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.