Selecting a Housing Microfinance Pilot Area: Part 1

Recently I was told about a new housing microfinance product that was not finding many clients at a branch where it was being piloted. It could be a case of a product – environment mismatch. The product itself seems relatively sound, but it is being piloted in an area where there is very little evidence of a typical housing microfinance market. I believe that same product piloted at one of the institution’s branches less than 10 kilometers away would have a significantly higher rate of disbursement. Whether the product is weak and misses an existing market or it is strong for the wider market but implemented where there is low demand, the result is the same: A low number of loans disbursed. This can be discouraging during a pilot period, generating skepticism about housing microfinance within the institution as well as from outside observers. The right pilot area is on factor in ensuring a successful pilot.

We use pilots to test the feasibility of a product design concept on a small scale so that we can improve it prior to making significant investment and scaling up. There have been quite a few new housing microfinance products developed in East Africa since 2005, especially following a housing microfinance workshop that was held in Dar es Salaam in May 2008. So far none of the products have moved out of the pilot stage, and some probably never will. Whereas institutions tend to focus on capital as the key to scaling up, a key pre-requisite to achieving scale is understanding the market and developing a product that fits it. Otherwise an institution will be unable to move funds through its housing microfinance portfolio, which could pose a risk depending on the terms of the capital.

During the pilot period, the institution should clearly be able to show that it has found the right match between the product and the market. The selection of pilot area is critical. Some features of a housing microfinance pilot area may include:

 

1. Population Density: Assuming the product is well-designed, are there sufficient households in the operating area to ensure adequate client intake to determine that the product has been a success (or needs some adjustment)? Short-term success helps any change process or new product. Piloting where there are a lot of households increases the likelihood of short-term victories, allowing a product to gain momentum.

2. Housing Activity: Population size and density are not enough to move a product through the pilot process. There must be evidence of housing activity in the pilot area. Housing microfinance usually finds its market where there is extensive incremental building. A housing microfinance product that is introduced into an area that does not have this kind of housing activity may face an uphill struggle. In the example of the institution with a low number of disbursements at one of its pilot branches, they failed (I believe) to confirm that the type of housing activity within the branch’s operating area corresponds to their housing microfinance product features.

3. Settlement Diversity: Housing is not homogenous, even within one city or region. There may be different settlement patterns and characteristics that impact a housing microfinance product. A pilot area that covers more than one type of settlement gives the institution the opportunity to determine whether the product is flexible enough to cover different housing environments or if there is a niche market that might warrant a specialized product.

4. Accessibility: How will clients access the product? How will recovery take place? Logistics plays a large role in both the cost to the client and to the institution. One housing microfinance product in East Africa was being marketed to an extremely wide area from a single service delivery point. The area is so wide that it is expensive and time consuming for clients to go to a distant branch office to make further inquiries about the product and start the application process. Even if the clients make the effort to access the product, follow-up by staff will be difficult, costly and time consuming. This is never a good thing, but especially not in a pilot period when an institution trying to determine if the product is viable and then demonstrate its viability to funders if capital is needed. The service point during the pilot must be near the market and make it easy for the client to access the housing microfinance service and for the field staff to get to the client.

The key to getting through a pilot stage is not accessing capital. It is having a successful pilot. Success is usually measured by disbursing a given number of loans in the pilot period and those loans resulting in a healthy housing microfinance loan portfolio. The selection of the pilot area is only one of many factors in achieving this success, but it is a significant one. In Part Two, I will discuss how we chose our operating area for our MAKAZI BORA housing microfinance pilot in Dar es Salaam, Tanzania.

Product Performance: The Human Factor

There are many factors that affect housing microfinance performance. A match between the product and the realities of the market is a critical factor. Even if the product is strong, there need to be strong systems and processes to deliver it. A key component in these delivery systems is the human factor. Strong leadership is needed to introduce and design a new product, but once it is introduced the staff dealing with clients day in and day out can make or break performance.

Very basic indicators of performance for any financial product are disbursements (number and value) and portfolio health. It is not sufficient to simply disburse loans, but they must be good loans that clients repay as agreed. This is largely the work of the credit officers in the field, making client appraisals and interacting with clients throughout their repayment period. A credit officer who generates bad loans quickly puts the institution at risk.

We have noted, sometimes painfully, the human factor in loan performance in our MAKAZI BORA housing microfinance program. We have some outstanding credit officers who have maintained 0% portfolio at risk (30 days) for months. We have had other credit officers whose portfolio climbed to as high as 22% PAR. The credit officers had the same training, same case load and portfolio size, worked in the same operating area, had the same supervisor, the same incentive scheme and delivered the same product. The difference could only be explained by the fact that some people make better credit officers than others. Unfortunately, it is sometimes hard to tell which is which during the hiring process.

The challenge in maintaining performance is to be able to note when a credit officer’s portfolio is going bad (it usually doesn’t take long) and take action. A first action is to stop the credit officer from disbursing new housing microfinance loans. This obviously hurts on the portfolio growth side of the performance equation, but may be necessary to mitigate further damage to the portfolio health component. If the credit officer cannot improve his or her portfolio health, there need to be systems in place to part ways with the employee and to get a replacement in the field as soon as possible. Whereas we expect a learning curve, our experience in MAKAZI BORA has been that credit officers who are still making bad loans into their second month rarely improve.

The MAKAZI BORA program has changed its criteria for credit officer selection over time. Initially, we recruited only university graduates who were fluent in both English and Kiswahili. We gave an extensive two-week training program on housing, microfinance, housing microfinance and the MAKAZI BORA product and followed this up with staff refresher sessions. Since then, we have started recruiting credit officers with diploma or secondary school education and only require fluency in Kiswahili. Credit officers have been brought in to fill urgent vacancies and have received on-the-job training rather than a comprehensive orientation program. Perhaps counter-intuitively, performance in the same key indicators has improved significantly through these changes.

Performance by individual credit officers does not seem to have been related to educational background, training received or other institutional systems. A change in hiring criteria and emphasis has definitely helped, but a sill somewhat illusive human factor seems to be at play. The best we can do for the moment is to be ready to keep sifting through credit officers until we find good ones, minimizing as much as possible damage from those who aren’t the right people for the job.

The fact that some credit officers consistently deliver 0% portfolio at risk seemed to indicate that any portfolio performance problems were not product related. As new housing microfinance products are piloted, management must closely examine any performance shortfalls and try to isolate the potential source. Is it the suitability of the product for the market? Are delivery systems weak or inefficient? Or is there a human factor at play. Knowing the difference and taking the appropriate actions requires a lot of institutional candour and is the foundation of improving housing microfinance performance through a pilot stage.

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.