinance in Africa: Bringing Financial Services to Africa's Poor||Kristin Helmore|
|2009||Capitalizing Housing for the Poor: Findings from Five Focus Countries||Cheryl Young|
|2009||Finance for incremental housing; current status and prospects for expansion||Bruce Ferguson|
|2009||Scoping the Demand for Housing Microfinance in Africa: Status, Opportunities and Challenges||Michael Kihato, SBC Consulting|
|2009||"Housing Microfinance," In Housing Finance Policy in Emerging Markets||Frank Daphnis|
|2009||Mongolia: Microfinance and Financial Sector Diagnostic Study||The Microfinance Initiative for Asia (MIFA)|
|2009||Bangladesh: Microfinance and Financial Sector Diagnostic Study||The Microfinance Initiative for Asia (MIFA)|
|2008||Housing Microfinance: Is the Glass Half Empty of Half Full?||Bruce Ferguson|
|2008||Housing Finance in Africa: Analysis of Housing Finance Sector Studies||Kecia Rust|
|2008||Linking Commercial Banks and Slum Dwellers||Shorebank International|
|2008||Maximizing Choice: Diverse Approaches to the Challenge of Housing Microfinance||James Hokans|
|2008||Development of Appropriate Housing Finance Products to Support Upgrading Activities||Richard Martin|
|2008||Putting the "Housing" Back into Housing Finance for the Poor: The Case of Guatemala||Irene Vance|
|2007||Getting to Scale in Housing Microfinance: A Study of ACCION Partners in Latin America||Nino Mesarina and Christy Stickney|
|2007||Access to Housing Finance in Africa: Exploring the Issues||James Gardner|
|2005||Commercial Banks and Microfinance: Evolving Models of Success||Jennifer Isern & David Porteous|
|2004||Donor Brief: Housing Finance||CGAP|
|2003||Shelter Finance for the Poor Series Synthesis||Cities Alliance|
|2003||Information Sharing and Microfinance in Peru||Martin Valdivia and Jonathan Bauchet|
|2000||Housing Microfinance Initiatives; Sythesis and Regional Summary: Asia, Latin America and Sub-Saharan Africa with Selected Cas||The Center for Urban Development Studies Harvard University Graduate School of Design|
|1996||Microcredit Interest Rates||CGAP|
|Six Randomized Evaluations of Microcredit: Introduction and Further Steps||Abhijit Banerjee, Dean Karlan, and Jonathan Zinman|
James Hokans is a director of Bankable Frontier Associates. Recently, Mr. Hokans has served as a strategic advisor to Mercy Corps in Asia, CHF International in Africa, and Habitat for Humanity International’s housing finance practice, and designed a housing microfinance product for rural banks approved by the Central Bank of the Philippines (BSP). He is also consulting with the World Bank in India and Mexico.
David Porteous is the founder and director of Bankable Frontier Associates, a niche consulting firm based in Boston, Massachusetts USA. He has undertaken consultancy assignments in the areas of financial strategy and policy for a wide range of clients including public clients such as DFID, the World Bank, CGAP and private clients including a banking group and telco group.