Housing Microfinance

 

Definition of Topic

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.

 

 

Background and Approaches

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.

 

 

Key Cases to Watch

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  

Philippines

 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.  

Mexico

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

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.

 

 

Links to Publications

 

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About the Editors

James Hokans
Contact
Website

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
Contact
Website

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.