What is this thing called Housing Microfinance?

A few months ago I gave a presentation on housing microfinance to a delegation from various  microfinance institutions that was organized by Stromme Microfinance East Africa. I borrowed elements from Franck Daphnis’ work and added a few of my own interpretations. The following day, we attended the Housing Microfinance Working Group Tanzania’s workshop and Jamie Ritchie from Rooftops Canada gave a presentation titled An Introduction to Housing Microfinance. He had a slightly different definition and interpretation of housing microfinance. How we define, interpret and envision housing microfinance plays a key role in how we implement it in practice.

Housing Microfinance applies the principles of microfinance to housing, addressing a bottleneck in the housing value chain for many low income households. In Housing Microfinance: A Guide to Practice (Daphnis and Ferguson, 2004), Franck Daphnis described Housing Microfinance “...as a discrete practice that intersects housing finance and microfinance” (p.3). I have seen this represented in a graphic as part of several Housing Microfinance Presentations by Franck Daphnis.

Whereas Daphnis places an emphasis on housing microfinance’s position in the field of housing finance,  Jamie Ritchie's Presentation at the HMFWGTZ Workshop focused on housing microfinance as a combination of microfinance and prudent, pro-poor real estate development. Jamie places a strong emphasis on housing support services and community development in his definition and resulting model of housing microfinance.

The graphic I have used for trainings in the MAKAZI BORA program simply states that housing microfinance is the intersection of housing and microfinance. (It almost seems too simplistic!) My use of housing refers to the "housing as a verb" concept (see John F. C. Turner's Freedom to Build) and the housing process in practical use by low income households.

The differences between my definition and those of Franck Daphnis and Jamie Ritchie are primarily ones of emphasis. On the housing finance side, I would tend to emphasize how housing microfinance fits into the strategies that low income households use to self-finance their housing activities more than any similarities to traditional housing finance in the form of mortgage lending. On the housing side, I approach housing from the support paradigm and emphasize how housing microfinance integrates with informal and incremental building practices that are common to low income households, regardless of whether or not they conform to what may be considered prudent real estate development at the time.

These three slightly different explanations of housing microfinance are not mutually exclusive and I am confident that a simple definition such as the application of microfinance principles to housing would be broadly accepted by most of the housing microfinance community with whatever additions one might add on to it. How we describe this thing called housing microfinance is  a reflection of our backgrounds and assumptions.  Put all of the descriptions together and we start to get a picture of the current practice of housing microfinance. Each definition at its core, however, may imply a slightly different model of housing microfinance in practice. I will be discussing this more in the coming weeks and months.

The Debate Continues

My last post was titled Why Housing Microfinance is a Base of the Pyramid Solution. It was a direct response to short blog post by Ruban Selvanayagam entitled Why Housing Microfinance is Not a Base of the Pyramid Solution. The two positions are roughly representative of two different housing paradigms.. Although each position seeks improved housing conditions as an end, the operating assumptions and resulting means promoted are quite different.

Ruban's most recent contribution is appropriately titled Housing Microfinance - The Debate Continues.

Why Housing Microfinance is a Base of the Pyramid Solution

In August 2011, Ruban Selvanayagam published an excellent post on the Habitation for the Planet (HABITAÇÃO PARA PLANETA) website entitled Why Housing Microfinance is not a base of the pyramid solution (http://www.habitationfortheplanet.org/blog/2011/08/why-housing-microfinance-is-not-a-base-of-the-pyramid-solution/). Selvanayagam argues that that housing microfinance lacks what is necessary as a strategy for the base of the pyramid that should be grown to scale. I take an opposing position and believe that housing microfinance is a base of the pyramid solution when viewed as a part of a housing strategy already in use by the people at the base of the pyramid themselves.

It is first important to acknowledge that Mr. Selvanayagam and I agree on many basic points concerning housing microfinance:

 

• It is focused on small-medium sized loans for the low income demographic for incremental housing and the construction of very basic housing, usually with locally available materials.

• Advantages may include community integration / cohesion, employment opportunities, encouragement of personal finance management and seemingly improved housing conditions compared to what was often the case before. (I would perhaps put less emphasis on the community and social factors and give more validity to the value of the improvements made.)

• There are simply no perceived and workable (urban housing) solutions for the massively growing base of the pyramid population.

• Developers tend to cater to middle and high income populations

• New housing developments are usually only feasible in peripheral areas, which place the target population far from their livelihoods

• A high proportion of the base of the pyramid population have limited legal land rights and reside and work informally.

• New financial systems (products and delivery methods) are needed to cater to these specific and idiosyncratic needs.

Despite our general agreement in these areas, we begin to diverge on the appropriateness of housing microfinance as a solution. This may be as a result of our expectations of what housing microfinance is intended to achieve. I respond to a few of Selvanayagam’s points as follows:

 

1. Opportunity: While acknowledging that base of the pyramid urban population may possess certain land rights and have thriving communities and livelihoods, Selvanayagam states that “the reality is that most of them would leave given the opportunity of a better standard of living.” Although this may be true, I would argue that leaving to a “better standard of living” in another location is unfortunately not a viable option for the majority. If such opportunities existed in reality, then there would be less need for housing microfinance. A better standard of living would include both the physical conditions as well as associated livelihood factors, which has been an extremely challenging opportunity to offer at the scale needed.

 

2. Polishing Over: Mr. Selvanayagam states that housing microfinance only polishes over a bad state of affairs. He writes that, “Even if it is slightly larger, has received plastering or has added protection against the elements, a slum unit is still a slum unit – related social / environmental / political problems and issues will eventually re-appear in some way or another.” I don’t believe that housing microfinance claims to be a solution to social, environmental and political problems. Personally, I have always viewed it first and foremost as a household level solution to a particular housing need or desire. In this light, the value of a larger, plastered or better protected home would be best judged by the household itself who undertook the home improvement project. Housing microfinance is usually not marketed to its users as a solution to social, political and environment problems. Clients tend to have more personal, concrete and immediate objectives that can be addressed in the short-term with access to housing finance.

3. Risk of Evictions: Selvanayagam correctly states that housing microfinance would be challenged to fully and effectively function in areas where there is risk of evictions. Two basic pre-requisites for housing microfinance are 1) Households that are willing to invest in improving their homes (demand) and 2) Institutions that believe risk can be sufficiently mitigated to lend to those households (supply). Risk of eviction may result in an unwillingness to enter into a housing finance transaction by one party or the other. It might be mitigated by smaller and shorter loans, but Mr. Selvanayagam is correct that there may not be a housing microfinance market in such environments. It won’t work everywhere.

4. Quality: Selvanayam’s article follows a general assumption that is common to the provider paradigm of housing: Informal housing + base of the pyramid population + builders without professional certification = low quality. I don’t believe this assumption necessarily holds true or that informality is a bad thing. This is perhaps the key assumption in designing housing services to the bottom of the pyramid: Are local and informal housing solutions sufficient? The provider paradigm usually prefers a solution of outside technical expertise to solve the presumed qualitative gap Many housing microfinance programs come from a support paradigm perspective that recognizes informal and local efforts as legitimate and seeks only to build upon what is already happening.

Certainly Selvanayagam is correct in stating that most of housing microfinance projects are unlikely to meet international building standards. Meeting international building standards in an informal settlement is one of those areas in which a workable solution has yet been yet to be developed to scale in practice. The current reality is that enforcing international (and even national) building standards is a non-starter in most informal settlements. The important question, I would argue, is whether home improvement projects (usually on very basic housing) can be completed to the satisfaction of the households who undertake them with at least non-opposition (even if tacit) from local authorities. If the reality of the housing environment changes, then housing finance will change accordingly.

When trying to determine whether or not housing microfinance is a base of the pyramid solution, it is helpful to make our assumptions and expectations explicit: A strategy as used by whom and with what objectives? If a government agency or other actor is trying to identify a strategy to formalize settlements occupied by base of the pyramid populations, bring the structures to international building standards and solve social, environmental and politic ills within the next 10 – 20 years, then I would agree with Mr. Selvanayagam 100% that housing microfinance is probably not going to do the trick. If it is viewed as a component of strategies used by base of the pyramid households to improve their own homes and by financial service providers to respond to a demand for housing finance in informal settlements, housing microfinance might be seen in a different light.

Faced with limited realistic opportunities for a formal housing solution, the base of the pyramid has developed its own strategies all over the world. They build informally and incrementally. It may not be the ideal, but it is happening on massive scale and there are few, if any, other options available to most base of the pyramid households. Housing microfinance is only responding to a pre-existing base of the pyramid housing strategy. Locally, the questions to ask would be:

• Is the base of the pyramid investing in their housing (with or without access to housing finance)?

• Can financial service providers develop housing finance products that respond to current base of the pyramid housing strategies and are perceived as value added by potential clients?

• Do informal housing activities have at least de facto acceptance by local authorities?

If the answer to all three of these questions is “yes,” then I would argue that housing microfinance is a viable base of the pyramid strategy for household-level home improvements until such time as any of those conditions change.

I truly enjoyed Mr. Selvanayagam’s article and his frank positions concerning housing microfinance. We obviously come from opposite sides of the housing paradigm divide (see  Housing Paradigms and Housing Microfinance). Although we agree on more points than we disagree, the critical question of how to interpret and react to informality in housing linked with our expectations for housing microfinance leads us to opposing conclusions its viability as a base of the pyramid housing solution.

I highly recommend Habitation for the Planet’s Blog : http://www.habitationfortheplanet.org/ 

and encourage others with ideas concerning base of the pyramid housing strategies to voice their opinions.

Two Years of Piloting Housing Microfinance In Tanzania

As I have noted in other posts, I have been working with the MAKAZI BORA housing microfinance program in Dar es Salaam, Tanzania. We started the program in mid 2009. Not everything has gone as planned, but some significant success was made in developing what appears to be a product with strong potential within its current operating environment.  The following report may be of interest to fellow practitioners:

Two Years of Piloting Housing Microfinance in Tanzania

Group Lending and HMF in Kenya

Last week I was fortunate to be able to review a housing microfinance product in Kenya. The product was a  home improvement loan, which could also be used to start new construction. The maximum loan amout for a first loan was 35,000 Kenyan Shillings (+/- $375.00). Subsequent loans could be taken for up to 70,000 Kenyan Shillings. What I found interesting about the product was that it uses a group lending methodology, with groups of 15 – 30 people.

I have always been somewhat sceptical of group lending for housing microfinance products in Africa. I believed that if higher loan amounts and longer loan terms are used, it is likely to stress the group guarantee that forms one of the foundations of group lending. The few housing microfinance products I had previously seen using a group methodology had not performed spectacularly. The Kenya product, however, was a pleasant surprise. It needed some substantial work in pricing and a few other features, but I thought the product had tremendous potential.

As I reviewed disbursements and payment records, several things became clear:

• There was vigorous loan disbursement over an extended period
• Clients were paying well.
• Clients were paying off their loans and taking second loans.

Whatever other problems there may have been with the product, these key elements show that there is a demand for housing microfinance and that the product is responding to the demand. The product is flexible and clients were using the loans for building foundations, walls, roofing, and finishing their houses. They consistently expressed a high level of satisfaction with the product, (although many wished the first loan could be slightly larger). I believe that the product is strong enough that any minor adjustments in pricing and back-office systems needed to improve it are unlikely to negatively affect demand.

Although I still favour individual lending for housing finance, my experience in Kenya was an eye-opener for me. Group lending can work for housing microfinance in East Africa. I guess the moral of the story for me would be that if an institution is already using a group lending methodology, has group lending expertise and is experiencing good performance in its group lending portfolio, it may not be necessary to move to individual lending for a housing microfinance product.

One key of the Kenya product I reviewed was that it stays true to the microfinance aspect of housing microfinance. Loan amounts are generally small and loan periods short. How well a product would stand up in a group mechanism if either of these were significantly increased is another question.

Landing Housing Microfinance

Last month the Housing Microfinance Working Group Tanzania had a small workshop with the theme: An Introduction to Housing Microfinance. After a keynote speech by a representative of the Ministry of Lands, Housing and Human Settlements, there were  four presentations on various topics. An extended question and answer session followed, with the vast majority of questions pertaining to land policy. I am not sure whether these were all legitimate housing microfinance concerns or whether they were simply the result of combining access to a representative of the ministry and television cameras on the day the national budget was being read. Regardless, access to land and legal tenure are frequently cited as challenges for housing microfinance. Even as I had already started writing this post, a colleague asked me whether I would agree that such land issues are a major constraint to developing the housing microfinance industry. Going against the grain, I would say no, at least to the extent that the practice currently exists in Africa.

Access to land is a critical issue and challenge to many households. It is more than worthy of rigorous advocacy and efforts to promote land reform. The largest and most easily accessed market for housing microfinance in Africa today, however, is not with households that don’t have land. It is with households that already have land and are actively engaged in a housing process. Housing microfinance does not respond to all housing needs for all people. Although there may be a market of land products for the landless, basic housing microfinance usually targets households that are building incrementally. The good news for lenders is that this is a very large (and largely untapped) market in most places in Africa. But if too much emphasis is placed on land access as the constraint to the growth of the housing microfinance, one can easily miss the market that is already there.

Secure title to land is a pre-requisite for the mortgage market. If secure, legal title is also assumed to be a pre-requisite for housing microfinance, it could move products away from some of the very principles of microfinance (See What they need is microfinance). Microfinance provides financial services to clients who, for whatever reasons, may not be able to access formal financial services. It often uses alternative forms of loan security. Housing microfinance provides a financial service for clients who, for whatever reasons, are not able to access traditional housing finance. Households with low incomes are building. Rather than trying to seek ways to formally secure their property through legal titles, it may be more beneficial to determine how to find alternative forms of security and other means to comfortably mitigate the risks of a housing microfinance loan. An effective product will always be designed around the realities of the market, rather than an ideal which does not effectively exist in practice (See Housing Microfinance and the Housing Environment). The bare minimum requirement for land security (as opposed to legal title that can secure a loan) is that households feel secure enough to make  investments on their homes and lenders are reasonably certain that the borrower will still be in same place and have the same feeling of security of tenure  throughout the loan term.

When one designs a housing microfinance product around the assumption that it should start with land, it brings numerous challenges if the land product is linked to a housing product. I addressed some of these in my last post (Greener Pastures?). Another more basic challenge is that the lender is dealing with a client who has not actually started a housing process yet. This poses more risk than a client who is already incrementally building and has made a capital investment in his or her home. The concept is not too different from micro-enterprise lending, in which a lender might want to see proven stability in an existing small business and evidence that the borrower has invested his own capital in the business.

In Sub-Saharan Africa, housing microfinance has yet to take off, let alone land. The key to turning the practice into reality on the ground will probably be in focusing on the basics: Where is the market now? How can a product be designed to fit that market and tap into effective demand? When we focus on what housing should be (but isn't now), we can easily miss the opportunities that could be today for microfinance lenders expanding their product mix and for low income households looking for money to improve their living conditions within the current environment.

Greener Pastures?

Building a community for low-income households is probably the ultimate project for those who come from the provider paradigm (see Housing Paradigms). Architects, planners, community-developers, water and sanitation specialists and community groups of almost every kind join hands to bring people together for form a new community. Donors are fond of such projects and the visible, dramatic results.  As housing microfinance evolves in Africa, these greenfield projects seem to be identified with the practice. They remain a highly popular approach to low cost housing, but do they form the basis for a viable housing finance product that targets low income households?

I started my journey into housing at a greenfield project in Gemena, Zaire (now Democratic Republic of Congo) in 1989. Since then I have been involved in managing well over 30 such projects in Congo, Ghana, Malawi, Tanzania and Uganda. I “inherited” most of these projects after they started, but I did the project design (and house design) for a few of them as well. There were some recurring issues that appeared regardless of the country in which they were implemented, the land tenure system involved or whether it was in an urban, peri-urban or rural setting. Colleagues who have worked on similar projects have experienced similar results.

1. Land Issues: From acquisition to surveying, removing squatters, negotiating plot sizes and getting title, land is expensive and time consuming. Identifying and recovering the real costs can be a challenge. The difference between the purchase cost and the true value-added cost can be substantial.

2. House Design: Typical projects have a few standard house designs. Even if these are designed with input from “the community,” the designs often do not meet the needs or expectations of the intended owners as individuals.

3. House Cost: Providing a complete house and land for a low income household results in a challenge bridging the gap between real cost and repayment capacity. This frequently leads to either subsidisation or extending the loan term.  When the implementer owns the land and house, it can quickly turn into asset based lending rather than capacity based lending and eventually test the will of the implementer to evictand or live with high portfolio at risk.

4. Livelihoods: The sites of greenfield projects are typically  distant from the intended dwellers' livelihoods and social capital. This can present challenges to the households as well as the project outcomes.

5. Occupancy: One outcome of low income households participating in greenfield projects far from their livelihood sources is that they often do not to occupy the houses. One would wonder why someone would rather live in a house of lesser quality than the beautiful house that has been built in a better community, but economically it often makes perfect sense. Houses are rented or sold without the owners ever occupying them. The true value of a house is in what it does for the dweller, not what it is in terms of a physical structure (Turner's Second Law of Housing - see Turner's Three Laws of Housing).

6. The Effect of Rising Costs: When the project is in an inflationary environment, the cost of the initial houses (and often the house cost quoted clients at the beginning of the project) is lower than the cost of the same house design in later stages of the project. No matter how you explain the effects of inflation or the value of the house in real terms, clients still seem to get annoyed when their houses cost more than their neighbour’s exact same house which was completed earlier.

7. Community Participation: Mutual help schemes frequently look better on paper than they do in reality, especially after the first month of the project.

8. Procurement and Inventory: Procuring, storing and distributing inventory is complicated, generates a lot of transactions for the finance department and leaves many avenues for fraud and corruption. To prevent corruption requires extensive internal controls, which are expensive and time consuming.

9. Construction Management: The implementer must manage builders, contractors, and dwellers through a construction process. This can be complicated and imply responsibility for construction outcomes.

10. Turner’s Third Law: Any shortcoming or imperfection in your house is infinitely more tolerable if you are responsible than if someone else was. What happens when there are construction related problems with a house. In my experience, dwellers tend to hold the implementer responsible for much longer than the implementer believes it is responsible.

11. The Donor: If the project used donor funds, donors like to visit the project and even brand the community with their logos. When dwellers understand that houses were built with donated funds, motivation to repay ldrops.

12. Time Factor: A 2,000 house project sounds very exciting. If it takes 5 years to complete, that is about 400 clients per year. It would not be unusual for a 2,000 house project to take more than 5 years from inception and approval to completion. What are the opportunity costs compared to what could be accomplished with the same time and resources using other housing models?

Those are just a few concerns from my experience with such projects. The management time, hassle, hidden costs, sometimes dubious housing outcomes and repayment challenges from any form of client dissatisfaction make the model risky as a financial product. If it is a donor funded project that desires to have some kind of cost recovery component without the necessity of  becoming financially viable, greenfield projects can be very impressive. As a sustainable housing finance product for low income households, I am still highly skeptical. Lender beware: The hype is great, but so are the risk and opportunity costs involved.

Borrower Behaviour and Risk

Our MAKAZI BORA housing microfinance pilot program is just about to complete two years of operation in Dar es Salaam. Quite a few clients have paid off their first loans and returned for second home improvement loans to continue with their incremental building activities. As with many microfinance institutions, clients returning for subsequent loans may access larger loan amounts based on their capacity to pay and previous borrowing history. Repeat clients should be lower risk to the institution, but we have occasionally had cause for concern.

Some clients have taken relatively small loan amounts for their first loan with the shortest possible loan term. After paying off this first loan, they have then applied for the maximum loan amount for their second loan. Their intention of targeting the higher loan value is clear. It is not necessarily a problem in itself, but we noticed that the loan performance of some of our initial repeat clients was not as stellar as it had been with their first loans. We have also noticed some miraculous increases in reported income from the first loan application to the second loan application, which clients have attempted to use as a basis to access larger loans. Such clients are viewed with greater scrutiny. Any microfinance financial institution is naturally concerned with decreasing the risk of financial loss due to default in loan payments and must be able to identify such risky borrowing behaviour in the absence of strong loan security.

Fortunately, not all clients exhibit risky borrowing behaviour. In the last few weeks, we have started receiving applications from clients who have paid off their first and second MAKAZI BORA loans and come back for another. These initial clients to apply for their third MAKAZI BORA loans have shown very conservative borrowing behaviour. First time borrowers can access loans up to 800,000 Tanzanian Shillings. Clients can access up to 2,000,000 shillings for their second loan and up to 3,000,000 shillings for a third loan and beyond. The clients who have just become third time borrowers have taken loans as follows:

Unlike the type of client who seeks the maximum loan amount at all costs (and risks), these third time borrowers have always applied for loans significantly below the maximum loan amount. Just as financial institutions must mitigate risks associated with lending, the best performing clients also mitigate risks associated with borrowing. If, for whatever reasons, a client does not pay, he or she risks having collateral seized, having a trusted friend or relative approached as their guarantor or even going to court. These events can be costly to the client and also represent a reputation risk that could damage their social capital. When clients have excellent repayment records and consistently apply for loans with loan amounts lower than the maximum for which they are eligible, MAKAZI BORA deems them to present a much low level of risk to the institution than their neighbours who race for the maximum.

When the institution and the client fully understand each other’s risks and means of risk mitigation, it helps them achieve their objectives on both sides of the housing microfinance loan.

Housing Microfinance Working Group

This afternoon I was honoured to be able to give a presentation at a workship organized by the Housing Microfinance Working Group Tanzania. The theme was: An Introduction to Housing Microfinance and the workshop was  well-attended.  Among the attendees were various financial service providers and stakeholders from the housing sector. Also in attendance was a delegation from microfinance institutions in Kenya, Uganda and Tanzania that was led by Stromme Microfinance East Africa. They were in Dar es Salaam for a field visit to the MAKAZI BORA housing microfinance program that coincided with the workshop.

Following a keynote speach from the Ministry of Land, Housing and Human Settlments' Deputy Director for Housing Finance, the Working Group introduced its member institutions and its purpose and objectives. It then gave brief presentations on What is Housing Microfinance, Housing Microfinance Models in Tanzania and Opportunities and Challenges in Housing Microfinance. It was an exciting event for the Working Group, which is a network of institutions engaging in housing microfinance or housing microfinance-related services in Tanzania. Member institutions contributed to cover the cost of holding the event.

Within the working group, institutions have widely varied means of approaching housing microfinance. There are significant ideological divides over issues such as the role of land, the role of planning and regulations, housing support services, relevance of policy, and other issues. These differences often generate fascinating discussions at Working Group meetings.

Despite diverse and sometimes conflicting models and approaches, the Working Group is united in sharing ideas and promoting the practice of housing microfinance in Tanzania. Several of  non-member institutions who were in attendance at the workshop indicated that they were preparing to develop housing microfinance products and would like to join the Working Group. The workshop appears to have succeeded in its objective of promoting the practice of housing microfinance and bringing more institutions into the on-going dialogue of how the practice can be developed.

"What they need is microfinance...."

I recently got a ride home from a meeting with some colleagues from other institutions offering housing microfinance products. While stuck in a typical Dar es Salaam traffic jam, we discussed product features and approaches. At one point the focus was on whether or not to secure housing microfinance loans and the available mechanisms for doing so. It seems as though quite a few of the institutions offering affordable housing finance in East Africa are securing their loans in one way or another.

Securing the loan by putting some kind of lien on the property is an obvious solution to minimizing risk. With secured loans and relatively higher loan amounts, many of the housing microfinance products emerging in East Africa appear to fall more along the lines of micro mortgages. If asset-based lending is avoided by lending according to client capacity to pay, micro mortgage products decrease risk of default while offering higher margins of return than "typical" microfinance loans. They make good business sense for a financial service provider.

As the discussion continued on various options for securing the loans, someone mentioned that a secured loan can often be difficult or impossible for low income clients to access. Indeed it can! They may not have the requisite land tenure. Even the administrative procedures for securing the loan alone could be a constraint. Typical loan requirements and loan sizes are likely to prevent lower income households from accessing micro mortgage loans. Someone in the car offered an interesting suggestion: What they need microfinance. Perhaps even housing microfinance!

As housing finance develops in East Africa, will it drift toward micro mortgage lending to the detriment of what was once the typical microfinance target group? Will the industry have to come full circle to ensure inclusiveness in affordable housing finance? There is almost a mystique about housing finance. Microfinance institutions can very easily succumb to the temptation to become like mortgage lenders and thus move away from some of the basic microfinance concepts on which they were founded. Although still considered in the same category for most purposes, micro mortgage products and housing microfinance will probably become more differentiated over time as the practices develop in East Africa. While both are needed and diverge from traditional housing finance, they seem to have different characterics and serve different populations.

Selecting a Housing Microfinance Pilot Area: Part 1

Recently I was told about a new housing microfinance product that was not finding many clients at a branch where it was being piloted. It could be a case of a product – environment mismatch. The product itself seems relatively sound, but it is being piloted in an area where there is very little evidence of a typical housing microfinance market. I believe that same product piloted at one of the institution’s branches less than 10 kilometers away would have a significantly higher rate of disbursement. Whether the product is weak and misses an existing market or it is strong for the wider market but implemented where there is low demand, the result is the same: A low number of loans disbursed. This can be discouraging during a pilot period, generating skepticism about housing microfinance within the institution as well as from outside observers. The right pilot area is on factor in ensuring a successful pilot.

We use pilots to test the feasibility of a product design concept on a small scale so that we can improve it prior to making significant investment and scaling up. There have been quite a few new housing microfinance products developed in East Africa since 2005, especially following a housing microfinance workshop that was held in Dar es Salaam in May 2008. So far none of the products have moved out of the pilot stage, and some probably never will. Whereas institutions tend to focus on capital as the key to scaling up, a key pre-requisite to achieving scale is understanding the market and developing a product that fits it. Otherwise an institution will be unable to move funds through its housing microfinance portfolio, which could pose a risk depending on the terms of the capital.

During the pilot period, the institution should clearly be able to show that it has found the right match between the product and the market. The selection of pilot area is critical. Some features of a housing microfinance pilot area may include:

 

1. Population Density: Assuming the product is well-designed, are there sufficient households in the operating area to ensure adequate client intake to determine that the product has been a success (or needs some adjustment)? Short-term success helps any change process or new product. Piloting where there are a lot of households increases the likelihood of short-term victories, allowing a product to gain momentum.

2. Housing Activity: Population size and density are not enough to move a product through the pilot process. There must be evidence of housing activity in the pilot area. Housing microfinance usually finds its market where there is extensive incremental building. A housing microfinance product that is introduced into an area that does not have this kind of housing activity may face an uphill struggle. In the example of the institution with a low number of disbursements at one of its pilot branches, they failed (I believe) to confirm that the type of housing activity within the branch’s operating area corresponds to their housing microfinance product features.

3. Settlement Diversity: Housing is not homogenous, even within one city or region. There may be different settlement patterns and characteristics that impact a housing microfinance product. A pilot area that covers more than one type of settlement gives the institution the opportunity to determine whether the product is flexible enough to cover different housing environments or if there is a niche market that might warrant a specialized product.

4. Accessibility: How will clients access the product? How will recovery take place? Logistics plays a large role in both the cost to the client and to the institution. One housing microfinance product in East Africa was being marketed to an extremely wide area from a single service delivery point. The area is so wide that it is expensive and time consuming for clients to go to a distant branch office to make further inquiries about the product and start the application process. Even if the clients make the effort to access the product, follow-up by staff will be difficult, costly and time consuming. This is never a good thing, but especially not in a pilot period when an institution trying to determine if the product is viable and then demonstrate its viability to funders if capital is needed. The service point during the pilot must be near the market and make it easy for the client to access the housing microfinance service and for the field staff to get to the client.

The key to getting through a pilot stage is not accessing capital. It is having a successful pilot. Success is usually measured by disbursing a given number of loans in the pilot period and those loans resulting in a healthy housing microfinance loan portfolio. The selection of the pilot area is only one of many factors in achieving this success, but it is a significant one. In Part Two, I will discuss how we chose our operating area for our MAKAZI BORA housing microfinance pilot in Dar es Salaam, Tanzania.

Product Performance: The Human Factor

There are many factors that affect housing microfinance performance. A match between the product and the realities of the market is a critical factor. Even if the product is strong, there need to be strong systems and processes to deliver it. A key component in these delivery systems is the human factor. Strong leadership is needed to introduce and design a new product, but once it is introduced the staff dealing with clients day in and day out can make or break performance.

Very basic indicators of performance for any financial product are disbursements (number and value) and portfolio health. It is not sufficient to simply disburse loans, but they must be good loans that clients repay as agreed. This is largely the work of the credit officers in the field, making client appraisals and interacting with clients throughout their repayment period. A credit officer who generates bad loans quickly puts the institution at risk.

We have noted, sometimes painfully, the human factor in loan performance in our MAKAZI BORA housing microfinance program. We have some outstanding credit officers who have maintained 0% portfolio at risk (30 days) for months. We have had other credit officers whose portfolio climbed to as high as 22% PAR. The credit officers had the same training, same case load and portfolio size, worked in the same operating area, had the same supervisor, the same incentive scheme and delivered the same product. The difference could only be explained by the fact that some people make better credit officers than others. Unfortunately, it is sometimes hard to tell which is which during the hiring process.

The challenge in maintaining performance is to be able to note when a credit officer’s portfolio is going bad (it usually doesn’t take long) and take action. A first action is to stop the credit officer from disbursing new housing microfinance loans. This obviously hurts on the portfolio growth side of the performance equation, but may be necessary to mitigate further damage to the portfolio health component. If the credit officer cannot improve his or her portfolio health, there need to be systems in place to part ways with the employee and to get a replacement in the field as soon as possible. Whereas we expect a learning curve, our experience in MAKAZI BORA has been that credit officers who are still making bad loans into their second month rarely improve.

The MAKAZI BORA program has changed its criteria for credit officer selection over time. Initially, we recruited only university graduates who were fluent in both English and Kiswahili. We gave an extensive two-week training program on housing, microfinance, housing microfinance and the MAKAZI BORA product and followed this up with staff refresher sessions. Since then, we have started recruiting credit officers with diploma or secondary school education and only require fluency in Kiswahili. Credit officers have been brought in to fill urgent vacancies and have received on-the-job training rather than a comprehensive orientation program. Perhaps counter-intuitively, performance in the same key indicators has improved significantly through these changes.

Performance by individual credit officers does not seem to have been related to educational background, training received or other institutional systems. A change in hiring criteria and emphasis has definitely helped, but a sill somewhat illusive human factor seems to be at play. The best we can do for the moment is to be ready to keep sifting through credit officers until we find good ones, minimizing as much as possible damage from those who aren’t the right people for the job.

The fact that some credit officers consistently deliver 0% portfolio at risk seemed to indicate that any portfolio performance problems were not product related. As new housing microfinance products are piloted, management must closely examine any performance shortfalls and try to isolate the potential source. Is it the suitability of the product for the market? Are delivery systems weak or inefficient? Or is there a human factor at play. Knowing the difference and taking the appropriate actions requires a lot of institutional candour and is the foundation of improving housing microfinance performance through a pilot stage.

Housing Microfinance and Informal Asset Building

“Housing microfinance must build an asset for the client.” Several people have said something like this to me as the basis for requiring formal title before issuing housing microfinance loans. Their underlying assumption is that a house is not truly an asset unless it has legal title, it is built to regulations and standards, and it can be used as collateral for a loan from a formal financial institution. To many housing practitioners, anything that does not resemble the housing process used by the middle and upper class is illegitimate at best and is simply overlooked. In reality, housing microfinance clients are usually already in the process of developing an asset before they even apply for a loan.

Clients of the MAKAZI BORA housing program are at all different stages of their housing process. We have clients at the beginning of their housing journey who are just trying to finish a small house and move into it. Loans to these clients tend to be for roofing and exterior doors and windows. Many clients move into houses before there is a permanent floor and sometimes even before there are windows in place. Clients who have already started living in their houses take loans for basic features such as floors, interior doors and sometimes windows. Clients further along in their housing process borrow for electricity connections, ceilings, plaster, painting, tiles, security bars and other upgrading activities. Although the house may not be eligible to serve as formal collateral, the whole process is one of asset building for the client.

Even where there is no formal title, houses are bought and sold on parallel, semi-formal markets. With each improvement, the resale value of a house increases. This is an asset into which the client can tap in case of extreme need. In urban and peri-urban environments, it is not unheard of for someone to sell their house to convert it into cash, purchase another house, and have money left over for a need or opportunity. This is a second best option to taking a loan for the need, but when there is little to no viable access to financial services, it is a means of converting a physical asset into a cash asset to solve a problem.

MAKAZI BORA has some clients who build rooms for renting out, usually on the same property on which they live. These rooms become an income generating asset. We have disbursed loans to complete construction of new rental units as well as to upgrade existing ones. When a room for rental purposes is improved, the rent is almost always increased, providing more income for the client while simultaneously making higher quality rental housing available in the informal settlements in which we are working.

Many houses that are improved with housing microfinance loans will never be used as the basis for a mortgage. By no means, however, does this mean that the house is not an asset for the owner. The true value of a house is not in how it is appreciated by outsiders, but what it does for the owner.

Turner's Three Laws and MAKAZI BORA

MAKAZI BORA, the small housing microfinance program with which I currently work, just registered its 1,00th Client (646 loans disbursed – currently 507 active clients). We have had our struggles over the last 20 months since the MAKAZI BORA pilot opened its doors, but the product seems to have high demand and sells itself. (We have done very little promotion and no community sensitisation.)

Recently I have been working on some  brief refresher sessions for staff on the topic of The Foundations of MAKAZI BORA. The sessions reflect concepts I have discussed in this blog, which form some of the theory that guides our approach to housing microfinance and the design of the MAKAZI BORA product. The first of these “Foundations of MAKAZI BORA” is an oldie but goody from John Turner’s Housing by People: Towards Autonomy in Building Environment. Turner wrote Housing By People and Freedom to Build before the development of microfinance and long before housing microfinance began to emerge. I am more convinced than ever that his thought, as summarized by Collin Ward in Turner’s Three Laws of Housing, is fully complementary to housing microfinance products and services, if not essential.

 

I have written on Turner's 3 Laws of Housing before, but I never tire of them because (as any good law should) they continue to ring true over the years and through a variety of housing experiences:

1. Turner’s First Law of Housing: When dwellers are in control of their housing process it is a better process both for the individual and the overall housing environment.

2. Turner’s Second Law of Housing: The value of a house is not in what it is, but in what it does for the household. The value is not necessarily related to imposed standards.

3. Turner’s Third Law of Housing: “Deficiencies and imperfections in your housing are infinitely more tolerable if they are your responsibility than if they are somebody else‟s.” (1)

Housing is a funny thing in that very good microfinance institutions can be tempted to develop housing microfinance products that do not adhere to the principles of microfinance and housing institutions can follow assumptions that lead them to design housing microfinance support services that, in practice, work contrary to Turner’s Three Laws.  I will continue to argue that it will be difficult to develop a successful housing microfinance product targeting low income households in Sub-Saharan Africa  that does not align with Turner's Three Laws. Perhaps that will change as the overall finance and housing environments develop and change, but the short to medium term reality, I believe, will reward housing microfinance products that give clients the most freedom to build.

(1) Turner, J.F.C. (1976) Housing by People: Towards autonomy in building environments, London: Marion Bayers, p.51