Better Loans for Better Housing: How housing microfinance and strategic value chains can help alleviate the low-income housing deficit
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Today, the majority of the world’s population lives in cities. And not suprisingly, much of the future population growth is projected to occur in cities of the developing world, where approximately one in six people live in an urban slum. UN-HABITAT warns that if left unchecked, this number will multiply threefold to 3 billion by the year 2050.
In recent decades, the base of the pyramid housing market has been largely handicapped by informality and undeveloped channels for financing and technical assistance. Latin America is the most urbanized region in the world, with over 80 percent of the population living in cities (and 90 percent expected by the year 2050). According to a 2012 IDB study, one in three families in the region live in housing that is either unsuitable for habitation, built with poor materials, or lacking in basic infrastructure services. Constrained by limited resources and often criticized for poor planning and management, government housing programs have continually failed to significantly improve the housing situation for those at the base of the pyramid. Absent major change, the ills associated with inadequate housing are likely to increase as slum communities expand.
The majority of financing for housing construction in developing regions has traditionally come from outside commercial mortgage institutions. In many cases, families use personal savings or cooperatives to finance improvements and expansions to homes. These low to moderate income populations constitute the majority of demand, but are unable to afford even the lowest cost commercially developed housing units. It is estimated that 70 percent of the developing world’s population – approximately four billion people – finance their homes incrementally, spreading costs over time. Thus, the majority of the demand for housing finance is characterized by small loans intended for the incremental progression of existing structures. Traditional requirements for commercial housing finance are not only poorly suited for the conditions faced by low-income populations (self-employment, seasonal income variation, and/or the absence of a full legal title to the property), but loan terms do not reflect the demand for small, short-term credit for incremental building.
Many microfinance institutions (MFIs) and other private sector actors not typically involved in housing finance (most notably cement manufacturer CEMEX of Mexico) are increasingly focused on this sizeable and untapped market (estimated at $331.8 billion worldwide). Providing microloans for housing shows much potential, but the supply of such services still lags far below the natural client demand (estimates from Habitat for Humanity show that less than 10 percent of servable demand is being met globally). The practice of housing microfinance (HMF) has grown much slower than anticipated due to the difficulties associated with developing, implementing and scaling these products.
Barriers to HMF growth include concerns about the cost of developing housing microfinance products, and the client’s possible perception of the MFI’s responsibility if problems arise during or after the construction, thereby increasing the risk of loan default. To help remedy this, some HMF lenders combine construction assistance with financing to create a more attractive product, though most still view it as costly to the lender and unnecessary to the customer. However, recent research I’ve conducted for Habitat for Humanity (with the possibility of publication in the coming months) suggests that technical assistance not only improves construction quality but also helps families save money on labor and material costs. This increases client satisfaction and retention while strengthening the housing product and positively influencing the image of the MFI. In this respect, combining construction assistance with housing loans is beneficial to both clients and providers. Debate continues amongst HMF lenders over the value of incorporating these services with loans.
Non-governmental organizations like Habitat for Humanity have recently played a strategic role in mobilizing the housing microfinance sector by launching the “Center for Innovation in Shelter and Finance.” The Center assists microfinance providers in the development and implementation of housing products. Habitat leverages its expertise in low-income housing construction to offer everything from support in the development and implementation of a pilot prototype, to construction technical assistance for large, structural improvements. The organization also offers training programs for credit officials to identify, budget and oversee smaller, non-structural improvements.
Partnerships like these represent only the first step in creating a value chain for improving the housing conditions of those at the base of the pyramid. Establishing partnerships with materials providers can incentivize manufacturers and retailers to offer discounted construction supplies through increased volumes of sales. Providing access to private capital and guaranteeing construction quality can influence local governments and other public entities to formalize land holdings or illegal settlements. Partnering with local universities to offer training and certification programs can improve the skills and knowledge of community masons, thereby increasing construction quality and creating licensed microenterprises of skilled labor. The United Nations Industrial Development Organization (UNIDO) has recently partnered with the University of El Salvador to provide a vocational training course to improve the skills of masons in low-income communities in and around San Salvador. Through its role as a trusted intermediary between financial institutions, materials providers, masons, NGOs and the University of El Salvador, UNIDO provides strategic actors with a profitable business opportunity that puts the well-being of low-income Salvadorans at the center of the value chain.
Improving the housing conditions of low-income families is a complex issue that requires an equally complex approach. Mobilizing and incentivizing actors in the value chain requires a trusted intermediary like UNIDO or Habitat for Humanity to place the well-being of families at the forefront of initiatives while recognizing and capitalizing on the incentives of stakeholders. Such partnerships create tremendous opportunity for entrepreneurs and private sector entities to provide financing, construction assistance, training programs, and materials and utilities access.
Heavy top-down approaches, like relocating entire communities to the fringes of urban centers at the expense of taxpayers, should no longer be tolerated as an acceptable approach to addressing the low-income housing deficit. This is an outdated method that has continually proven itself unsuccessful in providing a long-term solution. Instead, solutions should be sought that preserve the established fabric of informal communities while increasing services, formalizing land holdings, and improving housing conditions for families. Among these solutions, strategic partnerships that create and generate market-based opportunities should be increasingly recognized as a viable approach to alleviating the low-income housing deficit in Latin America and across the developing world.
Gary Carrier is a graduate student at the University of California, Berkeley, whose studies center on housing microfinance and social enterprise aimed at serving the habitat needs of low-income families in the developing world.