12 July, 2011

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.


  1. Scott - always a delight reading your blog. I agree with most of what you said here. I think one cannot deny though that having a legal title is better than living in a house that is not registered. While it varies in practice from place to place there does exist some inherent risk with family if they don't have a proper title. In other words, a family would feel more secure and invest even more with greater level of confidence on that piece of land. I agree that lack of title should not deter lenders but I think it is good for the family to have a title and for the economy too since a legalized house counts towards national capital stock. So, do you think making a loan for acquiring a title or even buying a piece of land fits under tenets of HMF? If so, did you try doing that? If you don't think it fits, would love to hear your thoughts.

  2. Hi Sasi,

    I would certainly agree that legal title is a good thing. My point was only that lack of legal title should not be considered a constraint to housing microfinance. In most of the places I have worked in Africa, the market for housing microfinance is primarily in unplanned areas where title is not available anyway. Those who have titles generally are in a different. Within the MAKAZI BORA operating area there is part of one ward that is planned and people have titles. We don't get many clients from there and I suspect that they are targeting much larger loans from formal financial institutions.

    I have not yet developed a land product or any kind of loan product for administrative processes and documentation. Those kinds of loans could work though. I have thought about a land product, but we are still busy working out the basics of home improvement loans and haven't done much on segmentation within housing microfinance products.

    If I were pursuing a loan product for land in the operating environment where I am currently working, I would probably design it for individually obtained plots as identified by the client. I would then try to find a way to mitigate risk within the common land acquisitiion processes being used by low income households, even if it did not reach the level of legal title.