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.