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.
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.
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