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.