"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.