What is this thing called Housing Microfinance?

A few months ago I gave a presentation on housing microfinance to a delegation from various  microfinance institutions that was organized by Stromme Microfinance East Africa. I borrowed elements from Franck Daphnis’ work and added a few of my own interpretations. The following day, we attended the Housing Microfinance Working Group Tanzania’s workshop and Jamie Ritchie from Rooftops Canada gave a presentation titled An Introduction to Housing Microfinance. He had a slightly different definition and interpretation of housing microfinance. How we define, interpret and envision housing microfinance plays a key role in how we implement it in practice.

Housing Microfinance applies the principles of microfinance to housing, addressing a bottleneck in the housing value chain for many low income households. In Housing Microfinance: A Guide to Practice (Daphnis and Ferguson, 2004), Franck Daphnis described Housing Microfinance “...as a discrete practice that intersects housing finance and microfinance” (p.3). I have seen this represented in a graphic as part of several Housing Microfinance Presentations by Franck Daphnis.

Whereas Daphnis places an emphasis on housing microfinance’s position in the field of housing finance,  Jamie Ritchie's Presentation at the HMFWGTZ Workshop focused on housing microfinance as a combination of microfinance and prudent, pro-poor real estate development. Jamie places a strong emphasis on housing support services and community development in his definition and resulting model of housing microfinance.

The graphic I have used for trainings in the MAKAZI BORA program simply states that housing microfinance is the intersection of housing and microfinance. (It almost seems too simplistic!) My use of housing refers to the "housing as a verb" concept (see John F. C. Turner's Freedom to Build) and the housing process in practical use by low income households.

The differences between my definition and those of Franck Daphnis and Jamie Ritchie are primarily ones of emphasis. On the housing finance side, I would tend to emphasize how housing microfinance fits into the strategies that low income households use to self-finance their housing activities more than any similarities to traditional housing finance in the form of mortgage lending. On the housing side, I approach housing from the support paradigm and emphasize how housing microfinance integrates with informal and incremental building practices that are common to low income households, regardless of whether or not they conform to what may be considered prudent real estate development at the time.

These three slightly different explanations of housing microfinance are not mutually exclusive and I am confident that a simple definition such as the application of microfinance principles to housing would be broadly accepted by most of the housing microfinance community with whatever additions one might add on to it. How we describe this thing called housing microfinance is  a reflection of our backgrounds and assumptions.  Put all of the descriptions together and we start to get a picture of the current practice of housing microfinance. Each definition at its core, however, may imply a slightly different model of housing microfinance in practice. I will be discussing this more in the coming weeks and months.

The Debate Continues

My last post was titled Why Housing Microfinance is a Base of the Pyramid Solution. It was a direct response to short blog post by Ruban Selvanayagam entitled Why Housing Microfinance is Not a Base of the Pyramid Solution. The two positions are roughly representative of two different housing paradigms.. Although each position seeks improved housing conditions as an end, the operating assumptions and resulting means promoted are quite different.

Ruban's most recent contribution is appropriately titled Housing Microfinance - The Debate Continues.

Why Housing Microfinance is a Base of the Pyramid Solution

In August 2011, Ruban Selvanayagam published an excellent post on the Habitation for the Planet (HABITAÇÃO PARA PLANETA) website entitled Why Housing Microfinance is not a base of the pyramid solution (http://www.habitationfortheplanet.org/blog/2011/08/why-housing-microfinance-is-not-a-base-of-the-pyramid-solution/). Selvanayagam argues that that housing microfinance lacks what is necessary as a strategy for the base of the pyramid that should be grown to scale. I take an opposing position and believe that housing microfinance is a base of the pyramid solution when viewed as a part of a housing strategy already in use by the people at the base of the pyramid themselves.

It is first important to acknowledge that Mr. Selvanayagam and I agree on many basic points concerning housing microfinance:

 

• It is focused on small-medium sized loans for the low income demographic for incremental housing and the construction of very basic housing, usually with locally available materials.

• Advantages may include community integration / cohesion, employment opportunities, encouragement of personal finance management and seemingly improved housing conditions compared to what was often the case before. (I would perhaps put less emphasis on the community and social factors and give more validity to the value of the improvements made.)

• There are simply no perceived and workable (urban housing) solutions for the massively growing base of the pyramid population.

• Developers tend to cater to middle and high income populations

• New housing developments are usually only feasible in peripheral areas, which place the target population far from their livelihoods

• A high proportion of the base of the pyramid population have limited legal land rights and reside and work informally.

• New financial systems (products and delivery methods) are needed to cater to these specific and idiosyncratic needs.

Despite our general agreement in these areas, we begin to diverge on the appropriateness of housing microfinance as a solution. This may be as a result of our expectations of what housing microfinance is intended to achieve. I respond to a few of Selvanayagam’s points as follows:

 

1. Opportunity: While acknowledging that base of the pyramid urban population may possess certain land rights and have thriving communities and livelihoods, Selvanayagam states that “the reality is that most of them would leave given the opportunity of a better standard of living.” Although this may be true, I would argue that leaving to a “better standard of living” in another location is unfortunately not a viable option for the majority. If such opportunities existed in reality, then there would be less need for housing microfinance. A better standard of living would include both the physical conditions as well as associated livelihood factors, which has been an extremely challenging opportunity to offer at the scale needed.

 

2. Polishing Over: Mr. Selvanayagam states that housing microfinance only polishes over a bad state of affairs. He writes that, “Even if it is slightly larger, has received plastering or has added protection against the elements, a slum unit is still a slum unit – related social / environmental / political problems and issues will eventually re-appear in some way or another.” I don’t believe that housing microfinance claims to be a solution to social, environmental and political problems. Personally, I have always viewed it first and foremost as a household level solution to a particular housing need or desire. In this light, the value of a larger, plastered or better protected home would be best judged by the household itself who undertook the home improvement project. Housing microfinance is usually not marketed to its users as a solution to social, political and environment problems. Clients tend to have more personal, concrete and immediate objectives that can be addressed in the short-term with access to housing finance.

3. Risk of Evictions: Selvanayagam correctly states that housing microfinance would be challenged to fully and effectively function in areas where there is risk of evictions. Two basic pre-requisites for housing microfinance are 1) Households that are willing to invest in improving their homes (demand) and 2) Institutions that believe risk can be sufficiently mitigated to lend to those households (supply). Risk of eviction may result in an unwillingness to enter into a housing finance transaction by one party or the other. It might be mitigated by smaller and shorter loans, but Mr. Selvanayagam is correct that there may not be a housing microfinance market in such environments. It won’t work everywhere.

4. Quality: Selvanayam’s article follows a general assumption that is common to the provider paradigm of housing: Informal housing + base of the pyramid population + builders without professional certification = low quality. I don’t believe this assumption necessarily holds true or that informality is a bad thing. This is perhaps the key assumption in designing housing services to the bottom of the pyramid: Are local and informal housing solutions sufficient? The provider paradigm usually prefers a solution of outside technical expertise to solve the presumed qualitative gap Many housing microfinance programs come from a support paradigm perspective that recognizes informal and local efforts as legitimate and seeks only to build upon what is already happening.

Certainly Selvanayagam is correct in stating that most of housing microfinance projects are unlikely to meet international building standards. Meeting international building standards in an informal settlement is one of those areas in which a workable solution has yet been yet to be developed to scale in practice. The current reality is that enforcing international (and even national) building standards is a non-starter in most informal settlements. The important question, I would argue, is whether home improvement projects (usually on very basic housing) can be completed to the satisfaction of the households who undertake them with at least non-opposition (even if tacit) from local authorities. If the reality of the housing environment changes, then housing finance will change accordingly.

When trying to determine whether or not housing microfinance is a base of the pyramid solution, it is helpful to make our assumptions and expectations explicit: A strategy as used by whom and with what objectives? If a government agency or other actor is trying to identify a strategy to formalize settlements occupied by base of the pyramid populations, bring the structures to international building standards and solve social, environmental and politic ills within the next 10 – 20 years, then I would agree with Mr. Selvanayagam 100% that housing microfinance is probably not going to do the trick. If it is viewed as a component of strategies used by base of the pyramid households to improve their own homes and by financial service providers to respond to a demand for housing finance in informal settlements, housing microfinance might be seen in a different light.

Faced with limited realistic opportunities for a formal housing solution, the base of the pyramid has developed its own strategies all over the world. They build informally and incrementally. It may not be the ideal, but it is happening on massive scale and there are few, if any, other options available to most base of the pyramid households. Housing microfinance is only responding to a pre-existing base of the pyramid housing strategy. Locally, the questions to ask would be:

• Is the base of the pyramid investing in their housing (with or without access to housing finance)?

• Can financial service providers develop housing finance products that respond to current base of the pyramid housing strategies and are perceived as value added by potential clients?

• Do informal housing activities have at least de facto acceptance by local authorities?

If the answer to all three of these questions is “yes,” then I would argue that housing microfinance is a viable base of the pyramid strategy for household-level home improvements until such time as any of those conditions change.

I truly enjoyed Mr. Selvanayagam’s article and his frank positions concerning housing microfinance. We obviously come from opposite sides of the housing paradigm divide (see  Housing Paradigms and Housing Microfinance). Although we agree on more points than we disagree, the critical question of how to interpret and react to informality in housing linked with our expectations for housing microfinance leads us to opposing conclusions its viability as a base of the pyramid housing solution.

I highly recommend Habitation for the Planet’s Blog : http://www.habitationfortheplanet.org/ 

and encourage others with ideas concerning base of the pyramid housing strategies to voice their opinions.