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?