Microfinance for Housing: Assisting the "Bottom Billion" and the "Missing Middle"

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Abstract

UN-HABITAT has calculated that one-sixth of humanity—1 billion people—currently live in slums. In the next 30 years, this figure could rise to over 31 percent of the world's population. The vast majority of these households will never be able to afford, nor have access to, formal mortgage finance. Thus, increasing the availability of microfinance for housing (MFH) to help provide adequate shelter and sanitation will become increasingly important.

Several decades ago, MFH was the nearly invisible stepchild of micro enterprise finance. Micro enterprise loans were indeed used for housing purposes in some cases, but this was not recognized as such, and explicit loan products for MFH did not exist. Change has come rapidly, however, and MFH loan products are now widespread. MFH has two "parents": microfinance institutions and groups advocating and supporting low income housing. MFH was first strongly entrenched in Latin and Central America, but is now widespread in Asia and also finally taking hold in Africa.

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Introduction

1. What is MFH?

Microfinance for housing (MFH) is a subset of microfinance, designed to meet the housing needs of the poor, especially those without access to the banking sector or formal mortgage loans. MFH is designed for low-income households who wish to expand or improve their dwellings, or to build a home in incremental steps, relying on sequential small loans. MFH differs from formal mortgage lending in four key ways:

• the loans are smaller and shorter term than conventional mortgage loans,
• because of their smaller size, MFH loans are not used to purchase a home but rather for home improvements, incremental building, or development of a starter dwelling in sites and services initiatives;
• MFH loans are usually not collateralized by the property, which is, of course, a defining characteristic of formal mortgage loans; and
• Whereas banks are the primary source of mortgage lending, MFH is offered by MFIs, NGOs, co-ops and NBFIs. MFH clients generally cannot qualify for formal mortgage loans for a variety of reasons, including low income, informal sources of income, lack of land title, and inability to meet formal building standards (standards which are often far too rigid for accommodate affordable housing)..

2. How does MFH differ from Micro-enterprise Finance?

Micro-enterprise finance (MEF) provides working capital and fixed assets loans to micro entrepreneurs. Underwriting of MEF is generally based on assessment of ability to pay (an income stream, cash flow from the enterprise being funded) and assumed willingness to pay (prior successful MEF loan, character assessment). Business equipment and various assets, including property, are often used as collateral. MFH loans, in contrast, are specifically targeted to housing development or improvement. In some cases previous success with micro-enterprise loans is used to underwrite MFH loans. However, as not all MFH borrowers may be entrepreneurs, and not all MFH loans are offered by micro lenders, underwriting generally includes a variety of approaches to reducing credit risk. Lenders may rely on mandatory savings over a specified period, membership in savings groups, and/or co-signers. A number of MFIs, particularly, in South Africa, have relied on payroll deduction for those formally employed. Similarly, collateral may include property and other assets not linked to a micro enterprise; land title is required by some but not all MFH lenders.

It should be noted, however, that MFH and MEF loans may sometimes be indistinguishable: many micro businesses are conducted in whole or in part from the home, and many micro lenders have learned that some portion of their loans are being used for housing. Thus, MFH may in fact expand or improve the households dwelling for the purpose of conducting its business, or selling or storing the goods being produced. In addition, expanding the dwelling by building a shop in front of the home or adding extra rooms for rental purposes, and thus producing an income stream, also emphasize the numerous links between MFH and MEF.

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