Housing Microfinance and the 6 S's: Site

Although the other 5 S’s of a building come, are modified and go over time, Stewart Brand wrote in How Buildings Learn: What happens after they are built that “Site is eternal.” [1] Site is a prerequisite for (or part of) any housing finance intervention. The level of formalization in the land market determines the legal status of “site” and how it is accessed. This then influences the development of formal housing finance (mortgage market). When a vibrant mortgage market that reaches down to low income households is absent, there will be a rise in demand for housing microfinance to fill the gap and finance alternative housing processes.

Site and Risk in Housing Finance

Mortgage markets require the ability of the lender to put a lien on the property (site) over the loan term. This requires legal title that is dependent upon a land registration process. It also requires a legal framework giving the lender the practical ability to sell the property in the case of default by the borrower. Risk is mitigated by ensuring that the net resale value of the asset (property inclusive of the site and structure) is greater than the amount owed by the borrower. Over-reliance on the asset as a means of reducing risk can be problematic, however, if the resale value of the asset decreases to below the outstanding loan balance.

Housing microfinance usually does not require legal tenure (if it does, it may be more like a micro mortgage). It relies instead on land security, being some kind of evidence that there is low risk of the owner being removed from the land against his/her will. This could be a document showing purchase, inheritance or customary ownership and may include a signed statement from local leaders that the owners has a right to the land that they wish to use for construction or making home improvement. In the absence of formal land registration, there is often a recognized parallel land system. Whereas formal land and mortgage systems prevent the sale of property (site) when it is mortgaged, it is often possible to sell property in a parallel land market by simply generating a new document of sale. This is a potential risk for housing microfinance providers even if they are generally satisfied that the client will not be forcibly removed.

Reducing Risk

Because the site itself cannot be effectively leveraged to reduce risk in housing microfinance, risk mitigation falls back on standard microfinance methodologies. These include ensuring affordability of the housing microfinance loan through rigorous income assessment, assessing character and sometimes using guarantors both as security and a form of social pressure. The process is highly reliant upon the work of credit officers, as opposed to legal documents. Understanding the history of the settlement in which client’s housing project is located, the land and human settlement policy framework and local politics helps to assess whether there is a potential risk of removal from the land. Evidence of commitments in the community and an understanding of the character and personal history of a borrower may also help asses the risk of the borrower selling the site, disappearing and leaving the financial service provider with an uncollectible account.

Site and Effective Demand

When housing microfinance is undertaken in the form of a home improvement loan on a client’s existing housing project, site is a pre-requisite to obtaining a loan. In African rural areas, this is usually not a problem. With some exceptions, most rural households in Africa have access to land through customary rights or agreement with local leaders. In urban areas, however, a significant portion of the poor and low income households rent their accommodation and do not own land. This excludes them from access to housing microfinance, making  effective demand solely from those who have secure land. This can potentially influence the social performance of a housing microfinance product based on the practically ability of low income households to obtain land in a suitable location to match their livelihood strategies. If low income households find it very difficult to acquire land due to whatever reasons, then housing microfinance that relies on a borrower’s access to land will serve clients with relatively higher incomes compared to the very poor in the community. Site (or rather access to it) also influences the market and demand for various potential housing microfinance products.

One way of serving populations who do not have access to land is to offer land (site) as a loan product. This could be the purchase of land on its own, or a package of services that include land and housing. One approach is for an institution to acquire a large piece of land through a formal process, or through mobilization of members, and then parcel it out as part of a housing package. In African urban centers, such land is commonly found on the outskirts of the city and far from employment opportunities for non-skilled workers and the vibrant local economies of informal settlements. Although access to land and housing may be secured using this method, it is at high cost to the institution and it can sometimes be a risk to a household’s livelihood sustainability if the location of the site does not support their income strategies and/or results in significant added expenditures.

Another option for land as a loan product would be to support the acquisition of land through existing informal processes. In this case, a client might identify land for sale in an area of his/her choice and access a loan to purchase it. In some cases, the site may also include an existing structure. This type of transaction takes place frequently in informal settlements, but is usually “off the radar” to those who only focus on formal processes resulting in title. There is no reason why housing microfinance could not support such transactions as long as the institution is comfortable that a reasonable level of security exists and that any risk can be mitigated in other ways.

A third housing microfinance option for serving those who do not have access to their own site would be supporting the construction or improvement of rental units. This could clearly lead to allegations of supporting “slum lords,” but it must also be recognized that renting is a viable livelihood strategy for many low income households in informal settlements. Increasing the quantity and quality of rental stock in low income areas can certainly have multiple benefits, impacting the renter, landlord and overall housing environment. It is not uncommon for low income households living in informal settlements to rent out rooms, providing accommodation for one family and an additional steady source income to the other.

Conclusion

Macro level factors related to site (land policy and legal frameworks) are a major factor in determining how low income household access land. Macro land-related issues also influence what types of housing finance options are (or could be) available and who can access them. Providing site (land) as a product or part of a product could potentially make housing microfinance more inclusive in some environments. Likewise, housing microfinance products that target rental uses also ultimately benefit those who do not have access to land or rent as part of their livelihood strategy.

[1] Brand, S. (1994) How Buildings Learn: What happens after they’re built. NY: Penguin. p. 13.

The 6 S's and Housing Process

I previously wrote about a housing concept from Stewart Brand’s How Buildings Learn: What happens after they are built. (See Incremental Building and Housing Microfinance Part III, posted on 13th September 2009) Brand built upon  work by Frank Duffy and identified “The 6 S’s” of a building: Site, Structure, Skin, Services, Space and Stuff.[1] How the Six S’s are integrated into a building varies, depending on whether the building was constructed through a formal or informal housing process and the degree of access to housing finance. As Brand states, “The flow of money through a building acts to organize that building.”[2]

Let me start with a brief look at the 6 S’s:

• Site: This is the location of a building. In the western setting, it is almost certain to be legally and specifically defined. In other parts of the world, there may be no legal title. Many countries have yet to conduct cadastral surveys for the vast majority of land, making formal title nearly impossible and resulting in  alternative forms of land tenure. Site has a tremendous impact on the building process in terms of the eventual form of structure and  the availability of housing finance options.
• Structure: Brand writes that “The foundation and load-bearing elements are perilous and expensive to change – so people don’t. These are the building.” [3] The structure of a building is  defined by its foundation plan and, as Brand notes,  is not likely to be significantly altered. Structure can be added incrementally through additions and extensions, using either formal and informal housing processes.
• Skin: The skin of a building is what meets the eye. It has a functional purpose of protecting the structure and providing insulation, security and safety, but it also frequently has aesthetic purposes. It is not uncommon for waddle and daub traditional houses in Africa to have an extra layer clay added to the outside to protect the structure. This is sometimes painted in designs with different color clays. “Keeping up with the Jones’” knows no socio-economic boundaries and often involves improvements or changes to the skin of a building.
• Services: Services include heating, electrical wiring, gas fittings, plumbing communication or other utilities and services in and around a building. Efforts are often made to hide the majority of services behind the skin of the building with the exception of access points like sockets, plumbing fixtures, etc.
• Space: The space plan includes the non-load bearing walls which delineate how space is used within the structure, as well as elements such as ceilings, doors and windows. Years ago I remember my father taking a sledge hammer and tearing out a wall between our dining room and kitchen to join the rooms and add a wood-burning stove. At the time, I didn’t think of it as a modification of the space plan and addition of a service, but that’s exactly what he was doing.
• Stuff: These are the things we put into the house and usually take with us when we move. Furniture, appliances and personal items all fall into this category. “Stuff” is clearly separate from what we usually consider as the building, but you will almost never see a building that is being utilized without it!

How Buildings Learn addresses the change and adaptation that takes place in a house or structure after it is built. Owners personalize and adapt buildings to their needs and wants over time. Brand uses the 6 S’s as a frame for identifying the types of transitions through which buildings pass. Brand looked at the change process primarily in the context of the formal housing sector. Although there are many similarities, there are also a number of differences when viewed through the lens of informal housing.

The 6 S’s in a formal housing process:

• Instant House: Whether built as new construction or bought as a pre-existing building, all of the 6 S’s (except “stuff”) are usually complete at the time of purchase. The incremental process of change begins after the owner has acquired a complete unit. At the time of sale, one owner’s ending point with a building becomes the next owners starting point, but it almost always starts as a complete unit in terms of the S’s.
• Built to Standards: The S’s themselves are built to standards, with inspection being a requirement. The formal housing process is highly regulated and the builders, sellers and just about everyone involved must be licensed and /or conform to standards. This is in an effort to guarantee quality and safety.
• Financed with Formal Housing Finance: The mortgage market is designed to facilitate the purchase of complete units with repayments over a long period of time. The structure, skin, services and space plan must meet quality standards and there must be legal tenure for the site, because mortgage financing is based on the presumed legal ability to resell the asset (the building) in case of default. Mortgage financing supports the acquisition of the 6’s in one complete unit, but it is also dependent on the ability to do so according to local quality standards and regulations.

The 6 S’s in an informal housing process:

• Incremental Construction: Most informal building processes are incremental. The time from the start of construction to when a building is complete with all of the 6 S’s can often be measured in years. Many buildings never have a complete set of the 6 S’s in their entire lifespan. In the incremental building process, structure is king. Buildings often sit on an untitled site and are occupied with incomplete skins, space, services and stuff. The S’s are added for the first time as the building is already in use by the owners.
• Questionable Standards: Even where regulations and standards exist, low income households often cannot afford to comply with them. This results in houses being built outside of standards. Builders are usually people who may have some knowledge of simple construction, but have not received formal training or licensing and are difficult to hold liable for the quality of work. There are few guarantees or avenues for recourse in the case of a poor quality construction.
• Financed Through Informal Sources: Houses built using informal process are  commonly built by people who do not qualify for loans from a bank. The site may not be legally viable as collateral and an informal building process undertaken by builders of indeterminate skill may appear risky to conservative bankers. As a result, owners build using whatever sources of finance they can access. This is often self-financing through savings, but could also include small loans from family, friends or places of employment. With the growth of the microfinance industry it is not uncommon for small business loans from MFIs to be diverted into housing. Whatever the source of funds, it tends to be piecemeal and the incremental building process becomes an exercise of prioritizing the 6 S’s and then adding and improving them gradually. The flow of money does indeed determine the building process.

Owners usually don’t choose whether they want to use a formal or informal housing process. The policy, regulatory and finance environments linked with predominant sources and levels of income essentially predetermine the process that will be used in practice and how the 6 S’s will be acquired. How Buildings Learn demonstrates that incremental building is more common than often imagined within the formal housing sector. Although housing microfinance is often thought of as a tool to support informal housing processes, its use in terms of the 6 S's it is not too different from home improvement loans delivered through formal lending institutions to support housing modifications complete with building permits, inspections and qualified builders. When housing microfinance is applied to informal housing processes, however, the effect is to speed up the initial acquisition of the 6 S’s and to allow the dweller to move towards and eventually own a complete building. As Brand showed, however, buildings continue to transform long after initial “completion.”

[1] Brand. S. (1994) How Buildings Learn: What happens after they're built. New York: Penguin
[2] Brand, p. 85
[3] Brand, p. 13

A Tale of Two Products Part Four: The Performance

INTRODUCTION

In this tale of two products we have looked at the power of housing paradigms on housing microfinance product development and two different product and partnership designs in  Uganda and Kenya. The Uganda product was a flexible housing loan that was delivered by the MFI with institutional support from the Housing NGO, but without branding the NGO to the MFI’s clients or integrating the NGO into the loan process. In Kenya, the product included specific house designs and significantly more construction technical assistance. The Kenyan MFIs product was co-branded with the NGO and staff from the Kenyan Housing NGO  participated in the MFI’s housing microfinance loan process. Having looked at paradigms, products and partnerships, we now move on to performance.

SLOW STARTS

The partnerships between the Housing NGO and MFIs in Uganda and Kenya has very similar start-ups. All of the partners attended the same housing microfinance market research workshop and used similar tools and techniques in their market research and product development. Memoranda of Understanding were signed within one month of each other and the amount of loan capital provided by the Housing NGO was the same. The actual transfer of capital to the Ugandan and Kenyan MFI partners took place at approximately the same time. Although Kenya and Uganda have slightly different operating environments, as East African nations they are relatively similar  when compared to each other, as opposed to Latin American or Asia countries, or even South Africa. The product development process, time lines, capital committed and even the missions of the institutions were essentially the same. The only salient differences were some product features and the partnership design.

Getting from the transfer of capital to actual loan disbursements started quite slowly with each partnership. The MFI in Uganda (designated “UMFI” for this tale of two products) was going through some internal transitions that slowed down the implementation of its flexible housing loan. Implementation of the construction loan at “KMFI” (not actual name) was also delayed in part due to post-election violence. The Housing NGO offered additional institutional technical support to the MFIs to get the products up and running in each country and the MFIs finally started disbursing housing microfinance loans at about the same time..

HIGHLY VARIED PERFORMANCE

Once loans started being disbursed and minor process issues were addressed, performance between the two partnerships became markedly different. UMFI began experiencing high demand for its flexible housing loan and used up the initial loan capital from the Housing NGO. The partnership was refinanced with additional capital, which was quickly put to use. Loans disbursed are approaching 500, but have been controlled due to limitations on available capital.

The KMFI product continued to struggle, despite KMFI being a significantly larger MFI than UMFI. Disbursements never picked up and the partnership was terminated before the loan capital had been fully utilized. Total disbursements of the construction loan during the partnership between KFMI and the Housing NGO were less than 50.

Neither product truly “took off.” The KMFI product performance was significantly poorer than UMFI’s in terms of generating and meeting demand. Even UMFI, however, has failed to take housing microfinance to scale beyond the capital provided by the Housing NGO. It has intentionally limited disbursement to the funds available at a concessionary rate through the partnership rather than seeking additional funds from other sources to scale up and meet the actual demand for the product.

WHAT CAUSED THE DIFFERENCE IN PERFORMANCE?

The partners themselves have various interpretations of their performance. One explanation for the KMFI performance was that the institution focused on and incentivized their core  business loan products rather than the housing microfinance product. Certainly that may be a factor, but I can’t help but believe that having both the Housing NGO and MFI interacting directly with clients may have led to some confusion around the product and between the institutions. We may never really know.

I also believe that  higher  levels of construction technical assistance (particularly using standardized designs) make it more difficult  to generate and sustain effective demand for housing microfinance in Africa. This has been my own experience so far; the greater degree of flexibility of the housing component of the product, the greater the ability to generate effective demand. When comparing higher and lower levels of construction technical assistance in housing microfinance, however, Franck Daphnis has stated that “No empirical evidence currently suggests that one approach is correct and the other is not.” [1] My own hypothesis would be that housing microfinance in Africa with less construction technical assistance will generate more effective demand, a higher rate of loan disbursement and lower cost for the institution. When choosing between a hypothesis from me and Franck Daphnis’ experience, however, Daphnis is the more reliable choice. Even this tale of two products, although true, is largely anecdotal in nature rather than part of a larger empirical study.

CONCLUSION

This brings my tale of two products to a close. The Housing NGO, UMFI, KMFI and their housing microfinance partnerships really exist, although I have not used the actual names of the institutions. The product with minimal construction technical assistance and no direct contact between the housing NGO and the MFI clients did in fact disburse approximately 10 times more loans in the same period than the product with a higher level of CTA and both institutions interacting directly with MFI clients. There were some who predicted this very outcome based on the product and partnership design, even before the first loans were disbursed. Whether that says something definitive about the types of housing microfinance products and their performance is yet to be determined. It is something for more study and I hope that some  empirical studies comparing product types in the African context will be coming in the future as housing microfinance continues to develop on the continent.

[1] Daphnis. F. & Ferguson, B. (eds). (2004). Housing Microfinance: A guide to practice. Bloomfield, CT: Kumarian Press, p. 11.

A Tale of Two Products Part Three: The Partnerships

Two weeks ago I started a tale of two products by looking at two very different housing microfinance product concepts that came out of a product development workshop held in Mbarara, Uganda in 2007. I hypothesized that the difference between the two products could be explained more by the housing paradigms and philosphies held by the designers than by the market research data collected. The workshop was part of an initiative to forge partnerships between a Housing NGO and participating microfinance institutions. Two partnerships were indeed formed, one in Uganda and one in Kenya and the resulting products bore a very close resemblance to the ones developed at Mbarara. Having already looked at the broad differences between the products in a Tale of Two Products Part Two, there are also some notable differences in the partnership structures.

UGANDA

In Uganda, the Housing NGO and the MFI (which I am calling UMFI for this posting) launched a home improvement loan very similar to the flexible housing loan concept that was developed in the training workshop. The Housing NGO developed a market research process, which was implemented by UMFI staff. UMFI and the Housing NGO jointly developed a prototype product and did prototype testing in the field. The Housing NGO’s HMF manager was part of the prototype testing, but was essentially presented to the clients as a HMF consultant working with UMFI and not identified as a Housing NGO staff.

After the HMF product was finalized, the Housing NGO provided wholesale funding to UMFI to launch its housing microfinance portfolio. Promotional materials were also supported in part by the Housing NGO, but the product was branded solely as a UMFI product. The Housing NGO’s name and logo were  not identified with the product to the clients or public. The Housing NGO's HMF manager provided institutional capacity building and worked with UMFI staff in implementing the product, but the Housing NGO did not have any role in the loan assessment, disbursement or collection processes and did not interact with UMFI clients directly except when monitoring progress. Even monitoring was undertaken without branding the Housing NGO’s involvement in the product to the clients.

(click on graphic to enlarge)

KENYA

The Housing NGO’s Kenya process with its MFI partner (which we will call KMFI) was similar to that of their colleagues in Uganda in many aspects. The Housing NGO supported product development, marketing and offered wholesale funds to KMFI. A primary difference in developing the product and partnership was that the product was co-branded, bearing the names and logos of the Housing NGO and KMFI and that the Housing NGO staff were more directly involved in the market research.

Another key difference between the products was the housing components of the loans. While UMFI’s flexible housing loan emphasized client control of the housing component and had little to no construction technical assistance, the Construction Loan offered by KMFI included specific house design options and extensive construction technical support. This resulted in a differing partnership structure based on the premise that KMFI would handle the credit aspects of the loan, but the Kenya Housing NGO would directly provide housing support services to KMFI clients.

The Housing NGO would conduct training on the Construction Loan for KMFI clients at joint meetings with KMFI staff. KMFI clients were trained in the Housing NGO’s housing process and given tips on cost reduction strategies in house construction. The Housing NGO staff would also take part in client assessment visits and help clients decide on an appropriate housing solution. The Housing NGO would then provide on-site monitoring and supervision through the construction process, while KMFI would manage the credit aspects of the loan. The Housing NGO had put a ceiling on maximum loan amount that it would support for each HMF loan and in some cases KMFI added additional capital for clients who were approved for loans higher than what the Housing NGO would support.

(click on graphic to enlarge)

CONCLUSION

The basic product development process and institutional support given by the Housing NGO to its MFI partners in Uganda and Kenya was very similar with the exception of the product being co-branded in Kenya. The nature of the products, however, may have influenced how the Housing NGO would interact with the MFI and its clients once the product was launched. (Or perhaps housing paradigms and an underlying model for partnership influenced the nature of the products.) Direct interaction between the Kenyan Housing NGO staff and KMFI clients as an integral part of the loan process was the major factor differentiating it from the Uganda partnership model during implementation. The question would remain: Given the difference in products and partnership models, would there be a difference in performance?

A Tale of Two Products Part Two: The Products

In A Tale of Two Products Part One, I began to look at the power of housing paradigms on housing microfinance product design. Two groups that attended the same product development workshop in Mbarara, Uganda and had worked together during field research developed two remarkably different housing microfinance product concepts. The workshop was a training exercise that was part of an initiative to forge partnerships between a housing NGO and microfinance institutions. Two rough product concepts that came out of the workshop bore a close resemblance to the final products that were later used in the partnerships; one in Uganda and one in Kenya. This is a continuation of the Tale of Two Products.

As the two product concepts were presented and debated, there was little to no controversy or disagreement over product features such as interest rate, grace period, security or loan insurance. Whether the products should be linked (for existing clients) or stand alone (available to new clients) was also not a major point of contention. The debate (and it was heated, contentious debate) was over what the housing component of the product would look like. Here is a summary of the two housing microfinance products, focusing on the housing component:

FLEXIBLE HOUSING LOAN

The Flexible Housing Loan concept was a home improvement loan. The design concept was to allow the client to personalize the loan to his or her own unique housing situation by proposing the work to be done within the given limits on loan amounts. Loans would be disbursed in cash or cheque and the client would be responsible for overseeing the home improvement project. Clients who used the loan for non-home improvement purposes would have a higher interest rate than clients who used the loan on a home improvement as agreed with the MFI.

The MFI would not provide construction technical assistance to the client. It was assumed that there was sufficient construction expertise locally to undertake typical home improvement projects. This was deduced by the fact that the vast majority of the houses in the area studied during the workshop had good roofs, despite the fact that the households had built on their own using informal construction services that were locally available.

The flexible housing loan product concept aligned closely with the supporter paradigm of housing. It supported incremental building while emphasizing dweller control of the housing process. Existing and informal construction services were essentially seen as part of the solution to be harnessed, rather than part of the problem. Something very similar to the flexible housing loan concept was later implemented by the housing NGO and its MFI partner in Uganda, which we will call UMFI for the purpose of this tale of two products.

THE CONSTRUCTION LOAN

The Construction Loan product concept offered a variety of housing packages to clients. The packages ranged from complete units to designs that could be built in stages with several loans. The objective of the range of house designs was to offer complete housing services for clients with different income levels. The designs had names such as the gold, silver and bronze packages. Loans would be disbursed in-kind or in installments to avoid diversion to non-housing purposes.

The primary emphasis was ensuring the quality of the house product. Full technical services were included, from training of the client in the housing process to supervision and potentially procurement and the actual construction work. The product concept, with its emphasis on a complete solution and the quality of the house aligns with the provider paradigm of housing. A very similar product was launched by the housing NGO in Kenya with its MFI partner there, which we will call KMFI for the purpose of this tale.

THE DEBATES

The two groups at the Mbarara workshop entered into hot debate. What was more important, quality or flexibility? Could the institution providing the loan accept a housing result not up to given quality standards? Did the institution have the capacity to deliver construction services at scale? Did clients have the ability to manage their own construction process? In the end, the debates were not resolved and the workshop facilitator had to close the session.

Several months later, UMFI went on to offer a flexible housing loan in partnership with the housing NGO. At almost the same time,  KMFI offered something similar to the construction loan with the same housing NGO in Kenya. Aside from the clear differences in the product features, how the housing NGO and MFI interacted with each other (and with the MFI clients) was markedly different in Uganda as compared to Kenya, but that is for another posting.

A Tale of Two Products Part One: The Power of Paradigms

The setting is a market research workshop held in Mbarara, Uganda in July 2007. In attendance are staff from a housing NGO representing several country programs and representatives of two microfinance institutions. The workshop is working towards an objective of forging housing microfinance partnerships between the NGO and MFIs. The participants study several MicroSave market research tools, develop some of their own and go out to test them in the field with clients from one of the MFIs. They come back from the field, share their experience and split into groups to develop rough housing microfinance product concepts as a learning exercise. Looking at the exact same data and having worked together in the field, the groups come up with prototype housing microfinance products that bear almost no resemblance to each other. How could this happen?

Housing is often more ideological than we imagine. In Housing Microfinance: A guide to practice, Franck Daphnis writes: 

“A defining characteristic of some housing microfinance programs is the provision of construction advice or supervision to clients. Some institutions view this form of technical assistance to the client as an important part of any housing microfinance loan. Others do not perceive any particular value added in providing construction assistance services.” [1]

One might suppose that these different approaches could arise from disparate environments or differing demand preferences as measured through objective market research. In reality, housing microfinance product design often has more to do with the housing ideology or paradigm held by the designers. Daphnis demonstrates this with an example of FUNHAVI, which sees non-financial services to clients as a mission cornerstone and ADEMI, which believes that construction assistance to clients would be against the institution’s philosophy. [2] It is not unlike American Democrats and Republicans who look at the same health system in the same environment and come up with completely different interpretations and resulting solutions.

Some questions that would bring out the different underlying assumptions between conflicting housing ideologies or paradigms might include:

• What makes a good house?
• To what extent are low income households capable of making housing decisions and managing their own housing process?
• Which is more important for a low income target group, the product features related to pricing and terms or the product features related to the construction of the house or home improvement?

If we look at the answers in terms of Provider and Supporter Paradigms of housing (see posting from 8th August on housing paradigms and housing microfinance), I would suggest that they might look like this:

(click on table to enlarge)

The different underlying assumptions about housing will lead to very different housing microfinance products.

One of my own early assumptions about paradigms and products was that staff from a housing NGO would lean towards the provider paradigm and building complete houses (or including heavy construction technical assistance) and that those from an MFI would be more inclined to emphasize the finance side of the loan product over the construction side. I am no longer sure that is necessarily true. In the Mbarara workshop example, the two divergent products were developed by groups that were composed of mixtures of housing NGO and MFI staff, with the champion of each product coming fom the opposite type of institution from what I would have assumed. Paradigm positions do not necessarily correspond to the type of provider. The housing ideology of an institution’s leaders, however, will almost always strongly influence the type of product developed. Where the leadership is divided within a single institution, there will probably be considerable confusion, conflict and challenges in successfully launching a product, as opposed to institutions in which the leadership is strongly aligned with one paradigm or the other.

In my next posting I will continue the tale of two products with the rough product concepts themselves as they came out of the Mbarara market research and product development workshop. They are not particularly extraordinary in their own right, but they are representative of two opposite ends of housing microfinance product design.

[1] Daphnis, F. & Ferguson, B., eds. (2004). Housing Microfinance: A guide to practice. Bloomfield, CT: Kumarian Press. pp. 9-10

[2] Daphnis & Ferguson (2004) p. 11

Portfolios of the Poor: How the World’s Poor Live on $2 a Day – Book Review

Some years back, Stuart Rutherford’s The Poor and Their Money was an eye-opening essay for me. It demonstrated that  the poor, just like the non-poor, need a useful lump sum of money for emergencies, opportunities and life-cycle events. It went on to describe some of the means that they use to obtain these lump sums. Now Rutherford is joined by three colleagues (Daryl Collins, Jonathan Morduch and Orlanda Ruthven) as they delve more deeply into the financial landscape and behaviors of the poor in Portfolios of the Poor: How the world’s poor live on $2 a day.

Portfolios of the Poor studied 250 households in three countries (Bangladesh, India and South Africa) over a period of one year. The households were interviewed about their financial activities every two weeks and income statements and balance sheets were generated for each household at regular intervals. The authors are frank about the limitations of the study in terms of the ability to generalize, but at the same time some remarkable insights could be drawn from consistencies across the majority of the households studied. These include:

• Irregular Cash Flow: For the poor living on $2 a day or less, a considerable problem is cash flow. Most households had fluctuating cash flows, yet needed to ensure that very basic needs were met, such as daily meals. Risks and emergencies also need to be managed as well as putting together money for larger expenses. These challenges were met using a variety of financial instruments.
• Financial Instruments: The poor use a variety of financial instruments to manage their often irregular cash flow. Most of these are informal, such as money guards, credit at shops, loans from friends or family, reciprocal lending relationships, wage advances, saving on the person(always carrying around some small amount of money), saving at home, etc.). The households studied used a remarkable number of financial instruments over the period, usually several at any given time.
• The Reliability Problem: Although the poor were shown to be adept at using a variety of financial instruments to smooth out their cash flow, a considerable problem was that many of the instruments were unreliable, creating loss at some times and not being available at others. More formalized options often were not flexible enough to match the way and timing in which income was earned.

Despite the myriad of challenges faced by the poor, Portfolios of the Poor does much to dispel stereotypes that paint a portrait of the poor as helpless, passive and ignorant. In the case studies presented, one cannot help but admire the households’ ingenuity, creativity and downright financial savvy in managing a low and fluctuating income through sometimes unreliable financial instruments. Poor households not only successfully meet basic needs, but often even manage to save something, however small, for a rainy day. Both the case studies and the household financial statements make fascinating reading and bring complicated financial realities to life.

Portfolios of the Poor does not limit itself to describing the financial activities of the poor. It goes on to look at developments in the world of microfinance. The authors suggest keys for providing better financial services targeted to households living on $2.00 a day or less. Some principles outlined  include reliability, convenience, flexibility and structure, which respond to the poor's experience.

Portfolios of the Poor is a must-read for those who provide financial services to the poor and is a critical resource as microfinance continues to develop and improve its services. For financial services to be relavent and useful, they must reflect the the true situation and needs of those for whom they are intended to serve. Collins, Morduch, Rutherford and Ruthven use their research and analysis to open a window for a clearer view of that reality and how the world's poor live on $2 a day.

This posting was a review of: Collins, D., Morduch, J., Rutherford, S. & Ruthven , O. (2009). Portfolios of the Poor: How the world’s poor live on $2 a day. Princeton: Princeton University Press. ISBN- 13: 978-0-691-14148-0

The Provider Paradigm, Housing and Housing Finance: An NGO Provider Approach and Its Challenges

Housing projects of a few hundred to a few thousand units are impressive and can capture the imagination as successful housing interventions. Indeed, housing conditions are usually materially improved for the participating households. But what is the relative significance of such interventions in the overall housing environment? A challenge in the field of housing is how to effectively serve statistically significant numbers of households with low incomes. In Housing Without Houses: Participation, flexibility and enablement, Nabeel Hamdi defined two paradigms of housing which he described as being in conflict: The Provider and Supporter Paradigms (see posting from 8th August, 2009). The provider solution to this housing challenge is simply to build houses. Hamdi gives a sampling of some key features of the provider paradigm as follows:

… Providers go on to argue that if production is to be increased, then housing types (tightly defined packages of space and material) should be rationalized to represent a careful balance of technical feasibility, building regulations, and planning controls – the very things that supporters argue have raised costs beyond the reach of those with the lowest income, especially in developing countries.

Providers argue that to mass produce effectively is to mechanize, to mechanize effectively is to standardize, to standardize effectively enables better control of quality, quantity and cost. For providers, to build fast is to build instantly, to solve problems of housing is to build a large number of houses…[1]

Hamdi was largely applying the paradigms to governmental approaches to housing; the provider paradigm being epitomized in public housing projects. The overall concepts behind the paradigms, however, equally apply to many non-governmental organizations (NGOs) and other institutions engaged in housing, particularly as a social service to the poor. Housing NGOs or cooperatives that hold a provider paradigm tend to build houses, have standard house designs and often prescribe required types of materials and technologies (which may be described as “appropriate technologies”). They  frequently define the  housing process for those who would participate in the program as essentially a take it or leave it option. The organization's housing process becomes the clients' housing process. For the purpose of this posting, I will call anything that falls relatively close to these general housing program features the “NGO provider approach,” although it is not to say that all housing NGOs or cooperatives use or are restricted to it. Key stated objectives of the approach typically include ensuring the quality of the house, keeping costs low and affordable and serving a large number of households with the house as a product. The overall results of the NGO provider approach are not always as intended, especially when it enters the realm of housing finance by being building houses as a credit facility.

I was an adherent of the provider paradigm using the NGO provider approach for many years across various countries in Sub-Saharan Africa. Our key metric for performance was the number of houses built. It might have been stated with different euphemisms, but when asked what we did the answer would essentially be: “We build houses.” Although slightly varied for local situations, house designs were roughly the same across the continent. The houses we built were to standard designs, (commonly 24 – 48 square metres by the early 1990s), with two or three bedrooms, a sitting room and sometimes a corridor, storage space and/or veranda. Each house was complete with an outdoor latrine; usually a ventilated improved pit latrine. At various times appropriate technologies were being promoted, such as roofing tiles or stabilized soil blocks, and these would then become mandatory for the clients for as long as the organization was committed to using them. The quantities and types of materials used in construction were specified and the organization did the procurement of materials and services for the client, who did not have much say in the matter.

In most cases the organization provided the skilled labor and/or supervision. Clients (sometimes called beneficiaries, homeowners, participants, families, home partners or other terms, but in this posting I will primarily call them clients based on the feature of a loan component) were told exactly what materials they must provide on their own (usually locally available materials such as stones, sand and bricks) as well as what tasks they must perform. The final costs of services provided by the organization were calculated when the house was complete and converted into a loan to be repaid by the client into a revolving fund to build more houses. To make the house affordable for households with low incomes, the loan was made for periods of 7 to 15 years and the beneficiary was charged primarily for direct cost with most of the operational costs carried by the organization as a subsidy. Specific details vary, but this general approach is not uncommon for housing NGOs or housing cooperatives.

I have been a designer and implementer of programs that have built thousands of low-cost houses across the continent and seen many similar programs run by other institutions. The transition from a traditional, substandard house to a more modern and durable house is powerful and dramatic and can bring many positive changes to households. From very early in my work with the NGO provider approach to low-cost housing in Africa, however, I had a few observations that have remained constant over the years:

1. Quality: The quality of structures was not always what we had expected or intended. One theory behind controlling the process was to ensure quality and improve over the local quality standards that existed prior to the program starting. However, to keep the work affordable to the organization and the clients who were to pay for the services, local labour was inevitably used. Because we used the same builders who were building locally anyway, we usually had roughly the same general level of quality when applied across all of the houses built. There were many well-built houses that were notably better than the traditional and non-durable houses we sought to replace. The overall quality, however, was not significantly greater over houses of similar design that were built by households independently and outside of the program. Construction quality was a consistent problematic area mentioned in program evaluations.

2. Dissatisfaction: An early shock as an idealistic field worker was to come across a significant number of clients who were very vocal in their dissatisfaction with the houses they received through the program. Recurrent complaints included the house being too small, the absence of plastering, dissatisfaction with the types of materials used (e.g. roofing tiles), construction quality complaints (the ubiquitous crack in the wall or floor) and restrictions on adding on to the house before it was paid off. We responded with stock answers to explain why the choices made were in the clients’ best interest and what the policies were, but this never seemed to be wholly satisfactory to the clients themselves. I heard the same discussions recurring almost verbatim across multiple countries, programs and projects and reports of the same from other colleagues over a period of more then 15 years as if it was all being read from the same script. In many ways I suppose it was.

3. Poor Repayment: Repayment was poor almost from the onset and the revolving fund simply did not revolve. Where repayment started well, it could rarely be maintained for longer than two or three years. (Note: This is a particularly bad problem with loan periods of up to ten or fifteen years.) New projects were started on the assumption that some previous implementers did something wrong at the foundation of the poorly performing projects that had resulted in the poor repayment. An often-heard comment was that “The model is good, but the implementation was poor.” Extra effort was usually placed in training and sensitization or strengthening systems, but the results were almost always the same, even with different implementers in different locations over a span of many years.

After years of believing I could fix the system and vigorously trying to do so, I began to realize that there were inherent problems with the model itself. The NGO provider approach may work fine as a hand-out or heavily subsidized housing program that serves relatively small numbers of people compared to the total population that is engaged in a housing process. (The delivery system is still cumbersome and expensive even without a credit component, but that is for another posting.) The biggest problem comes with scaling up and maintaining that scale beyond the duration of a donor’s interest. I think the main challenges could roughly be translated into three major issues that, when combined, make the NGO provider approach to housing and housing finance (the house as a loan product) an almost insurmountable challenge:

1. Charity Messages: NGOs that approach housing from the perspective of a social service often see their role as bringing help and hope to the poor and needy. This is how programs are marketed to donors and it impacts who joins the organization and why, and the institutional cultures and methodologies that translate into the client interactions. Language and symbolic events or rituals often place emphasis on poverty, need and the perceived inabilities of the low income clients, with giving by the affluent as the solution. When messages implying a mission of charity are communicated to clients, whether explicitly or implicitly, it immediately creates a very clear connotation of a “soft” program in the context of Sub-Saharan Africa. Clients will then interact with the program based on this and often will not prioritize payment. Because the charity impulse is woven into the fabric of the organization and its staff, when clients don’t pay (based on their assumption that the institution will not really enforce the terms), the perception of the soft NGO is confirmed and reinforced if and when the NGO fails to take action other than exhortations or repeated threats over a prolonged period. Loan portfolio health quickly declines, usually on a permanent basis.

Charity and credit do not mix well. When they do mix, it will be to the detriment of the credit. I have personally seen many clients years behind in house payments to a housing NGO, while diligently servicing other loans. How we inherently view the people who we serve determines how we interact with them. A program designed around the assumption that people are poor, hopeless and incapable of making good, logical decisions or managing their key life processes will look very different from one that is built around an opposite set of assumptions. Clients can easily read the difference and interact with the institution accordingly to their best advantage. If you have a very low income and can see an opportunity to free some cash flow by not paying a housing loan, not paying might look like a wise strategy in order to service other household needs with the cash that would have otherwise gone to the loan payment. If the lender will let you do it with minimal or no consequences, why not? (Despite regular reminders that a revolving fund exists to help others, the provider’s altruism may not always translate into every low income household’s decision making process in managing their precious and sometimes precarious finances.)

2. Standardized House Designs: The provider paradigm tends to build standardized house designs for efficiency and other reasons. The prescription of the housing package by the institution is a natural choice for an NGO or other institution that has a significant charity influence. Many people and institutions implicitly believe that the poor cannot build houses on their own (although they would rarely state it or may not even have a full self awareness of this underlying assumption). If the poor are doing it by themselves, it must be wrong and they will make bad choices (by the providers’ criteria), which necessitates the provider dictating the “right” way for the client to build and overseeing the process. The emphasis is on the house and ensuring that it meets the provider's criteria, which are usually based on the material standards of the structure.

As I mentioned, it is very powerful to see a family moving from a very poor house by material standards and a better quality house built by a housing institution. All inclusive language and development-oriented language aside, however, when the housing delivery mechanism is in actual and practical operations dictated by the provider, it is disempowering at the very least and could become a mismatch with the client’s livelihood framework at worst. It is not unheard of that clients who benefitted from materially good houses with land security and soft loan terms sell the houses and move back to where they were before the project because of just such a mismatch. This is incomprehensible to the provider who delivered the quality house, but may make perfect sense within the logic of the household in a given set of livelihood circumstances.

Another factor when credit is attached to the standard housing package designs of the NGO provider approach, is Turner’s 3rd Law of Housing (see posting from 23rd July 2009). If the housing process, and particularly the specifics of the house itself, were imposed upon or reluctantly accepted by the client, any problem with the house, construction quality or other, will be felt deeply by the client and can result in resentment towards the lender. The potential impact on loan portfolio performance, particularly if the lending organization is perceived to be soft on recovery, is significant.

3. Weak Housing Finance Products: The charity impulse and provider paradigm of building specific housing designs create some challenges to implementing organizations when it comes to the associated housing finance component of the house-as-the-product. Firstly, stakeholders within the institution may not believe that the people with low incomes should pay back the full cost of services provided. This can lead to internal conflict, but also leaves the door open for a wide acceptance of heavy subsidy, which ultimately hampers the institution’s ability to serve significantly large numbers of households. Sustainability is a key driver of outreach, but true self sustainability may be a hard-sell within some institutions. This may result in a pricing structure that does not recover the costs of delivery and cannot sustain a program of lasting signficance and impact.

Secondly, a possible tendency towards subsidy is aggravated by the challenge of bridging the gap between the actual cost of delivering the provider’s house and affordability to the desired target group. The results are either heavily subsidizing the houses because they are not affordable to the people the institutions wishes to serve, not subsidizing and serving wealthier clients, trying to mimic mortgage lending by using long loan terms to make payments more affordable, or a mixture of all of these. None of these work well for sustainably providing housing services to large numbers households with low incomes in Sub-Saharan Africa. The best option would appear to be longer loan terms, but experience has shown that most low income households do not have the long-term financial horizon or stability to use a specific financial instrument over a sustained period of many years. Sustained repayment becomes a challenge quickly, with somewhere around two to three years perhaps being on the outer margins for many of the poor.

Yet another challenge arises from controlling the construction process and pricing product. (And I am I only referring to the direct construction cost and not even the broader issue of pricing for sustainability.) The cost of materials constantly fluctuates (usually upward), yet the bill of quantities remains constant. This means an ever increasing loan amount in cash terms for the same physical product. If the cost is not calculated until the house is complete in inflationary environments, it is impossible to tell the client how much the loan amount will be before the house is done . This might not be comforting to a borrower who must commit to an uncertain loan amount. "How much will my house cost?" "We will tell you when it is finished."

At the same time, there is a related issue when an approximate house cost is quoted by a staff member prior to construction and the final cost ends up being significantly more. It is a common problem. When a program is introduced to a community or an inquiry is made, people always want to know what the cost of the house will be. The cost they are told sticks in their minds a lot longer than it sticks to the actual cost of construction. Avoid quoting the cost and it is not transparent and can create mistrust. Quote a cost but then change it when construction costs rise and the client feels cheated. Quote the cost and don’t change it when construction costs rise and you either need to have included a hefty margin in the quoted cost or will start facing serious financial losses quickly. It is an inherent challenge of the NGO provider approach when it is rolled out to a community in an unstable economy. When my neighbor receives a house costing 500,000 (in whatever currency) and a few months later I get the exact same house but it costs 750,000, it is hard not to feel cheated, which impacts the relationship with the lender.

Construction quality problems and dissatisfaction with the house as a product, although widely acknowledged in the field, are usually not reportable issues and remain field anecdotes or buried in evaluation reports. Institutions can continue with their assumption that because they are going good, they must also be doing well. Repayment rates, however, are often measured and reported even though they may be poor. I have seen periodic revivals to attempt to improve repayment rates and entire “revitalization” initiatives to increase dismal portfolio performance, but they have almost never been successful in the long term without changing the underlying model and approach.

When NGOs started using the language of sustainability, recovery sometimes became more rigorous. As standards increased and words began to be backed with strong and effective actions to enforce recovery, I have noticed an interesting trend in the programs which I have managed: Demand for new houses dropped dramatically and quickly. What we had experienced was a false demand, rather than an effective demand.

The standard low cost house might not be exactly what a household wants at a given time, but it might be all that is readily available. As long as it is perceived to be on very soft terms, it is advantageous to take the opportunity. It is as if people are thinking: “It is not really the house I want or how I would apply that much money to my housing situation, but what do I have to lose?” Once recovery becomes more rigorous and households come to understand that they actually might have to pay for the provider’s house or face negative consequences, it becomes less attractive and there is less demand for the same product in the area. The house as a product might start to represent a potential risk to their household livelihood framework or it simply no longer looks like such a great opportunity.

Households make informed choices about whether or not to participate in a program based on the perceived opportunities, risks, advantages and disadvantages to their livelihoods. If a household is going to take a loan for housing and really pay it back, control over the application of the loan to the household's own housing needs and desires (as experienced by themselves) is more likely to generate an effective demand than if the same amount of money were used for a design that satisfies the provider’s needs in terms of the type of house it wishes to provide. An underlying challenge for the institution is whether or not it can accept the way a household may choose to apply a housing loan to their situation or whether it even believes that the household is capable of managing the process and making the housing and related livelihood choices in their own best interest.

HMF Hypothesis 5: Standard low-cost housing units provided on credit by organizations that are perceived as charity in Sub Saharan Africa will experience an inverse relationship between demand for the house and rigor in recovery.

My assessment of what I am calling the NGO provider approach to housing is presented as a broad generalization. It is based on repeated experiences and observation over the years, but there are certainly going to be many instances where the generalization does not fit. On a whole, however, I am so far willing to stand by my overall belief that the general NGO provider approach described, as visually powerful and compelling as it may be, is not a feasible solution for serving the masses. To change my position, I would have to see some strong, objectively verifiable evidence of the NGO provider approach successfully implemented.

My criteria for success of a program using the NGO provider approach would be having reached at least OSS (operational self-sustainability), thousands of active clients (in one service area, rather than a global total), continued demand with constant and consistent service delivery, and an accurate PAR (portfolio at risk) of less than 5%. If you are aware of such a program Sub-Saharan Africa using what I have called the NGO provider approach , please write in and let me know about it under the comments section of this post. I am ready to be proven wrong and would be willing to promote and discuss the program and its methodologies in this blog and in my own work if it can meet the above criteria. In the mean time, I will continue to promote housing microfinance as what I currently believe to be a more viable practical approach to housing for the low income population in Africa. (All of my positions are, however, subject to change pending further information and learning, of course.)

20th ANNIVERSARY SPECIAL

This is something like a special anniversary posting for me. It was 20 years ago today that I touched down in Kinshasa, Zaire (now the Democratic Republic of Congo) on my way to start work as a community development worker in a rural housing program in the Equateur Region.

That is me in late 1989 near Gemena, Zaire with my neighbors, Mozukala Dogia and family. I was young and energetic, but had no idea of how much I didn’t know or understand. I am now less young, and perhaps a bit less energetic, but at least I have a more realistic impression of how much there is still to learn 20 years later.

[1]Hamdi, N. (1995). Housing Without Houses: Participation, Flexibility and Enablement. London: Intermediate Technology Publication, 29-30.


(all photos and graphics by the author)