A Product-Environment Mismatch?

My first venture into housing microfinance was in rural, northern Malawi in 2001-2005. Up until that time, years of building standard house designs and defining the housing process had produced a lot of houses, but repayment rates were very poor, (even with a high level of subsidization). Our first attempt to break out of the “provider” paradigm of housing was to use a building in stages model. We would build a small unit first, which could be extended with subsequent loans after each stage was paid off. The theory behind it was that it would keep costs low while giving the client incentive to pay so as to extend the house. This is what I labeled as “provider controlled incremental building” in a previous post. It had some level of success, but did not achieve as much as hoped. Demand was limited.

Houses like the one above were dramatic improvements over traditional houses in terms of construction standards and popular with donors, but loan performance was extremely poor even with very soft terms. To attempt to improve loan performance, a 3-stage "building in stages" design was introduced.

A "BUILDNG IN STAGES" STAGE 3 HOUSE

After conducting research on housing across all three regions of the country, we decided to pilot a home improvement loan product. We selected an area that had relatively high density compared other rural areas and one in which there was both evidence of economic activity as well as housing need. The vast majority of houses in the area had compacted earth floors, grass thatched roofs and mud walls. The population expressed a positive attitude towards improving homes when interviewed, although hidden underneath there were some unspoken cultural beliefs that dissuaded people from improving their homes to a level that might be better than their neighbors.

TYPICAL HOUSES IN NORTHERN MALAWI, CONSTRUCTED OF MUD OR MUD AND POLES

Our home improvement loan product was very much influenced by our organization’s operating policies and institutional culture at the time. Instead of interest, the loans were adjusted for inflation using a commodity-based index and the loans were disbursed in-kind in the form of materials. The most significant breaks from our past were that 1) the loan would not result in a “completed” unit, 2) the loan went to a structure as designed by the client, 3) we did not do or supervise the construction work, 4) the loan amounts were smaller with a shorter loan period. The initial program essentially was rolled out as several different home improvement loan products with slightly different terms: a roofing loan, floor loan, latrine loan and a loan for doors and window. There was also an option to buy plastic sheeting as a sort of lay-away product for those who could not afford a home improvement loan. (Because of scarcity of grass for thatching, most roofs were poorly thatched and used plastic sheets underneath to waterproof the house.) The loans were disbursed and payments collected seasonally, immediately after the harvest period (dry season). This fit the income patterns and with the traditional period for working on housing.

With a few adjustments on pricing and modalities of disbursement, the home improvement loan might have been an effective product. The challenge we faced, however, was in the criteria for loan approval. There had been many debates during the product design process, and even while reviewing the product during an annual evaluation and revision process each of the first few years. One of the key debates was how to ensure quality. If we did not control the house design and construction process (other than disbursing the loan as materials), how would we ensure that the loan resulted in a quality house? Our answer was a rigorous pre-loan assessment of the structure and criteria that required the structure to be built of burnt brick, have a foundation of a certain depth and have no visible weaknesses or faults in the wall. The criteria were widely communicated throughout the target area.

A PRE-LOAN ASSESSMENT OF THE STRUCTURE

In the first season of implementation, there were not many loans disbursed. Those few that were disbursed were for the relatively wealthier. (They were not wealthy in an absolute sense by any means, but they were clearly the better off in the local context.) The problem was simple. We required that houses be built to a certain standard to receive a loan, but almost no houses complied with the standard we required. They were built with mud walls that did not have a foundation. It was very poor link between our research and the product features. Sufficient income and housing need did not equate to effective demand for our home improvement loan because our own criteria disqualified over 90% of the population! This was a product-environment mismatch that would have led to extremely poor financial performance (had we been measuring it).

Over time, people began to build in order to meet the criteria, but it was a long process. In one year they would mould and burn their bricks. The following year they would build a structure and then roof it with grass thatch. In the third year they might apply for a loan. In the end, the program may have had a positive impact on housing development in the area. It broke some cultural barriers that had been restraining people from improving their houses even though they had sufficient income to do so. The availability of housing finance seemed to have a positive effect, but in its fourth year I left to work in another country before impact could be studied. I am unaware of how it has progressed since that time.

A CLIENT, STAFF AND NEIGHBOURS IN FRONT OF A HOUSE ROOFED WITH A

HOME IMPROVEMENT LOAN

Certainly the product could be improved and made more effective, but I am not sure whether it could reach sufficient volume to make it sustainable. We were fortunate that sustainability was not an objective at the time, and we were able to subsidize the costs of a long start-up period. Microfinance institutions entering into rural housing microfinance might not have the luxury of a very slow start.

I am not yet decided whether the best approach for housing microfinance in similar rural African settings would be to loosen standards and allow loans for roofs on mud structures or to proceed in the manner in which we did in Malawi and try to increase the standard of construction by setting minimum quality standards as criteria for loan approval. I suspect that even offering loans for roofs and other improvements on mud wall structures might eventually lead to people building to with improved standards over time, but I am currently working in an urban environment and have not ventured back into rural housing microfinance yet to find out if that would hold true.

If anyone has additional experience or ideas on rural housing microfinance, I would enjoy hearing about it under comments.

All photos used taken by author