Guest Articles

December 21

James Militzer

New Products, New Markets – New Risks? Microfinance Shifts its Gaze to Housing

Critics have landed plenty of punches over the long years of debate around microfinance’s true impact on the poor. But to my mind, the industry’s best response to these critiques has been to point to its singular success: Microfinance is “the only social innovation to: (1) reach global scale, (2) build a complete industry infrastructure, (3) tap into commercial capital on multiple continents, and (4) ‘produce enough profit to generate actual controversy over the returns to social investments,’” as Grameen Foundation founder Alex Counts put it (paraphrasing a paper by Financial Access Initiative Managing Director Tim Odgen).

Say what you will about its dangers and downsides, that achievement is unparalleled in social business. Regardless of the benefits of traditional entrepreneurship-focused microloans, tens of thousands of MFIs serving some 200 million households in low-income communities around the world provide an impressive platform for social change. The question is: What will the industry do with this platform, as it seeks new ways to make an impact?

Attending the European Microfinance Platform’s (e-MFP) European Microfinance Week, as I have for the past three years, has provided some fascinating insights into how the sector is answering that question. The conferences have revealed an industry that’s experimenting with new products and exploring new markets – while figuring out how to balance the risks and rewards of new technologies. This year’s event focused on a growing need among existing microfinance customers, and one that could draw new clients into the sector: housing.

“Study after study shows housing to be among the top three uses of microcredit, even when loans are designated for business investment,” said Christoph Pausch, executive secretary of the e-MFP in an interview with MicroCapital, explaining why housing was one main stream of the 2017 conference. Since housing is one of most families’ biggest investments, there’s a huge opportunity for microfinance to meet this demand – and yet “the vast majority of MFIs treat housing as a niche product.”



A Massive Global Opportunity

If that’s the case, it’s a niche of potentially vast proportions. According to a report by Habitat for Humanity, which had a major presence at the event:

  • By 2030, almost 60 percent of the global population will live in urban areas, and 95 percent of urban expansions will happen in the developing world.
  • Meeting this increasing demand for urban housing from low-income households will cost US $2.3 trillion by 2025
  • A significant portion of that $2.3 trillion can reasonably be expected to come from financial services providers

With those stats in mind, it’s no surprise that 64 percent of housing microfinance providers in a Habitat for Humanity survey reported that their housing portfolios are growing as a percentage of their overall lending. Also promising: 47 percent of these institutions said these loans are roughly as profitable as their other products, with 18 percent saying they are more profitable.  



No Shortage of Challenges

But according to one participant in a housing finance panel, Marja Hoek-Smit, director of the International Housing Finance Program at Wharton School: “Though housing microfinance is growing, it’s not growing as fast as I’d expected by this point.” Panelists discussed several possible constraints, including: MFIs’ lack of familiarity with housing lending, inconsistent client income, clients’ inability to budget for a construction project, limited property rights/land tenure security, and lack of collateral. One other challenge, said Daniel Rozas, senior microfinance expert at e-MFP: Housing loans are larger and longer-term than traditional microfinance loans, which means lower interest rates and lower margins – a challenge the industry has not yet figured out how to address.

But that’s not to say that these customers are seeking Western-style mortgages to build a house from scratch: At least 70 percent of houses in the developing world are built incrementally, often over the course of years, said Sandra Prieto, director of Global Operations and Financial Inclusion at Habitat for Humanity, in a plenary speech. She said these clients need financial products that are structured around this incremental building process – and that also match their income streams and affordability levels. And according to Hoek-Smit (and multiple other panelists throughout the conference), both housing microfinance clients and MFIs want more technical assistance along with loans, to make sure construction is done right. Increasingly, MFIs are building the cost of this assistance into the cost of their housing loans – an important shift in how they package these products.



However, the constraints to housing loans aren’t just on the demand side: Many MFIs flag capital constraints as key limitations in their ability to serve this market. As Rozas put it, many investors say they’re interested in doing more impact investing in affordable housing, but their actual investments don’t currently amount to much. What’s more, he said, much of the growth in affordable housing investment might be coming from a handful of major investors around the world – so the sector may be even less active than it seems. He wondered if more public entities could provide lower-cost, longer-term capital to complement private capital and enable more affordable housing investment.

According to several panelists, obstacles for investors include a narrow pipeline for affordable housing investments, limited choices of products and vehicles, and even concerns about social impact: Though the impact per person of a housing loan can be huge, due to larger loan sizes, the impact per dollar spent can be low.



Regardless of the challenges, it’s clear that many MFIs are enthralled by the business opportunities the housing market provides – and not just for construction-related loans. Multiple panelists spoke of the opportunities in packaging these loans with other services, like solar and water capture/treatment options to improve the buildings’ sustainability and their owners’ quality of life, and insurance to protect these borrowers’ investments.


A Note of Caution

Yet for all the excitement over this money-making potential, the conference offered a striking warning for those who ignore the risks of offering home loans to low-income borrowers – and it was delivered at a rather unexpected time and place. During the ceremony announcing the winner of the European Microfinance Award, at the headquarters of the European Investment Bank (“the belly of the beast,” as I heard one attendee describe it later), Leilani Farha, UN Special Rapporteur on the Right to Adequate Housing, gave a highly charged keynote speech. In it, she lamented that “housing has lost its currency as a universal human right,” instead becoming a commodity worth $163 trillion globally – and “a safe haven for banks to park excess capital.” Citing the devastation of the 2008 financial crisis (sparked, of course, by irresponsible housing loans), she urged microfinance not to make the same mistake by viewing these loans as a path to huge profits and, in the process, harming the very people it’s trying to help. She emphasized the need for caution and government oversight – an important corrective for an industry that, even now, could probably use the reminder.



James Militzer is an editor at NextBillion.

Photo by UNAMID via Flickr.




Investing, Social Enterprise
Base of the Pyramid, housing, lending, microfinance, mobile finance, poverty alleviation, social enterprise