Housing Microfinance and the Housing Environment

Housing Microfinance is a finance intervention designed to assist homeowners to improve their housing conditions. This could be through the construction of a new house, or the completion, extension, improvement or repair of an existing structure. Housing Microfinance responds to the challenge of acquiring a lump sum of money sufficient to undertake a desired housing activity. Although at its core housing microfinance is designed to address a personal housing finance gap, many practitioners seek to integrate housing microfinance with a broad range of non-financial housing interventions. The extent to which housing microfinance should include construction technical assistance (a construction quality intervention) is a common source of debate among practitioners. Another topic of debate is the role of housing microfinance in the wider housing environment. Is housing microfinance a product of the environment, or should it be a tool for changing the environment according to regulatory and planning frameworks?

 

Those familiar with my writing will not be surprised that I believe that the opposing sides of the debate on housing microfinance and overall housing environment represent two different housing paradigms. They also seem to represent the difference between a should and could approach to housing. The housing microfinance market is largely those who are building incrementally, informally, and outside of the parameters of whatever regulatory and planning frameworks exist. Some housing microfinance practitioners are completely comfortable with this, while others cannot help but have some nagging concerns. Practitioners’ perspective on the role of housing microfinance in the wider housing environment not only serves for some lively debate, but also dictates certain elements of the products and services they offer.

Position One: Housing Microfinance Should Help Drive Change in the Housing Environment

“If you offer housing microfinance without conforming to standards, regulations and plans, you are only expanding the housing problem.” I have heard variations on this statement many times from both opponents and practitioners of housing microfinance. The assumption behind it is that a major contributing factor to what has been identified as the housing problem is the failure of people to build within standards, regulations and plans. Some practitioners fear that if housing microfinance goes to scale without ensuring compliance to these, it will have a negative influence on the housing environment and become a driver of unwanted types of housing and human settlements. Housing standards, regulations and spatial planning reflect what human settlements and housing should be. Practitioners holding this position would then design their products with procedures that ensure that structures built or repaired with a housing microfinance loan conform to stated policy and regulations. This may require a variety of pre-disbursement and post-disbursement verifications. It would also limit the market for the product to those realistically capable of compliance at a cost acceptable to them. 

Position Two: Housing Microfinance Must Reflect the Realities of the Housing Environment

“Housing Microfinance must conform to housing realities to meet an effective demand. When that reality changes, products and services will naturally have to adjust.” This opposing position holds that housing microfinance is a product of the housing environment and not a driver of wider change in terms of standards and policy. Some holders of this position go so far as to say that when standards, regulations, plans and administrative procedures are unrealistic, they are the cause of informal settlements and not the solution. This argument holds that attempts to design a housing microfinance based on an ideal which does not exist in practice will result in products and services that do not correspond to any real demand and will therefore not scale up. While acknowledging that higher standards are a noble ideal, practitioners holding this position emphasize the current housing reality. They seek to support tangible improvements that households can make to their living conditions using whatever parallel housing processes exist rather than trying to enforce what is unachievable for the majority and which authorities have consistently failed to enforce in practice. Product design would then focus primarily on the minimal service needed to deliver a product that will meet local demand with limited risk to the lender. If the operating environment changes (e.g. stricter enforcement of standards) then the product will be adjusted to fit the changing reality on the ground.

The Difficult Question:

The root question is: What do we expect housing microfinance to do? The more we expect it to do, the more complicated the delivery of products and services becomes. As we think about our expectations for housing microfinance, another question to keep in mind is on what are we basing our expectations?

When Housing Microfinance is Not Housing Microfinance

Some months ago I wrote two posts on the topic of Housing Microfinance as Microfinance (See: Housing Microfinance is Microfinance Part 1 and Housing Microfinance is Microfinance Part 2). My premise was that “good” housing microfinance should conform closely to generally accepted principles of microfinance. In Sub-Saharan Africa, there is growing interest in housing microfinance, but it is still very much in an early stage of development. Housing microfinance products, both actual and proposed, are beginning to take a wide variety of forms. Some have loan sizes and terms that seem to have more in common with SME (small and medium enterprise) lending than traditional microfinance products found within the same operating environment. In at least one case in East Africa, housing microfinance falls under a lending institution’s SME department. As long sizes increase to amounts similar to SME loans, housing microfinance bears less and less of a resemblance to microfinance.

 

Some of those considering housing microfinance also appear to be working under the assumption that it requires more security than one typically seeks for a microfinance loan. (This may be a corollary drawn from an assumption that housing microfinance will automatically have higher loan amounts and longer terms.)When a housing microfinance product collateralizes the client’s property it essentially becomes a micro-mortgage. Because of high cost, complicated administrative procedures and in many cases the lack of prerequisite surveys and systems for securing property as collateral, a housing finance product that does so becomes out of reach for the majority of low income households in Africa.

One of the roles of microfinance is availing financial services to households that would otherwise be financially excluded. It would then reason that housing microfinance should bring access to housing finance in the same way. With an under-developed mortgage market in Sub-Saharan Africa, there is certainly a role for something like a micro mortgage or housing finance with loan terms similar to SME loans. I have seen a number of such products falling under the broad spectrum of housing microfinance. Such products are unlikely, however, to significantly expand access to affordable housing finance for low income households and begin to move away from some of the basic principles of microfinance. As housing finance continues to develop in Africa, it may become beneficial to differentiate between the product types that form the lower end of the market. The disparity in product features, methodologies, and mechanisms in what currently falls under the umbrella of housing microfinance leads not only to vastly different products, but also to serving significantly different target markets.

Mitigating Loan Diversion in Housing Microfinance

In Housing Microfinance is More Than Microfinance, I inferred that housing microfinance without a housing outcome is not housing microfinance at all. How do you ensure that housing microfinance results in a tangible improvement to housing? This is a practical question that is at the core of housing microfinance product design and implementation.

The means by which a financial service provider approaches the conversion of housing microfinance into housing purposes is often reflective of its overall  housing paradigm and the extent to which it feels comfortable controlling the customer’s housing process. There are a wide variety of methods to mitigate the risk of a housing microfinance product being diverted to non-housing purposes. Each method has its own pros, cons, risks and implications for reaching scale when the product is implemented. I will briefly look at seven methods of mitigating diversion and promoting a successful conversion of housing microfinance into home improvement. There are certainly more possibilities, and often combinations of methodologies are used, but the following are a few common examples. I will generally refer to housing microfinance loans, but savings products could also be included.

1. Honour System: Some products are designed without any tangible method for encouraging the finance to housing conversion. A customer presents an application for housing finance, perhaps with a budget or other requirements, and states that the loan will be used for housing. After disbursement, it is simply assumed that the loan was used for its intended purpose. The advantage of this is that it is extremely cost effective and has a low level of management complexity beyond the institution's normal business. Naturally, it can be assumed that some of the "housing" loans are not actually being used for housing. A counter argument is that given the high rate of diversion of business loans into housing activities, it could also be assumed that a large number of loans are being used for housing. If the product can achieve high volume, it might actually serve more customers with their housing needs than a product designed to better ensure the housing finance to housing conversion which has challenges scaling up.

2. Verification of Loan Use: In order to move away from assumptions about how a housing microfinance product is being used, an institution can verify the loan use. This would usually require at least a post-disbursement site visit to see that the proposed loan use activity was carried out. A pre-disbursement visit would improve reliability of the findings, to ensure that the customer does not show work that was completed long before the loan was even disbursed. Loan use verification simply puts a number to the finance to housing conversion. How many loans or what percentage of loans actually resulted in home improvements? Because there is no penalty or incentive for loan use built in, there is relatively low risk. The cost would be the cost of the verification visit, and the time taken to do it and report.

3. Cost Structure: Verification of loan use can be taken a step further by building in incentives or disincentives into the product’s cost structure based on loan use. The proposed housing project is inspected before the loan is disbursed and then again after disbursement. An incentive or penalty is then applied based on loan use. In my work in Uganda and Tanzania, we have disbursed loans at higher than market rate interest. If the loan is verified as having been used for housing purposes, it is then discounted to market rate or slightly below market rate. This seems to have a positive effect in curbing diversion. There are some risks and costs associated with this method. There is a possibility of collusion between the customer and staff to declare a loan verified as having been used for its intended purpose (when it was actually diverted) in order to receive a lower interest rate. Related costs include the cost of the visits as well as the administrative costs of changing repayment schedules, reporting and internal controls.

4. Multiple Disbursements: Multiple disbursements are another popular means of promoting the finance to housing conversion. This might also be thought of as “loan use verification in stages.” Rather than disbursing the entire loan at once, customers are given the loan in tranches and work is verified as a pre-requisite for the next disbursement. This limits the risk of diversion to the first disbursement only, rather than the entire loan amount. There is still a risk of collusion between customer and staff as with the cost structure methodology. The cost of verification is higher that the verification of cost structure methods, because of multiple visits to the site. There are more administrative tasks and financial transactions involved with the multiple disbursements

5. Site Supervision: Site supervision as a means of mitigating loan use diversion assumes that a key problem is poor use of materials, rather than mal-intent. It is sometimes thought of as a means of ensuring that housing finance results in a house, but it tends to be more of a quality control response than mitigation of outright diversion. On its own, there is little risk if it is not associated with a penalty or incentive for loan use. The only risk may be that of Turner's Third Law of Housing, should the customer be unhappy with the supervision and result. Associated costs include multiple visits and technical staff sufficient to support the product at scale. Site supervision can easily be linked to other methodologies that are more effective at mitigating actual diversion of funds, such as multiple disbursements or in-kind service.

6. Materials / Services In-Kind: The challenge of the finance-housing conversion is that cash is fungible and a loan designated for housing can just as easily be applied to something else. By providing materials or building services in-kind, it greatly decreases the likelihood that the loan will be diverted to non-housing purposes. This method could be an arrangement with a supplier through which the customer collects the materials needed, or it could be procurement by the lender. Procurement adds numerous risks of fraud. Kickbacks from suppliers are common and prices can be manipulated. This method has increased management complexity, especially when the requisite internal controls needs are taken into consideration. Turner’s Third Law may also be experienced if customers perceive that they have been provided with materials that are either more expensive or of a quality different than what they would have chosen on their own.

7. Full Service Delivery: One of the most certain ways to ensure a finance-housing conversion in housing microfinance is to control the housing process and deliver the service in full. The financial service provider essentially becomes a general contractor or linked to an outsourced general contractor-type service. This an effective but expensive and management intensive method of preventing loan diversion and ensuring the housing outcome. It has multiple risks throughout the process that must be mitigated with internal controls. Due to the intensive nature of the services provided, this methodology is the most challenging to operate at scale.

Each method has its pros and cons. Some appear to mitigate diversion better, but with  added risks, costs and management complexity. As cost, risk and complexity increase, the product will be more difficult to deliver at scale, especially for financial providers without construction experience. Choices are made along the way of developing a product. Is it better to offer services at high volume and acknowledge that some housing loans are diverted to non-housing purposes, or to tightly control the process and significantly decrease diversion even if it is at the cost of volume and the number of customers served?

No method completely eliminates diversion if the product is delivered at scale. I have personally experienced cases of “ghost houses” even where materials were provided in-kind in a full service delivery package. How the finance to housing conversion is approached, however, continues to be perhaps the critical consideration in housing microfinance design. Which trade-offs will be made and why? The institution's approach microfinance linked with its housing paradigm are likely to be the guiding factors in making the decision.

Housing Microfinance Is More Than Microfinance

In Housing Microfinance is Microfinance Part 1 and Part 2, I proposed that the most effective housing microfinance in terms of breadth and depth will conform closely to the key principles of microfinance. Housing microfinance may, however, be subject to influences that could either cause it to go “up market” or make it difficult to recover the costs of delivery. A focus on the double bottom line of profitability and social performance will keep housing microfinance true to the key principles of microfinance and result in the most effective delivery of affordable housing finance to low income households. Housing microfinance is indeed microfinance, but at the same time it is also more than microfinance. It is a specialty product that seeks specific housing outcomes.

Housing microfinance targets improved housing in one form or another. It may be to build or improve the customer’s home or it could be applied to rental units that increase the customers’ income while providing rental accommodation for others. A product or service may be marketed as housing microfinance and bear the words home improvement, but without a housing result it is not housing microfinance. A housing microfinance product that does not have a mechanism for ensuring that the financial service is applied to housing is in practice little more than an ordinary consumption loan. Such housing microfinance products do exist and in some places it is possible to obtain a “home improvement loan” to finance a motorcycle, business, school fees or other.

The microfinance industry has long acknowledged that it is not uncommon for business loans to be diverted to home improvement purposes. Clients who use microfinance services tend to be quite savvy. When a housing microfinance product has terms and conditions that are even marginally more favourable than other products, there is an equal likelihood of a housing microfinance service being diverted to non-housing purposes. This may or may not be problem for the financial institution, depending on their commitment to the housing outcome, but it makes the different between a personal loan or savings product and housing microfinance.

Balancing the housing outcome of a loan against the double bottom line that is implicit in microfinance principles is not an easy task. Too much cost on the housing component of the product could threaten either the ability to deliver a commercially viable financial product or push the product away from the reach of the poor. At the same time, diversion to non-housing purposes is very likely without sufficient emphasis on ensuring a housing outcome.

There are many ways to mitigate diversion of housing microfinance services to non-housing purposes. To have a housing microfinance product that can reach significant scale and continue to serve low income households, the methods for mitigating diversion should support the double bottom line while ensuring a housing outcome. In my next post I will look various methodologies in the battle against loan diversion. How do you turn a housing microfinance service into a housing outcome?

Housing Microfinance is Microfinance: Part 2

In Housing Microfinance: A Guide to Practice, Franck Daphnis gives an excellent general description of what we could expect in a housing microfinance product:

From a microfinance product perspective, housing microfinance encompasses financial services that allow poor and low-income clients to finance their habitat needs with methodologies adapted from the microfinance revolution. These methodologies rest most notably on the following principles: (1) Loans are for relatively small amounts and are based on the clients’ capacity to repay; (2) Repayment periods are relatively short (especially compared to mortgage lending) and are on a par with mid- to high-end microfinance individual loans; (3) Loan pricing is expected to cover the real, long-run costs – operational and financial – of providing the service; (4) Loans are not heavily collateralized, if at all, and collateral substitutes are often used; (5) Loans tend to finance habitat needs incrementally, a function of the purchasing power of loans with short repayment periods and relatively low monthly payments; and (6) If the provider is an MFI, credit services for housing can be linked to prior participation in savings or more traditional microenterprise loan services. In summary, from a product-based perspective, housing microfinance is the “micro financing” of housing needs: the application of a microfinance-based approach to housing finance.[1]

Daphnis’ explanation clearly makes the case for housing microfinance as microfinance, inclusive of the low income target group and the key features and principles. He  demonstrates how an incremental approach to housing finance is a natural function of the product features and the target group’s capacity to pay. (Not to mention that it fits with how low income households typically build their homes.) Daphnis also highlights pricing for sustainability (covering the real, long-run costs), which is one of the Key Principles of Microfinance as indentified by CGAP. One would expect a housing microfinance service to bear the hallmarks of microfinance and work within its key principles. Perhaps more than other microfinance products, however, housing microfinance may be subject to influences that potentially challenge its ability to stand as a strong microfinance product and practice.

In Housing Microfinance is Microfinance: Part 1, I stated that the differentiating factors in how much microfinance is in a given housing microfinance product derive from how the “housing” component is approached and its effect on the product features. Where the leadership of institution falls on the housing paradigm continuum (see: Housing Paradigms and Housing Microfinance) influences how it will design its housing microfinance services and quite possibly the extent to which they will align with the general principles of microfinance. Those who align with the provider paradigm of housing are likely to emphasize the house as the product, which can easily influence the design and delivery of the financial service.

Several tendencies will increase the likelihood that an institution’s housing microfinance services will closely align with the principles of microfinance: 1) An emphasis on demand-driven products that are affordable to poor and low income households; 2) A drive to achieve a double bottom line of profitability linked with social performance; 3) Defining the provision housing finance itself as a legitimate housing activity; 4) Understanding housing to be a process (housing as a verb); 5) An acceptance of local, often informal, channels for housing provision; and 6) A belief that low income households can and should be the decision makers in and drivers of their housing process.

A tendency to view housing as a noun could decrease the likelihood that an institution’s housing microfinance service will closely align with the microfinance principles and practices. Housing is expensive. When the emphasis shifts from the finance as a product to the house as the product, the potential for greatly increased cost of product delivery is very real. This can result in a difficult balancing act between affordability (for low income households), the cost of the service / the loan amount and sustainability. How well an institution balances these will become evident when crunching the numbers associated with the double bottom line and taking a close look at who is benefitting from the service: How are the ratios (OSS, FSS, Return on Investment, etc)? How is the social performance rating? How is the portfolio performance?

Developing financial products that are both affordable and sustainable is a challenge in its own right. Added costs related to meeting the institution’s housing standards magnify this challenge for housing microfinance. This frequently (although not always) results in at least one of the three following scenarios:

1. Moving the Target: Who doesn’t want to show a nice, beautiful house on their housing microfinance brochures or their reports to the board of directors, shareholders or providers of capital? What is one way to maintain profitability while being able to ensure that houses are of high standards? Serve clients of higher incomes. Housing microfinance can go upmarket very quickly and even start to bear a suspicious resemblance to mortgage financing. When assessing the double bottom line, social performance may be weak if the house is emphasized over affordability. If the housing loans are expensive and the product is still commercially viable, this could move the housing microfinance product away from one of the objectives of microfinance: To serve poor and low income households with financial services.

2. Subsidizing the Target: How do you serve poor and low income households with a high quality housing product that may be beyond their capacity to repay? Subsidize it! Most institutions use the language of sustainability, but the truth about an institution’s sustainability will be in the ratios, not the promotional materials. It is possible to offer a housing microfinance product and talk about sustainability in general terms without ever having a viable plan to at least break even. A reliance on subsidy to deliver housing services moves away from operationalal and  financial sustainability - a key principle of microfinance.

3. Extending the Loan Period: How do you provide a high quality house as a product to low income households without subsidy? Adjust the product features! One way of making housing microfinance affordable would be to extend the loan period to make it more like a mortgage. This seems like a reasonable idea on the surface, but when applied to low income households it eventually degenerates into portfolio health problems. Microfinance loans tend to be relatively short and there are good reasons for this.

The added cost burden (to either the client or the insitution) of relatively expensive housing support services or high loan amounts can easily either force product features away from microfinance norms or move the product away from accepted key principles of microfinance.  All of this is not to say that a housing microfinance product that includes housing support services will necessarily be something other than microfinance. Where there is an effective demand for such services from poor and low income households, it makes sense to offer them. Housing microfinance does, however, open itself up to housing ideologies that may create a supply-side push of non-financial services tied to a housing microfinance product. That could make achieving the double bottom line and conforming closely to the principles of microfinance significantly more challenging. In the absence of significant captial to make the push, such products will face difficulty in achieving scale and having significant impact on the financial landscape in Sub-Saharan Africa, where housing microfinance is just starting to develop and informal systems of housing and housing finance are the norm.

Housing microfinance is microfinance. Housing microfinance products that go upmarket and are priced above the affordability level of the poor will almost always fail to conform to the principles of microfinance, which include both serving low income households and sustainability. Broad access to affordable housing finance in Africa will likely only be achieved through a prevalence of housing microfinance products that closely conform to the principles of microfinance (running parallel with a stronger mortgage market). The extent that this can be done with a significant amount of non-financial housing services tied to the product will depend on the true effective demand for those services from the poor more than the housing ideologies of the service providers. How much microfinance is in a given housing microfinance product? The numbers will eventually tell the story.

[1] Daphnis, F. &; Ferugson, B. (2004). Housing Microfinance: A guide to Practice. Bloomfield, CT: Kumarian Press, p. 4.

Housing Microfinance is Microfinance: Part 1

That housing microfinance is microfinance is clear from its very name. The practice of microfinance is a diverse set of products, services and methodologies, so housing microfinance easily slips under its umbrella. Some housing microfinance products, however, more closely resemble what is conventionally understood as microfinance than others. How much microfinance is in any given housing microfinance product? The differentiating factors usually derive from how the “housing” component is approached and the effect that this has on the product features.

To understand housing microfinance as microfinance, it begs the question: “What is Microfinance?” CGAP (Consultative Group to Assist the Poor) answers the question like this:

Microfinance is often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as “microfinance institutions” (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.

More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers. [1]

According to the CGAP definition, microfinance is targeted to poor and low income clients using methodologies that have been developed to effectively deliver financial services to them. CGAP also looks at the broader picture of microfinance, including permanent access to a variety of quality financial services that have a positive effect on household livelihoods.If housing microfinance is microfinance by this definition, it will serve poor and low income households, use microfinance methodologies, be part of a range of high quality financial services, have a positive effect on livelihoods and may expand to a variety of other financial services beyond credit.

In Sub-Saharan Africa, housing microfinance is still in an infant state. Will it grow to be a viable microfinance practice that is valued among a range of financial services and products? Or will it be the subject of endless pilots and case studies but never really take on a life of its own and integrate into the financial landscape? My hypothesis is that until housing microfinance is developed as a commercially viable and profitable product that can effectively serve low income households, it will remain the subject of much interest and discussion, but significantly less actual delivery of housing microfinance products. It is possible for housing microfinance to bear the name microfinance without resulting in broad and permanent access to affordable housing finance by poor and low income households. Over the next few posts, I will be looking at housing microfinance as microfinance, both in terms of its product features and the principles of microfinance.

[1] CGAP. downloaded from http://www.microfinancegateway.org/p/site/m/template.rc/1.26.9183/#1 on 10th February 2010.

Housing Microfinance and the 6 S's: Stuff

We can learn something about a settlement in Africa just by what housing-related items or materials are being sold in or near it. In a place where there is very little cash investment in housing, (which still characterizes much of rural Africa), it may be hard to find any business supplying construction materials. In new settlements (or those showing rapid transformation from traditional construction methods), it is common to find a proliferation of businesses selling blocks, cement and roofing material. Settlements that are more established often have less cement, roofing sheets and blocks on the market, but more electrical supply, plumbing and paints. In settlements that are even more established, businesses sell a lot of Stuff.

In How Buildings Learn: What happens after they’re built, Stewart Brand implicitly considered Stuff as part of the housing process. Stuff is his term for the usually movable things such as furniture or appliances, that go into a house. N. J. Habraken also used Stuff as one of the basic elements in determining supportive housing design in Variations: The Systemic Design of Supports. Without a doubt, beds, sofas, tables and chairs, refrigerators, stoves, toasters, televisions, stereos and other household items are a critical part of one’s housing. Does stuff, however, have a place in housing microfinance?

Stuff is often sold with consumer credit by its vendors. I once visited a housing program in South Africa where clients prioritized payment for their sofas over their house payments. At first I found it strange that stuff had priority over shelter. It was, however, a  logical response given that the local housing environment made it very difficult to foreclose on a housing loan, whereas providers of consumer credit would quickly to arrive and collect their sofas, chairs or other items if their customer fell into arrears. People valued their stuff and there is no reason why housing microfinance could not extend to “stuff” as well. No home is complete without it!

Even if stuff is not part of an institution’s housing microfinance product offering, it still often has a critical role in housing microfinance. One of the differences between housing microfinance and mortgage finance is that housing microfinance usually does not secure land or the house as collateral. Stuff (chattel) often serves as at least partial security on housing microfinance loans. Sofas, televisions, tables and chairs and even beds can be pledged as collateral. They are usually much easier for the lender to seize and sell in case of default in loan payments than an attempted foreclosure and sale of property, particularly in places where even mortgage law is not fully developed in a practical sense.

An interesting thing about stuff is that it is a rough proxy for the socio-economic status of its owner. In the MAKAZI BORA program (the housing microfinance program with which I currently work) we take photographs of stuff that is pledged as collateral. A look through a client’s collateral photos can give a quick indication as to whether the per capita household income is closer to $1.00 per day or $5.00 per day just by the types of items used. Not all radios, sofas and cupboards are alike, and by the second month of implementation we had determined that a section of our operating area had a lot more people of higher income simply by the collateral they were pledging compared to that of other areas. That particular section was the only one in the area where clients consistently had what were listed as “sub-woofers” (music/entertainment systems) on their collateral pledge forms, whereas much older and simpler radios were the rule in other sections of the operating area. One rule of the credit committee is not to make comments or judgments about people’s stuff when reviewing applications. Regardless of its condition, age or value, it is theirs and it represents part of the assets of the people we serve.

Housing microfinance is a housing intervention. Starting with site and ending with stuff, each of Stewart Brand’s Six S’s of a building [1] is a potential loan use for housing microfinance products or otherwise influences the practice of housing microfinance. Housing microfinance products that fit in with the housing realities of their intended users will be the most successful, both commercially and in terms of having a significant effect on the people’s housing process and the overall housing environment. This marks the end of my series on the "6 S's." Additional topics will be forthcoming shortly.

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

Housing Microfinance and the 6 S's: Services and Space Plan

In How Buildings Learn: What happens after they're built, Stewart Brand states that “The flow of money through a building acts to organize the building.” [1]  In Sub-Saharan Africa, low income households face challenges with this flow of money due to lack of access to the type of mortgage finance that is the norm for middle and upper class households in other parts of the world. Money for home construction tends to be accessed in relatively small quantities compared to the task at hand, often over a period that can be measured in years. The result is a home that is built incrementally. Incremental construction becomes an exercise in prioritizing the flow of money across what Brand calls the Six S’s: Site, Structure, Skin, Services, Space Plan and Stuff. Services and Space Plan naturally fall after site and structure as priorities, but often surprisingly fall after skin as well.

Services typically include water, electricity or gas connections to a building. Because of climate considerations and the relative cost of various building materials, the most common construction material in Africa is some kind of brick or block. [2] This means that the services must be added through and on top of a block wall. Cladding over the block is extremely uncommon in low income households, with a plaster and paint being the most common interior skin, if there is one at all. Conduits are frequently placed into channels carved into the wall and covered with plaster with the exception of the socket outlets. There is not, however, a significant taboo against having visible conduits in low income households. It is not uncommon to add them directly over the skin instead of the skin being added after the services to hide them.

Housing Microfinance loans for services can link to water and sanitation efforts in upgrading informal settlements. Clients may use a housing microfinance loan to connect to potable water, sewage or a septic tank. The housing microfinance program in which I currently work is in an urban setting and electricity connections are a popular loan use. Loans for electricity connections tend to be taken by households that have reached some level of satisfaction with the structure and skin of their home. These loans are sometimes associated with home-based businesses that may use a refrigerator, freezer, electric sewing machine or other gadget. It is interesting that the “stuff” that uses the electricity is often acquired before the service is connected to the house, having been used in rented accommodation, kept in another person’s house, or used with car batteries that are periodically sent out for charging.

The Space Plan includes non-load bearing walls, ceilings and doors and windows. Because it is very common for low income households in Africa to move into a house before it has all (or sometimes even any) of its doors and windows, these become a common use for housing microfinance loans. In our MAKAZI BORA home improvement loan program in Dar es Salaam, Tanzania, doors and windows may be the most common house component sought, sometimes on their own but often as part of applications for roofing, or other improvements. Some loans have been used for improving existing windows with screens (to keep out mosquitoes) or bars (to keep out other unwanted visitors). Clients with very low incomes have purchased and installed second-hand windows and doors to shut their houses, while clients with slightly higher incomes have used the opportunity of a housing microfinance loan to purchase doors and windows of higher quality and durability.

Ceilings have also been a popular loan use. Like electricity connections, these tend to be for clients who have basically satisfied the rest of their housing priorities as they have worked through their incremental building process. Loans for ceilings are sometimes for relatively wealthier clients, but sometimes simply for clients who are further along in their process as they continue to build and organize their houses according to their own image of what their home should be.

Housing microfinance can be made flexible enough to assist people at all stages of their housing process as they acquire, add, or modify site, structure, skin, services and space. Access to housing finance increases the velocity at which a low income household is able to develop and organize its home. The more flexible a housing microfinance product is, the more utilitarian value it will have for dwellers in their housing process and the greater the potential demand for the product. Although this is a hypothesis to be explored more in-depth at another time, the very awareness of the ability to access affordable housing finance may assist a household in organizing and planning its journey through the 6 S’s.

[1] Brand, S. (1995). How Buildings Learn: What happens after they’re built. New York: Penguin. p. 85.

[2] This is not inclusive of traditional construction methods in rural areas that may use mud walls or a waddle and daub construction, which may still be statistically the most common construction forms in Sub-Saharan Africa.

Housing Microfinance and the 6 S's: Skin

When describing a sort of hierarchy of the 6 S’s, Stewart Brand wrote that “Site dominates the Structure, which dominates the Skin, which dominates the Services, which dominate the Space plan, which dominates the Stuff.” [1] Skin is the layer of the building that meets the eye and covers the structure. Brand calls skin mutable. In How Buildings Learn, he demonstrates its mutability with examples of how buildings’ facades change over time. In Sub-Saharan Africa, it is common for houses to be built and occupied with very little in the way of skin, which is then progressively added. This makes the addition or modification of skin a very popular loan use for housing microfinance in Africa.

Traditional houses in Africa usually have skin. When the structure is poles, builders weave bamboo, reeds or sticks through them and apply a mud or clay skin. Plaster of one type or another is the most common skin in Africa, both on traditional and "modern" houses. It is indeed dominated by the structure, because the plaster (skin) must be of compatible material to bind to the structure. In some of my previous work in the Democratic Republic of Congo and Ghana we built low cost houses using mud bricks as structure in communities where this seemed to be the most feasible option. The structure was then plastered with a mixture of cement and the same type of soil that made the bricks. Taking initiative in their self-help, clients would sometimes increase the cement component of the plaster ratio in the belief that it would make the skin stronger. The actual result was a plaster that could no longer bind to the structure and would soon start falling off. As the skin fell, so did repayments. Despite the fact that the clients’ actions directly caused the problem, the house design, selection of materials and technology and the overall process were ours and Turner's Third Law still seemed to apply.

In other communities where the soil was too sandy for mud bricks or where burnt bricks were an option, we built burnt brick or cement block structures. In an effort to reduce construction costs and keep clients’ income directed towards their loan repayments, we had a policy that houses could not be plastered until their loans were paid off. Complaints were seemingly endless when we (the providers) considered skin to be a luxury that a resilient structure made unnecessary. This was a constant source of conflict and we were ignoring a demand for skin as a loan product and as a key part of people’s housing wants and needs. Necessity and importance are not always the same thing when housing is viewed as a personal process as opposed to a shelter or commodity.

Skin is often a secondary or tertiary priority for households in Sub-Saharan Africa, after site and structure. It is extremely common for dwellers to move into a building before there is any skin except the roof covering. This is incremental building in action: An informal finance strategy that prioritizes available funds against housing as a livelihood component. Once the house is occupied, however, housing microfinance frequently assists dwellers to continue their housing process by adding interior and exterior skin. Plaster, paint, tiles, skirting, rough exterior finishing and embellishment on verandas are very common housing microfinance loan uses with demand even from very low income households. Skin brings a sense of pride to the dweller and adds a personal touch to their home that gives housing a deeper meaning than basic shelter. There is tremendous value in this as well as demand. Skin as a loan use is undoubtedly one key to housing microfinance reaching the scale needed to be sustainable and profitable.

My approach to skin has changed drastically over the years from the days when I was trying to enforce “no plastering” policies. Should we allow a household to use a housing microfinance loan to paint their house pink when there is some other item of apparent necessity still incomplete? Why not? They are probably more aware than we as to what is complete and incomplete on their own house. They probably have a reason why they want to paint it and we, as outsiders to their home, have little idea what painting their house pink means to them. Effective demand and a supportive, personalized housing process ultimately go hand in hand.

[1] Brand, S. (1994). How Buildings Learn: What happens after they’re built. New York: Penguin, p. 17.

Housing Microfinance and the 6 S's: Structure

“Structure is the building,” states Stewart Brand in How Buildings Learn: What happens after they’re built. [1] The structure is composed of the foundation and load-bearing walls. It is situated on the site and sets the parameters for skin, space and services. When low cost house construction is undertaken by the dwellers themselves, how structure is built depends upon what materials and skills are both readily available and affordable as well as cultural factors. Even a cursory survey of a settlement can determine what is readily available, affordable and acceptable to low incomes households simply by observing the materials in most frequent use in the structures and what is being sold where people with low incomes are building. How structure is most commonly built in a given locality and the lending institution’s position on it affects housing microfinance design.

My posting in September titled a product-environment mismatch  was essentially about structure. The prevailing structures in northern Malawi where a housing microfinance product was implemented were mud walls or waddle and daub (mud and pole) with no foundation, but the product required a burnt brick structure with a 60 cm foundation. This made for a slow and expensive start-up, because the effective demand was low based on the low number of households with eligible structures (which was much lower than the number of households in need of improved housing or interested in a home improvement loan). In such cases a decision must be made whether to design the product to work with houses having the prevailing type of structure, to require potential clients to build a different kind of structure prior to receiving a loan (as was done in the example) or to allow the loan to be used to build a structure to the desired standards. This is a decision that combines an institution’s housing ideology and its approach to lending.

The first option of working with the prevailing structures is perhaps the most market-oriented. In the northern Malawi example discussed in a product-environment mismatch, roofing was locally considered to be the biggest housing challenge and people wanted better roofs. Working with the prevailing structures might have meant allowing clients to use a home improvement loan to put a durable roof on a house with walls made of mud or mud and poles. From one housing perspective, putting better roofs on existing houses could be viewed as a significant improvement in living conditions. From another perspective, the houses may still be considered sub-standard, semi-permanent and undesirable to the lending institution. From the market perspective, effective demand for this type of product would be people who could afford a loan for a roof, wanted a better roof and desired to take a loan for roofing. Roofing sheets were locally available, so this may have captured the largest effective demand at lowest cost to both the client and the institution.

The second option of requiring potential clients to build a new structure to higher standards may also have some advantages for the lender. From a social perspective, the lender may have a role in improving the built environment by encouraging more durable building methods. When a household builds a new structure, it also shows a high level of commitment to putting resources into their housing. This can be an indicator of reduced risk for the lender. In the northern Malawi example, however, the demand (for roofing loans) moves to households who can afford a loan for a roof, want a better roof, desire to take a loan for a roof and are willing to rebuild their home using a different technology in order to be eligible. There may be a multitude of reasons that people are using the current methods of building structures. Changing this could be challenging and result in low effective demand with high costs and challenges to the lender in reaching sustainability.

The third option of supporting the structure with the loan could be in the form of cash disbursements for the purpose of building a foundation and walls or the institution actually overseeing the construction. This could result in quality structures, although in practice it is easier to assess the quality of an existing structure than to ensure the quality of a proposed one. The challenge of cash disbursements for structure is that it is difficult to gauge the household’s commitment to their housing process when looking at an empty space on a plot of land. There is a higher risk of loan diversion than when working with a household that has already put their own resources into a structure. When the institution oversees the construction, delivery becomes more expensive and complicated for the lender. It is a possible option, but it is perhaps the most challenging of the three from a lending perspective.

In my current work in Dar es Salaam, Tanzania, we have decided not to support structure with our loan and only work with pre-existing structures. Because of the sandy soil in the city, the prevailing material used for building structures is cement blocks. The advantage to this is that the material used is resistant to rain and can be collected on site and structures stand unroofed for long periods of time. When matched with a difficulty in financing roofing, this results in a market for roofing loans on existing structures. The quality of the structure can be viewed prior to approving a loan for its improvement. A household that has brought a structure to roofing level has both invested significant resources that show some level of commitment and it has learned a lot about building their own home as they have sourced materials and worked with builders. At least that is both our espoused theory and theory in use so far.

As Brand said, structure is the building. Lending institutions make decisions, at least implicitly, on their approach to structure through their housing microfinance product design. An understanding of the types of structures built locally, why they are built that way and what are the possible product design alternatives and their implications should be a prominent feature in housing microfinance product development.

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