NB Financial Innovation
Home Sweet Home: Mobilizing Microfinance for Housing
A thought experiment. What if we designed financial services based on the hierarchy of human needs? We would prioritize food, shelter … hmm. Shelter. That’s pretty high on the list.
Consider the financial portfolio of a typical reader of this site. What’s the single largest financial product this person has ever relied on? Most likely the answer will be a home mortgage. In fact, home mortgages comprise the bulk of retail credit in wealthy economies, nearly 90 percent in the U.S. and UK. And yet, housing finance plays but a bit part in the financial inclusion story. Habitat for Humanity, the world’s leading NGO dedicated to housing, estimates that while 1.2 billion people need improved shelter, only 2 percent of microfinance portfolios consist of housing loans. Why?
As a fundamental human need, housing has tremendous social returns. Substandard housing greatly deepens the effects of poverty. Exposure to the elements, poor ventilation and insufficient hygiene and sanitation facilities all contribute to poor health, including major killers such as childhood diarrhea. Poor building structures and risky locations undermine physical safety, vastly increase vulnerability, and are the leading cause of death following natural disasters. Lack of lighting and sufficient space limit children’s ability to study, affecting educational opportunities. Insufficient privacy and lack of toilet facilities can contribute to sexual assault and constrain opportunities for women and girls. And lack of clear property rights are major contributors to crime and social injustice, while creating a negative feedback loop by limiting families’ ability to invest in better housing.
Enabling better housing would thus address a host of developmental issues facing poor families. And positive impact from better housing doesn’t end with families. A healthy, vibrant housing finance market can be a major economic engine, generating local employment in construction, and drawing mainly on inputs from local producers. Meanwhile, communities enjoying secure property rights are also more likely to give rise to active citizens, less tolerant of corruption and more demanding of their political leaders.
In short, enabling housing investment by low-income and financially excluded households promises one of the highest returns in both social and economic development. And yet in the financial inclusion and microfinance sector, housing gets notoriously short shrift.
Given the scale of the financial inclusion sector, if 20 percent of the cross-border funding currently deployed toward financial inclusion were to be steadily steered toward housing, it would have a meaningful impact on the housing needs of some 100 million people.
Surely something can be done to fill this massive gap?
The role of microfinance
The microfinance sector has expanded beyond enterprise microcredit to other financial products, to education, health and Arc Finance’s focus: end-user finance for distributed renewable energy. But those are emerging areas. Housing microfinance has been around for nearly as long as microfinance itself, yet it remains peripheral. The reasons for this can be traced back to the roots of microfinance and its focus on funding microenterprise development. Although many in the sector have moved beyond this relatively narrow niche and now speak of financial inclusion more broadly, housing continues to languish in the “household spending” category. Within the traditional view of microfinance, it’s not income generating, so it’s somehow less deserving.
MFIs that have sought to enter the housing finance markets have found it difficult. Housing requires typically larger loans, on longer terms and at lower interest rates than microcredit loans, and this requires – especially if the loans are uncollateralized – specialized training among staff. Land titles must be verified; building assessments conducted.
Things are changing, though. The 2007 housing crash which cascaded from the U.S. to many other markets is a decade gone now, and with it, the near-allergy to housing among the investor community has receded. At the same time, the rapid – often overheated and dangerous – growth in traditional microfinance has slowed in many markets, including key ones such as Peru and Cambodia. Even if this expansion were possible, some investors have heard in recent years a cautionary tale.
Housing finance presents an opportunity to branch out not only into new lending, but to reach new clients. The opportunities for growth in this new segment, still largely unserved, are real.
The wheel doesn’t need to be reinvented. In fact, the methodologies to extend housing microfinance to traditional MFI clients have been honed over decades of practice, going back to at least the 1980s. More recent efforts to extend micro-mortgages to families on the next rung of the income ladder – the bottom of developing countries’ middle class – are now also in their second decade of practice. Both approaches have been shown to be financially self-sustainable and viable over the long term. What’s missing is the institutional focus needed to establish housing as an intrinsic part of the mission of financial inclusion, and not just a side benefit offered to a handful of MFI customers.
And that’s just the practitioner side. On the investor side, there has been oddly little innovation to provide the marketplace with the sorts of long-term, reasonably priced capital needed to bring housing finance up to a scale that can make a meaningful difference to the world’s poor. Out of the more than 100 active microfinance investment vehicles, just one – MicroBuild – is specifically devoted to housing finance.
European Microfinance Award 2017: Microfinance for Housing
Why are we bringing all this up right now? April 4 was the launch of the call for applications for the eighth European Microfinance Award. The 2017 award aims the spotlight on what financial institutions serving the world’s poor can do to address their housing needs. The award aims to recognize institutions that provide a broad range of financial and non-financial services. That means helping households to build out and improve their own homes through housing microfinance – or supplying micro-mortgages that allow young, working poor families to buy decent apartments. It can also mean providing property insurance that helps clients get back on their feet quickly following a natural disaster. Other products, like savings and even remittances, can all be incorporated into a successful housing finance program.
Over the eight editions the award has sought to recognize institutions working in emerging areas of microfinance practice, such as projects addressing environmental needs, post-disaster or post-conflict areas, access to education and others. First held in 2006, it includes a prize of €100,000 to be awarded to the winner on Nov. 30 during European Microfinance Week.
We won’t know until we receive the applications just what makes up the universe of microfinance housing interventions. We’re excited to see them, as they progress beyond the pre-selection and selection committee stages to – for a select few – the semifinalist and finalist stages.
But we do know some things. We’ll hear from MFIs that are offering housing financial products to serve their target segments, including housing microfinance loans (designed to finance house extension, renovation or construction); micro mortgages (for purchase of fully constructed homes); housing savings products (to meet large lump-sums related to land or house purchase, or house renovation); microinsurance products (to cover house-related risks); or remittances for housing (so that family members working in distant regions or countries can remit funds for housing purposes back home).
We hope to see a range of non-financial services linked to financial products as well, such as educational materials related to house construction or renovation; trainings on home improvement plans and budgets; professional advice on planned construction or renovation; legal advice on land ownership execution; or technical assistance – providing the capacities to renovate or construct a house. To do all this, MFIs may partner with NGOs and local governments to help clients secure tenure and gain protection against eviction. Others may collaborate with housing specialists to enhance local construction markets with supplies and building techniques that result in homes more resilient to earthquakes or hurricanes.
Whatever the standout applicants are doing in this important field, at e-MFP we’re excited to receive applications that offer different and innovative ways to improve housing conditions, from purchasing or expanding existing living space, to providing access to clean water, sanitation, electricity and other core housing needs, to raising the quality of those homes being lived in, to mitigating against the risks of natural disasters using the latest designs and materials.
We hope this award will shine a light on financial institutions that do it best, and in doing so, jumpstart a revolution in our sector to help tackle the enormous task of housing the rising billions of the world’s poor.
Detailed eligibility criteria for the European Microfinance Award can be found in the explanatory note on the award website.
Photo by Julius Mwelu/UN-Habitat