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.

Housing Microfinance is Microfinance: Part 2

In Housing Microfinance: A Guide to Practice, Franck Daphnis gives an excellent general description of what we could expect in a housing microfinance product:

From a microfinance product perspective, housing microfinance encompasses financial services that allow poor and low-income clients to finance their habitat needs with methodologies adapted from the microfinance revolution. These methodologies rest most notably on the following principles: (1) Loans are for relatively small amounts and are based on the clients’ capacity to repay; (2) Repayment periods are relatively short (especially compared to mortgage lending) and are on a par with mid- to high-end microfinance individual loans; (3) Loan pricing is expected to cover the real, long-run costs – operational and financial – of providing the service; (4) Loans are not heavily collateralized, if at all, and collateral substitutes are often used; (5) Loans tend to finance habitat needs incrementally, a function of the purchasing power of loans with short repayment periods and relatively low monthly payments; and (6) If the provider is an MFI, credit services for housing can be linked to prior participation in savings or more traditional microenterprise loan services. In summary, from a product-based perspective, housing microfinance is the “micro financing” of housing needs: the application of a microfinance-based approach to housing finance.[1]

Daphnis’ explanation clearly makes the case for housing microfinance as microfinance, inclusive of the low income target group and the key features and principles. He  demonstrates how an incremental approach to housing finance is a natural function of the product features and the target group’s capacity to pay. (Not to mention that it fits with how low income households typically build their homes.) Daphnis also highlights pricing for sustainability (covering the real, long-run costs), which is one of the Key Principles of Microfinance as indentified by CGAP. One would expect a housing microfinance service to bear the hallmarks of microfinance and work within its key principles. Perhaps more than other microfinance products, however, housing microfinance may be subject to influences that potentially challenge its ability to stand as a strong microfinance product and practice.

In Housing Microfinance is Microfinance: Part 1, I stated that the differentiating factors in how much microfinance is in a given housing microfinance product derive from how the “housing” component is approached and its effect on the product features. Where the leadership of institution falls on the housing paradigm continuum (see: Housing Paradigms and Housing Microfinance) influences how it will design its housing microfinance services and quite possibly the extent to which they will align with the general principles of microfinance. Those who align with the provider paradigm of housing are likely to emphasize the house as the product, which can easily influence the design and delivery of the financial service.

Several tendencies will increase the likelihood that an institution’s housing microfinance services will closely align with the principles of microfinance: 1) An emphasis on demand-driven products that are affordable to poor and low income households; 2) A drive to achieve a double bottom line of profitability linked with social performance; 3) Defining the provision housing finance itself as a legitimate housing activity; 4) Understanding housing to be a process (housing as a verb); 5) An acceptance of local, often informal, channels for housing provision; and 6) A belief that low income households can and should be the decision makers in and drivers of their housing process.

A tendency to view housing as a noun could decrease the likelihood that an institution’s housing microfinance service will closely align with the microfinance principles and practices. Housing is expensive. When the emphasis shifts from the finance as a product to the house as the product, the potential for greatly increased cost of product delivery is very real. This can result in a difficult balancing act between affordability (for low income households), the cost of the service / the loan amount and sustainability. How well an institution balances these will become evident when crunching the numbers associated with the double bottom line and taking a close look at who is benefitting from the service: How are the ratios (OSS, FSS, Return on Investment, etc)? How is the social performance rating? How is the portfolio performance?

Developing financial products that are both affordable and sustainable is a challenge in its own right. Added costs related to meeting the institution’s housing standards magnify this challenge for housing microfinance. This frequently (although not always) results in at least one of the three following scenarios:

1. Moving the Target: Who doesn’t want to show a nice, beautiful house on their housing microfinance brochures or their reports to the board of directors, shareholders or providers of capital? What is one way to maintain profitability while being able to ensure that houses are of high standards? Serve clients of higher incomes. Housing microfinance can go upmarket very quickly and even start to bear a suspicious resemblance to mortgage financing. When assessing the double bottom line, social performance may be weak if the house is emphasized over affordability. If the housing loans are expensive and the product is still commercially viable, this could move the housing microfinance product away from one of the objectives of microfinance: To serve poor and low income households with financial services.

2. Subsidizing the Target: How do you serve poor and low income households with a high quality housing product that may be beyond their capacity to repay? Subsidize it! Most institutions use the language of sustainability, but the truth about an institution’s sustainability will be in the ratios, not the promotional materials. It is possible to offer a housing microfinance product and talk about sustainability in general terms without ever having a viable plan to at least break even. A reliance on subsidy to deliver housing services moves away from operationalal and  financial sustainability - a key principle of microfinance.

3. Extending the Loan Period: How do you provide a high quality house as a product to low income households without subsidy? Adjust the product features! One way of making housing microfinance affordable would be to extend the loan period to make it more like a mortgage. This seems like a reasonable idea on the surface, but when applied to low income households it eventually degenerates into portfolio health problems. Microfinance loans tend to be relatively short and there are good reasons for this.

The added cost burden (to either the client or the insitution) of relatively expensive housing support services or high loan amounts can easily either force product features away from microfinance norms or move the product away from accepted key principles of microfinance.  All of this is not to say that a housing microfinance product that includes housing support services will necessarily be something other than microfinance. Where there is an effective demand for such services from poor and low income households, it makes sense to offer them. Housing microfinance does, however, open itself up to housing ideologies that may create a supply-side push of non-financial services tied to a housing microfinance product. That could make achieving the double bottom line and conforming closely to the principles of microfinance significantly more challenging. In the absence of significant captial to make the push, such products will face difficulty in achieving scale and having significant impact on the financial landscape in Sub-Saharan Africa, where housing microfinance is just starting to develop and informal systems of housing and housing finance are the norm.

Housing microfinance is microfinance. Housing microfinance products that go upmarket and are priced above the affordability level of the poor will almost always fail to conform to the principles of microfinance, which include both serving low income households and sustainability. Broad access to affordable housing finance in Africa will likely only be achieved through a prevalence of housing microfinance products that closely conform to the principles of microfinance (running parallel with a stronger mortgage market). The extent that this can be done with a significant amount of non-financial housing services tied to the product will depend on the true effective demand for those services from the poor more than the housing ideologies of the service providers. How much microfinance is in a given housing microfinance product? The numbers will eventually tell the story.

[1] Daphnis, F. &; Ferugson, B. (2004). Housing Microfinance: A guide to Practice. Bloomfield, CT: Kumarian Press, p. 4.

A Tale of Two Products Part One: The Power of Paradigms

The setting is a market research workshop held in Mbarara, Uganda in July 2007. In attendance are staff from a housing NGO representing several country programs and representatives of two microfinance institutions. The workshop is working towards an objective of forging housing microfinance partnerships between the NGO and MFIs. The participants study several MicroSave market research tools, develop some of their own and go out to test them in the field with clients from one of the MFIs. They come back from the field, share their experience and split into groups to develop rough housing microfinance product concepts as a learning exercise. Looking at the exact same data and having worked together in the field, the groups come up with prototype housing microfinance products that bear almost no resemblance to each other. How could this happen?

Housing is often more ideological than we imagine. In Housing Microfinance: A guide to practice, Franck Daphnis writes: 

“A defining characteristic of some housing microfinance programs is the provision of construction advice or supervision to clients. Some institutions view this form of technical assistance to the client as an important part of any housing microfinance loan. Others do not perceive any particular value added in providing construction assistance services.” [1]

One might suppose that these different approaches could arise from disparate environments or differing demand preferences as measured through objective market research. In reality, housing microfinance product design often has more to do with the housing ideology or paradigm held by the designers. Daphnis demonstrates this with an example of FUNHAVI, which sees non-financial services to clients as a mission cornerstone and ADEMI, which believes that construction assistance to clients would be against the institution’s philosophy. [2] It is not unlike American Democrats and Republicans who look at the same health system in the same environment and come up with completely different interpretations and resulting solutions.

Some questions that would bring out the different underlying assumptions between conflicting housing ideologies or paradigms might include:

• What makes a good house?
• To what extent are low income households capable of making housing decisions and managing their own housing process?
• Which is more important for a low income target group, the product features related to pricing and terms or the product features related to the construction of the house or home improvement?

If we look at the answers in terms of Provider and Supporter Paradigms of housing (see posting from 8th August on housing paradigms and housing microfinance), I would suggest that they might look like this:

(click on table to enlarge)

The different underlying assumptions about housing will lead to very different housing microfinance products.

One of my own early assumptions about paradigms and products was that staff from a housing NGO would lean towards the provider paradigm and building complete houses (or including heavy construction technical assistance) and that those from an MFI would be more inclined to emphasize the finance side of the loan product over the construction side. I am no longer sure that is necessarily true. In the Mbarara workshop example, the two divergent products were developed by groups that were composed of mixtures of housing NGO and MFI staff, with the champion of each product coming fom the opposite type of institution from what I would have assumed. Paradigm positions do not necessarily correspond to the type of provider. The housing ideology of an institution’s leaders, however, will almost always strongly influence the type of product developed. Where the leadership is divided within a single institution, there will probably be considerable confusion, conflict and challenges in successfully launching a product, as opposed to institutions in which the leadership is strongly aligned with one paradigm or the other.

In my next posting I will continue the tale of two products with the rough product concepts themselves as they came out of the Mbarara market research and product development workshop. They are not particularly extraordinary in their own right, but they are representative of two opposite ends of housing microfinance product design.

[1] Daphnis, F. & Ferguson, B., eds. (2004). Housing Microfinance: A guide to practice. Bloomfield, CT: Kumarian Press. pp. 9-10

[2] Daphnis & Ferguson (2004) p. 11

The Provider Paradigm, Housing and Housing Finance: An NGO Provider Approach and Its Challenges

Housing projects of a few hundred to a few thousand units are impressive and can capture the imagination as successful housing interventions. Indeed, housing conditions are usually materially improved for the participating households. But what is the relative significance of such interventions in the overall housing environment? A challenge in the field of housing is how to effectively serve statistically significant numbers of households with low incomes. In Housing Without Houses: Participation, flexibility and enablement, Nabeel Hamdi defined two paradigms of housing which he described as being in conflict: The Provider and Supporter Paradigms (see posting from 8th August, 2009). The provider solution to this housing challenge is simply to build houses. Hamdi gives a sampling of some key features of the provider paradigm as follows:

… Providers go on to argue that if production is to be increased, then housing types (tightly defined packages of space and material) should be rationalized to represent a careful balance of technical feasibility, building regulations, and planning controls – the very things that supporters argue have raised costs beyond the reach of those with the lowest income, especially in developing countries.

Providers argue that to mass produce effectively is to mechanize, to mechanize effectively is to standardize, to standardize effectively enables better control of quality, quantity and cost. For providers, to build fast is to build instantly, to solve problems of housing is to build a large number of houses…[1]

Hamdi was largely applying the paradigms to governmental approaches to housing; the provider paradigm being epitomized in public housing projects. The overall concepts behind the paradigms, however, equally apply to many non-governmental organizations (NGOs) and other institutions engaged in housing, particularly as a social service to the poor. Housing NGOs or cooperatives that hold a provider paradigm tend to build houses, have standard house designs and often prescribe required types of materials and technologies (which may be described as “appropriate technologies”). They  frequently define the  housing process for those who would participate in the program as essentially a take it or leave it option. The organization's housing process becomes the clients' housing process. For the purpose of this posting, I will call anything that falls relatively close to these general housing program features the “NGO provider approach,” although it is not to say that all housing NGOs or cooperatives use or are restricted to it. Key stated objectives of the approach typically include ensuring the quality of the house, keeping costs low and affordable and serving a large number of households with the house as a product. The overall results of the NGO provider approach are not always as intended, especially when it enters the realm of housing finance by being building houses as a credit facility.

I was an adherent of the provider paradigm using the NGO provider approach for many years across various countries in Sub-Saharan Africa. Our key metric for performance was the number of houses built. It might have been stated with different euphemisms, but when asked what we did the answer would essentially be: “We build houses.” Although slightly varied for local situations, house designs were roughly the same across the continent. The houses we built were to standard designs, (commonly 24 – 48 square metres by the early 1990s), with two or three bedrooms, a sitting room and sometimes a corridor, storage space and/or veranda. Each house was complete with an outdoor latrine; usually a ventilated improved pit latrine. At various times appropriate technologies were being promoted, such as roofing tiles or stabilized soil blocks, and these would then become mandatory for the clients for as long as the organization was committed to using them. The quantities and types of materials used in construction were specified and the organization did the procurement of materials and services for the client, who did not have much say in the matter.

In most cases the organization provided the skilled labor and/or supervision. Clients (sometimes called beneficiaries, homeowners, participants, families, home partners or other terms, but in this posting I will primarily call them clients based on the feature of a loan component) were told exactly what materials they must provide on their own (usually locally available materials such as stones, sand and bricks) as well as what tasks they must perform. The final costs of services provided by the organization were calculated when the house was complete and converted into a loan to be repaid by the client into a revolving fund to build more houses. To make the house affordable for households with low incomes, the loan was made for periods of 7 to 15 years and the beneficiary was charged primarily for direct cost with most of the operational costs carried by the organization as a subsidy. Specific details vary, but this general approach is not uncommon for housing NGOs or housing cooperatives.

I have been a designer and implementer of programs that have built thousands of low-cost houses across the continent and seen many similar programs run by other institutions. The transition from a traditional, substandard house to a more modern and durable house is powerful and dramatic and can bring many positive changes to households. From very early in my work with the NGO provider approach to low-cost housing in Africa, however, I had a few observations that have remained constant over the years:

1. Quality: The quality of structures was not always what we had expected or intended. One theory behind controlling the process was to ensure quality and improve over the local quality standards that existed prior to the program starting. However, to keep the work affordable to the organization and the clients who were to pay for the services, local labour was inevitably used. Because we used the same builders who were building locally anyway, we usually had roughly the same general level of quality when applied across all of the houses built. There were many well-built houses that were notably better than the traditional and non-durable houses we sought to replace. The overall quality, however, was not significantly greater over houses of similar design that were built by households independently and outside of the program. Construction quality was a consistent problematic area mentioned in program evaluations.

2. Dissatisfaction: An early shock as an idealistic field worker was to come across a significant number of clients who were very vocal in their dissatisfaction with the houses they received through the program. Recurrent complaints included the house being too small, the absence of plastering, dissatisfaction with the types of materials used (e.g. roofing tiles), construction quality complaints (the ubiquitous crack in the wall or floor) and restrictions on adding on to the house before it was paid off. We responded with stock answers to explain why the choices made were in the clients’ best interest and what the policies were, but this never seemed to be wholly satisfactory to the clients themselves. I heard the same discussions recurring almost verbatim across multiple countries, programs and projects and reports of the same from other colleagues over a period of more then 15 years as if it was all being read from the same script. In many ways I suppose it was.

3. Poor Repayment: Repayment was poor almost from the onset and the revolving fund simply did not revolve. Where repayment started well, it could rarely be maintained for longer than two or three years. (Note: This is a particularly bad problem with loan periods of up to ten or fifteen years.) New projects were started on the assumption that some previous implementers did something wrong at the foundation of the poorly performing projects that had resulted in the poor repayment. An often-heard comment was that “The model is good, but the implementation was poor.” Extra effort was usually placed in training and sensitization or strengthening systems, but the results were almost always the same, even with different implementers in different locations over a span of many years.

After years of believing I could fix the system and vigorously trying to do so, I began to realize that there were inherent problems with the model itself. The NGO provider approach may work fine as a hand-out or heavily subsidized housing program that serves relatively small numbers of people compared to the total population that is engaged in a housing process. (The delivery system is still cumbersome and expensive even without a credit component, but that is for another posting.) The biggest problem comes with scaling up and maintaining that scale beyond the duration of a donor’s interest. I think the main challenges could roughly be translated into three major issues that, when combined, make the NGO provider approach to housing and housing finance (the house as a loan product) an almost insurmountable challenge:

1. Charity Messages: NGOs that approach housing from the perspective of a social service often see their role as bringing help and hope to the poor and needy. This is how programs are marketed to donors and it impacts who joins the organization and why, and the institutional cultures and methodologies that translate into the client interactions. Language and symbolic events or rituals often place emphasis on poverty, need and the perceived inabilities of the low income clients, with giving by the affluent as the solution. When messages implying a mission of charity are communicated to clients, whether explicitly or implicitly, it immediately creates a very clear connotation of a “soft” program in the context of Sub-Saharan Africa. Clients will then interact with the program based on this and often will not prioritize payment. Because the charity impulse is woven into the fabric of the organization and its staff, when clients don’t pay (based on their assumption that the institution will not really enforce the terms), the perception of the soft NGO is confirmed and reinforced if and when the NGO fails to take action other than exhortations or repeated threats over a prolonged period. Loan portfolio health quickly declines, usually on a permanent basis.

Charity and credit do not mix well. When they do mix, it will be to the detriment of the credit. I have personally seen many clients years behind in house payments to a housing NGO, while diligently servicing other loans. How we inherently view the people who we serve determines how we interact with them. A program designed around the assumption that people are poor, hopeless and incapable of making good, logical decisions or managing their key life processes will look very different from one that is built around an opposite set of assumptions. Clients can easily read the difference and interact with the institution accordingly to their best advantage. If you have a very low income and can see an opportunity to free some cash flow by not paying a housing loan, not paying might look like a wise strategy in order to service other household needs with the cash that would have otherwise gone to the loan payment. If the lender will let you do it with minimal or no consequences, why not? (Despite regular reminders that a revolving fund exists to help others, the provider’s altruism may not always translate into every low income household’s decision making process in managing their precious and sometimes precarious finances.)

2. Standardized House Designs: The provider paradigm tends to build standardized house designs for efficiency and other reasons. The prescription of the housing package by the institution is a natural choice for an NGO or other institution that has a significant charity influence. Many people and institutions implicitly believe that the poor cannot build houses on their own (although they would rarely state it or may not even have a full self awareness of this underlying assumption). If the poor are doing it by themselves, it must be wrong and they will make bad choices (by the providers’ criteria), which necessitates the provider dictating the “right” way for the client to build and overseeing the process. The emphasis is on the house and ensuring that it meets the provider's criteria, which are usually based on the material standards of the structure.

As I mentioned, it is very powerful to see a family moving from a very poor house by material standards and a better quality house built by a housing institution. All inclusive language and development-oriented language aside, however, when the housing delivery mechanism is in actual and practical operations dictated by the provider, it is disempowering at the very least and could become a mismatch with the client’s livelihood framework at worst. It is not unheard of that clients who benefitted from materially good houses with land security and soft loan terms sell the houses and move back to where they were before the project because of just such a mismatch. This is incomprehensible to the provider who delivered the quality house, but may make perfect sense within the logic of the household in a given set of livelihood circumstances.

Another factor when credit is attached to the standard housing package designs of the NGO provider approach, is Turner’s 3rd Law of Housing (see posting from 23rd July 2009). If the housing process, and particularly the specifics of the house itself, were imposed upon or reluctantly accepted by the client, any problem with the house, construction quality or other, will be felt deeply by the client and can result in resentment towards the lender. The potential impact on loan portfolio performance, particularly if the lending organization is perceived to be soft on recovery, is significant.

3. Weak Housing Finance Products: The charity impulse and provider paradigm of building specific housing designs create some challenges to implementing organizations when it comes to the associated housing finance component of the house-as-the-product. Firstly, stakeholders within the institution may not believe that the people with low incomes should pay back the full cost of services provided. This can lead to internal conflict, but also leaves the door open for a wide acceptance of heavy subsidy, which ultimately hampers the institution’s ability to serve significantly large numbers of households. Sustainability is a key driver of outreach, but true self sustainability may be a hard-sell within some institutions. This may result in a pricing structure that does not recover the costs of delivery and cannot sustain a program of lasting signficance and impact.

Secondly, a possible tendency towards subsidy is aggravated by the challenge of bridging the gap between the actual cost of delivering the provider’s house and affordability to the desired target group. The results are either heavily subsidizing the houses because they are not affordable to the people the institutions wishes to serve, not subsidizing and serving wealthier clients, trying to mimic mortgage lending by using long loan terms to make payments more affordable, or a mixture of all of these. None of these work well for sustainably providing housing services to large numbers households with low incomes in Sub-Saharan Africa. The best option would appear to be longer loan terms, but experience has shown that most low income households do not have the long-term financial horizon or stability to use a specific financial instrument over a sustained period of many years. Sustained repayment becomes a challenge quickly, with somewhere around two to three years perhaps being on the outer margins for many of the poor.

Yet another challenge arises from controlling the construction process and pricing product. (And I am I only referring to the direct construction cost and not even the broader issue of pricing for sustainability.) The cost of materials constantly fluctuates (usually upward), yet the bill of quantities remains constant. This means an ever increasing loan amount in cash terms for the same physical product. If the cost is not calculated until the house is complete in inflationary environments, it is impossible to tell the client how much the loan amount will be before the house is done . This might not be comforting to a borrower who must commit to an uncertain loan amount. "How much will my house cost?" "We will tell you when it is finished."

At the same time, there is a related issue when an approximate house cost is quoted by a staff member prior to construction and the final cost ends up being significantly more. It is a common problem. When a program is introduced to a community or an inquiry is made, people always want to know what the cost of the house will be. The cost they are told sticks in their minds a lot longer than it sticks to the actual cost of construction. Avoid quoting the cost and it is not transparent and can create mistrust. Quote a cost but then change it when construction costs rise and the client feels cheated. Quote the cost and don’t change it when construction costs rise and you either need to have included a hefty margin in the quoted cost or will start facing serious financial losses quickly. It is an inherent challenge of the NGO provider approach when it is rolled out to a community in an unstable economy. When my neighbor receives a house costing 500,000 (in whatever currency) and a few months later I get the exact same house but it costs 750,000, it is hard not to feel cheated, which impacts the relationship with the lender.

Construction quality problems and dissatisfaction with the house as a product, although widely acknowledged in the field, are usually not reportable issues and remain field anecdotes or buried in evaluation reports. Institutions can continue with their assumption that because they are going good, they must also be doing well. Repayment rates, however, are often measured and reported even though they may be poor. I have seen periodic revivals to attempt to improve repayment rates and entire “revitalization” initiatives to increase dismal portfolio performance, but they have almost never been successful in the long term without changing the underlying model and approach.

When NGOs started using the language of sustainability, recovery sometimes became more rigorous. As standards increased and words began to be backed with strong and effective actions to enforce recovery, I have noticed an interesting trend in the programs which I have managed: Demand for new houses dropped dramatically and quickly. What we had experienced was a false demand, rather than an effective demand.

The standard low cost house might not be exactly what a household wants at a given time, but it might be all that is readily available. As long as it is perceived to be on very soft terms, it is advantageous to take the opportunity. It is as if people are thinking: “It is not really the house I want or how I would apply that much money to my housing situation, but what do I have to lose?” Once recovery becomes more rigorous and households come to understand that they actually might have to pay for the provider’s house or face negative consequences, it becomes less attractive and there is less demand for the same product in the area. The house as a product might start to represent a potential risk to their household livelihood framework or it simply no longer looks like such a great opportunity.

Households make informed choices about whether or not to participate in a program based on the perceived opportunities, risks, advantages and disadvantages to their livelihoods. If a household is going to take a loan for housing and really pay it back, control over the application of the loan to the household's own housing needs and desires (as experienced by themselves) is more likely to generate an effective demand than if the same amount of money were used for a design that satisfies the provider’s needs in terms of the type of house it wishes to provide. An underlying challenge for the institution is whether or not it can accept the way a household may choose to apply a housing loan to their situation or whether it even believes that the household is capable of managing the process and making the housing and related livelihood choices in their own best interest.

HMF Hypothesis 5: Standard low-cost housing units provided on credit by organizations that are perceived as charity in Sub Saharan Africa will experience an inverse relationship between demand for the house and rigor in recovery.

My assessment of what I am calling the NGO provider approach to housing is presented as a broad generalization. It is based on repeated experiences and observation over the years, but there are certainly going to be many instances where the generalization does not fit. On a whole, however, I am so far willing to stand by my overall belief that the general NGO provider approach described, as visually powerful and compelling as it may be, is not a feasible solution for serving the masses. To change my position, I would have to see some strong, objectively verifiable evidence of the NGO provider approach successfully implemented.

My criteria for success of a program using the NGO provider approach would be having reached at least OSS (operational self-sustainability), thousands of active clients (in one service area, rather than a global total), continued demand with constant and consistent service delivery, and an accurate PAR (portfolio at risk) of less than 5%. If you are aware of such a program Sub-Saharan Africa using what I have called the NGO provider approach , please write in and let me know about it under the comments section of this post. I am ready to be proven wrong and would be willing to promote and discuss the program and its methodologies in this blog and in my own work if it can meet the above criteria. In the mean time, I will continue to promote housing microfinance as what I currently believe to be a more viable practical approach to housing for the low income population in Africa. (All of my positions are, however, subject to change pending further information and learning, of course.)

20th ANNIVERSARY SPECIAL

This is something like a special anniversary posting for me. It was 20 years ago today that I touched down in Kinshasa, Zaire (now the Democratic Republic of Congo) on my way to start work as a community development worker in a rural housing program in the Equateur Region.

That is me in late 1989 near Gemena, Zaire with my neighbors, Mozukala Dogia and family. I was young and energetic, but had no idea of how much I didn’t know or understand. I am now less young, and perhaps a bit less energetic, but at least I have a more realistic impression of how much there is still to learn 20 years later.

[1]Hamdi, N. (1995). Housing Without Houses: Participation, Flexibility and Enablement. London: Intermediate Technology Publication, 29-30.


(all photos and graphics by the author)

Increment Building and Housing Microfinance Part II: Provider Controlled Incrementalism

There are at least two very different approaches to incrementalism within housing and housing microfinance. The approach I advocated in my previous posting was to design housing microfinance products that support existing, dweller-controlled incremental building efforts. In this approach, clients are already building incrementally according to their own house designs and process. Another approach, however, is to provide clients with an incremental building design and process. I will call this “provider controlled incrementalism” and personally see it as a second-best option that has numerous drawbacks. This prescribed building in stages may, however, meet some specific housing needs and have a niche market in some areas. The challenge will be whether it can be sustainable.

In my 8th August posting on Housing Paradigms and Housing Microfinance, I mentioned that one difference between the Provider and Supporter Paradigms of housing, as described by Nabeel Hamdi in Housing Without Houses: participation, flexibility and enablement, is that providers tend to seek “instant housing” in the form of units that are completed to a given standard, while supporters tend to be more comfortable with incremental processes. The challenge for providers then becomes making “instant housing” affordable for low income households. Where heavy subsidization is not an option, providers may tend to appropriate the incremental building concept and develop incremental building designs. These building in stages designs are usually small units built to a given standard that can be extended at a later date using subsequent loans. Clients building under this method will use a provider’s design and fit into an incremental process as defined by the provider. Providers and supporters may use similar language and acknowledge that incremental building is common among the poor, but supporters are more likely to “go with the flow” of how households are already building while institutions leaning more towards the provider paradigm are likely to control (or attempt to control) a household’s incremental process from start to finish.

Client dissatisfaction over real or perceived problems with a house that is dictated through a forced incremental process can translate into portfolio performance challenges. Although a stated theory is that the desire to extend the house will result good repayment, provider controlled incrementalism can often result in dissatisfaction on the part of the client when the house is considered too small or the client perceives that it is taking too long to move on to the next stage of the design. When the provider controls a significant portion of the housing process, it runs counter to Turner’s Third law of housing which states that “deficiencies and imperfections in your housing are infinitely more tolerable if they are your responsibility than if they are somebody else’s”[1] (posting see Turner’s 3 Laws and Housing Microfinance, 25th July).

Stage one of a building in stages design that was deemed affordable, but was highly unpopular. It was discontinued by popular demand.

If the house in a provider controlled incremental building scheme is perceived as too small, it can also result in low demand. Strangely, (or not so strangely depending on your viewpoint), some households would rather spend their money on a larger house built to their design, even if it is made with inferior materials or is incomplete in comparison to a smaller but complete unit. Between the cost of delivery and control of provider controlled incremental building models and the potential for low demand from the target group, there are challenges to sustainable housing microfinance using this method.

Another type of provider controlled Incrementalism has clients start building at foundation level. After paying off a foundation loan, a subsequent loan might be taken for walls and later a roof, etc. Again, client dissatisfaction is not uncommon in such schemes, especially in the early stages if the client perceives that they are paying for a piece of a house that they are unable to occupy. The key here is perception. I have experienced clients with complaints about this method, when many households collect blocks and/or remain only at foundation level for even longer periods of time without complaint when they are in control of their own housing process. It all goes back to Turner’s 3rd Law, which I have come to accept as a reality in housing.

There may be cases in which a prescribed building in stages model is effective or perhaps even appropriate. It can be used in housing projects in which the provider is also providing land as part of the package. Tapping into existing incremental building requires that the households have already somehow acquired land on which they are building. Because land availability and land markets are often a serious impediment to low income households in urban and peri-urban areas, building in stages housing schemes that involve land as part of the process may be aimed serving clients without land access. Such an intervention is still likely to experience the challenges of provider controlled incrementalism, but this use aligns easily with projects that undertake green field development. An alternative option to the problem would be land access as a loan or savings product, which might be followed by support of dweller-controlled incremental building at a later time.

Another niche market for building in stages designs may be households that do not have the skills, desire or confidence to control their own housing process. In one program with which I have worked, there seemed to be anecdotal evidence that women headed households were more likely to show interest in building-in-stages type designs. There may be cases in which forced Incrementalism meets a housing need in sufficient scale to make it sustainable. I have yet to see this in Sub-Saharan Africa, but am willing to assume that it could be possible. If someone knows of provider controlled incremental housing processes in Africa that are currently reaching significant scale and are sustainable, please write in and let us know about it. Housing microfinance is still essentially in a pioneering stage in Sub-Saharan Africa, but at this point I personally believe that fitting housing microfinance into existing incremental building will be more effective and have more impact than using a controlled incremental process as a vehicle for housing microfinance.

HMF Hypothesis Four: Provider Controlled Incrementalism holds inherent challenges that will make it difficult to reach scale and sustainability as a housing microfinance option in Sub-Saharan Africa.

[1] Turner, J.F.C. (1976). Housing by People: Towards autonomy in building environments. NY: Marian Boyars. 6.

Housing Paradigms and Housing Microfinance

I had been working in the housing sector for 15 years before I came to realize that there were two very different interpretations of what housing is and how to approach it. I originally assumed that there was a housing problem (especially for the poor) and that the natural solution to it was to build low cost houses. Over time I began to realize that effectively building houses for the poor held a lot of inherent challenges and the response was not always what was expected. Sometimes people didn’t really like the low cost houses that had been designed for them. They also often did not like to pay for them. Demand was much lower than we anticipated when offering the opportunity for a “good house” to people who were living in  materially very poor houses. I was experiencing symptoms related to the “provider” approach to housing and a focus on the house itself rather than the house in the context of its dwellers' lives.

In Freedom to Build, John F.C. Turner described two ways to define housing: Housing as a noun and housing as a verb. Housing as a noun refers to the physical structure: The house as a product or commodity. Housing as a verb focuses on the universal activity housing.[1] The two definitions correspond to two different ways of looking at housing. Those who view housing primarily as a noun will focus on physical housing units. Those who view housing as a verb are more likely to look a housing as an on-going process and concentrate on the role of housing within the context of the household's broader livelihood. Turner’s second law of housing (see previous post) states that what is important about housing is what it does and not what it is. This could be seen as a sort of manifesto for those who see housing as a verb. How we look at and define housing ultimately shapes how we approach housing interventions.

Nabeel Hamdi built upon the idea of housing as a noun or verb in his book Housing Without Houses: Participation, flexibility and enablement. Hamdi outlined two paradigms of housing that are often in conflict: Provision and Support. The provider paradigm holds that the solution to housing deficits is to build houses. Providers tend to control the housing process to deliver housing units completed to a certain standard. Rather than controlling the production of units, Supporters look at the management of resources such as land, services and finance to assist dwellers to improve their housing, rather than controlling the production of units. Providers and Supporters differing approaches can be seen this diagram adapted directly from Housing Without Houses[2]:

(click on graphic to enlarge)

Someone (or an institution) can be identified as a predominantly a provider or supporter by the language they use and the interventions they design. Providers place a heavy emphasis on their role in building housing units. They maintain a significant level of pride and ownership in the finished physical product. Their interventions tend to keep control in the institution's hands and focus on the standards of the units. The houses produced are almost always complete units. Even when implementing an incremental building scheme that uses Supporter-like language, the Providers' incrementalism is often controlled and built in complete, stand-alone stages to a given standard . Given the choice between their standards and dweller choice that may compromise those standards, Providers will stick to the standards. Providers tend to see those engaged in informal housing services commonly accessed by the poor as suspect at best, but often as illegitimate actors in the housing environment who are a menace or the source of the problem.

Supporters are often a little more ambiguous about what they actually do, because there are a wide variety of possible support interventions and approaches. They usually do not, however, see themselves as builders and instead leave significantly more control of the housing process in the hands of the dwellers. Incremental building is accepted as a reality and part of a housing process. As such, supporters are comfortable with interventions based on progress that does not necessarily result in a "complete housing solution" to the Provider's standards. Whereas Providers tend to see housing as a problem to which they bring the technical expertise to solve, supporters believe that “most solutions exist in everyday practice, they only need to be recognized and the built on. They exist not as governments and professionals might like and might not be working as effective as we would need them, but they exist nevertheless.”[3] This results in supporters usually embracing informal housing activity rather than doubting its legitimacy.

Because two sides of the divide interpret housing differently, they do not see eye to eye when it comes to their respective interventions. Supporters are likely to question the ability of Provider interventions to sustainably serve low income households at scale. They may also raise concerns whether the Providers' solutions are appropriate and sustainable in the context of the dwellers' livelihood strategies. Providers in turn inevitably will point out that Supporter interventions do not meet their housing quality standards. It is at its roots a philosophical conflict on the nature of housing that can sometimes resemble dialogue and debate between opposing political parties.

I doubt that any person or institution holds a 100% Provider or 100% Supporter position. The paradigms are more like a continuum with provision on one side, support on the other and a range of positions mixing the two in between.

(click on graphic to enlage)

Now… this seems all highly theoretical and esoteric, but the housing paradigm of the implementer has a tremendous and visible effect on the design of housing microfinance products and services. The degree to which an institution focuses on the house that results from a housing microfinance loan is an indicator of its housing paradigm. I have heard staff from an institution that provides housing microfinance berate housing choices made by their clients. They insist that the institution must only support "quality" houses with their loans and  must therefore exercise greater control on loan use. The implication was that it was more important for the resulting house or home improvement to meet institutional criteria for satisfaction than the client’s own criteria for his or her housing process. This is a view from the provider paradigm. I have also heard others deeply question whether construction services attached to a housing microfinance loan were sustainable or even necessary: The view from the supporter side.

HMF Hypothesis One: The degree to which an institution engaged in housing microfinance holds a provider or support paradigm of housing will be evident in level of construction technical support offered as part of the product.

One key factor differentiating housing microfinance products is the level of construction technical assistance offered. Some products bear the name housing microfinance or home improvement loan, but in practice are little more than a consumption loan with the word housing tacked on. Other housing microfinance products exert significant control over the loan use and the clients' housing process. Putting the above hypothesis into the proposed housing paradigm continuum, it might look something like this:

(click on graphic to enlarge)

HMF Hypothesis Two: More CTA (provider approach) will result in a higher likelihood of achieving quality standards in the house resulting from a housing microfinance product, but the associated costs and complications in the delivery process will make it harder to achieve sustainability and scale while serving low income households (the double bottom line). Less CTA will make it easier to reach sustainability and scale, but will give less of a guarantee on the quality of the house or home improvement for which the HMF product was used.

(click on graphic to enlarge)

I see housing microfinance as a support intervention. In (what I believe to be) its purest form, it is a finance intervention that provides capital to households so that they can address a finance gap in their housing process. It corresponds to housing as a verb when it leaves control of the housing decisions to the dwellers. When housing microfinance is approached as a support intervention, I believe it has the highest likelihood of reaching scale and sustainability while serving low income households. As a housing microfinance product leans more towards the provider paradigm, I would expect 1) the delivery process to become more  complicated and stress capacity, 2) demand to decrease as dwellers lose control of their housing process and either 3) subsidization to make it affordable to households with low incomes (at the expense of sustainability) or 4) an "up market" drift to wealthier clients to recover high delivery costs (at the expense of social performance).

It is not only the housing sector that may tend to lean towards the provider paradigm. Even some MFIs envision housing microfinance that more resembles a beautiful house with a conventional mortgage , than affordable housing finance for low income households  engaged in an incremental building process. I believe effective housing microfinance for households around the poverty line will fit into the housing process in which they are already engaged, but that is another topic.

I welcome any feedback through comments on these concepts and working hypotheses, particularly opposing viewpoints. I would also like to recognize once more the work of Nabeel Hamdi in describing the housing paradigms and John Turner's concept of housing as a verb. Although liberally interpreted and applied, I am indebted to their work for its influence on my approach to housing and housing microfinance.

[1] Turner, J. & Fichter, R. eds. (1972). Freedom to Build, New York: MacMillan. 151.[2] Hamdi, N. (1995). Housing Without Houses: Participation, flexibility, enablement. London: IT Publications LTD. 27

[3] Hamdi (1995). 36