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.
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.
