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.