Two Years of Piloting Housing Microfinance In Tanzania

As I have noted in other posts, I have been working with the MAKAZI BORA housing microfinance program in Dar es Salaam, Tanzania. We started the program in mid 2009. Not everything has gone as planned, but some significant success was made in developing what appears to be a product with strong potential within its current operating environment.  The following report may be of interest to fellow practitioners:

Two Years of Piloting Housing Microfinance in Tanzania

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.

Turner's Three Laws and MAKAZI BORA

MAKAZI BORA, the small housing microfinance program with which I currently work, just registered its 1,00th Client (646 loans disbursed – currently 507 active clients). We have had our struggles over the last 20 months since the MAKAZI BORA pilot opened its doors, but the product seems to have high demand and sells itself. (We have done very little promotion and no community sensitisation.)

Recently I have been working on some  brief refresher sessions for staff on the topic of The Foundations of MAKAZI BORA. The sessions reflect concepts I have discussed in this blog, which form some of the theory that guides our approach to housing microfinance and the design of the MAKAZI BORA product. The first of these “Foundations of MAKAZI BORA” is an oldie but goody from John Turner’s Housing by People: Towards Autonomy in Building Environment. Turner wrote Housing By People and Freedom to Build before the development of microfinance and long before housing microfinance began to emerge. I am more convinced than ever that his thought, as summarized by Collin Ward in Turner’s Three Laws of Housing, is fully complementary to housing microfinance products and services, if not essential.

 

I have written on Turner's 3 Laws of Housing before, but I never tire of them because (as any good law should) they continue to ring true over the years and through a variety of housing experiences:

1. Turner’s First Law of Housing: When dwellers are in control of their housing process it is a better process both for the individual and the overall housing environment.

2. Turner’s Second Law of Housing: The value of a house is not in what it is, but in what it does for the household. The value is not necessarily related to imposed standards.

3. Turner’s Third Law of Housing: “Deficiencies and imperfections in your housing are infinitely more tolerable if they are your responsibility than if they are somebody else‟s.” (1)

Housing is a funny thing in that very good microfinance institutions can be tempted to develop housing microfinance products that do not adhere to the principles of microfinance and housing institutions can follow assumptions that lead them to design housing microfinance support services that, in practice, work contrary to Turner’s Three Laws.  I will continue to argue that it will be difficult to develop a successful housing microfinance product targeting low income households in Sub-Saharan Africa  that does not align with Turner's Three Laws. Perhaps that will change as the overall finance and housing environments develop and change, but the short to medium term reality, I believe, will reward housing microfinance products that give clients the most freedom to build.

(1) Turner, J.F.C. (1976) Housing by People: Towards autonomy in building environments, London: Marion Bayers, p.51

Housing Microfinance and the 6 S's: Stuff

We can learn something about a settlement in Africa just by what housing-related items or materials are being sold in or near it. In a place where there is very little cash investment in housing, (which still characterizes much of rural Africa), it may be hard to find any business supplying construction materials. In new settlements (or those showing rapid transformation from traditional construction methods), it is common to find a proliferation of businesses selling blocks, cement and roofing material. Settlements that are more established often have less cement, roofing sheets and blocks on the market, but more electrical supply, plumbing and paints. In settlements that are even more established, businesses sell a lot of Stuff.

In How Buildings Learn: What happens after they’re built, Stewart Brand implicitly considered Stuff as part of the housing process. Stuff is his term for the usually movable things such as furniture or appliances, that go into a house. N. J. Habraken also used Stuff as one of the basic elements in determining supportive housing design in Variations: The Systemic Design of Supports. Without a doubt, beds, sofas, tables and chairs, refrigerators, stoves, toasters, televisions, stereos and other household items are a critical part of one’s housing. Does stuff, however, have a place in housing microfinance?

Stuff is often sold with consumer credit by its vendors. I once visited a housing program in South Africa where clients prioritized payment for their sofas over their house payments. At first I found it strange that stuff had priority over shelter. It was, however, a  logical response given that the local housing environment made it very difficult to foreclose on a housing loan, whereas providers of consumer credit would quickly to arrive and collect their sofas, chairs or other items if their customer fell into arrears. People valued their stuff and there is no reason why housing microfinance could not extend to “stuff” as well. No home is complete without it!

Even if stuff is not part of an institution’s housing microfinance product offering, it still often has a critical role in housing microfinance. One of the differences between housing microfinance and mortgage finance is that housing microfinance usually does not secure land or the house as collateral. Stuff (chattel) often serves as at least partial security on housing microfinance loans. Sofas, televisions, tables and chairs and even beds can be pledged as collateral. They are usually much easier for the lender to seize and sell in case of default in loan payments than an attempted foreclosure and sale of property, particularly in places where even mortgage law is not fully developed in a practical sense.

An interesting thing about stuff is that it is a rough proxy for the socio-economic status of its owner. In the MAKAZI BORA program (the housing microfinance program with which I currently work) we take photographs of stuff that is pledged as collateral. A look through a client’s collateral photos can give a quick indication as to whether the per capita household income is closer to $1.00 per day or $5.00 per day just by the types of items used. Not all radios, sofas and cupboards are alike, and by the second month of implementation we had determined that a section of our operating area had a lot more people of higher income simply by the collateral they were pledging compared to that of other areas. That particular section was the only one in the area where clients consistently had what were listed as “sub-woofers” (music/entertainment systems) on their collateral pledge forms, whereas much older and simpler radios were the rule in other sections of the operating area. One rule of the credit committee is not to make comments or judgments about people’s stuff when reviewing applications. Regardless of its condition, age or value, it is theirs and it represents part of the assets of the people we serve.

Housing microfinance is a housing intervention. Starting with site and ending with stuff, each of Stewart Brand’s Six S’s of a building [1] is a potential loan use for housing microfinance products or otherwise influences the practice of housing microfinance. Housing microfinance products that fit in with the housing realities of their intended users will be the most successful, both commercially and in terms of having a significant effect on the people’s housing process and the overall housing environment. This marks the end of my series on the "6 S's." Additional topics will be forthcoming shortly.

[1] Brand, S. (1994) How Buildings Learn: What happens after they're built. NY: Penguin. p. 13

Housing Microfinance and the 6 S's: Services and Space Plan

In How Buildings Learn: What happens after they're built, Stewart Brand states that “The flow of money through a building acts to organize the building.” [1]  In Sub-Saharan Africa, low income households face challenges with this flow of money due to lack of access to the type of mortgage finance that is the norm for middle and upper class households in other parts of the world. Money for home construction tends to be accessed in relatively small quantities compared to the task at hand, often over a period that can be measured in years. The result is a home that is built incrementally. Incremental construction becomes an exercise in prioritizing the flow of money across what Brand calls the Six S’s: Site, Structure, Skin, Services, Space Plan and Stuff. Services and Space Plan naturally fall after site and structure as priorities, but often surprisingly fall after skin as well.

Services typically include water, electricity or gas connections to a building. Because of climate considerations and the relative cost of various building materials, the most common construction material in Africa is some kind of brick or block. [2] This means that the services must be added through and on top of a block wall. Cladding over the block is extremely uncommon in low income households, with a plaster and paint being the most common interior skin, if there is one at all. Conduits are frequently placed into channels carved into the wall and covered with plaster with the exception of the socket outlets. There is not, however, a significant taboo against having visible conduits in low income households. It is not uncommon to add them directly over the skin instead of the skin being added after the services to hide them.

Housing Microfinance loans for services can link to water and sanitation efforts in upgrading informal settlements. Clients may use a housing microfinance loan to connect to potable water, sewage or a septic tank. The housing microfinance program in which I currently work is in an urban setting and electricity connections are a popular loan use. Loans for electricity connections tend to be taken by households that have reached some level of satisfaction with the structure and skin of their home. These loans are sometimes associated with home-based businesses that may use a refrigerator, freezer, electric sewing machine or other gadget. It is interesting that the “stuff” that uses the electricity is often acquired before the service is connected to the house, having been used in rented accommodation, kept in another person’s house, or used with car batteries that are periodically sent out for charging.

The Space Plan includes non-load bearing walls, ceilings and doors and windows. Because it is very common for low income households in Africa to move into a house before it has all (or sometimes even any) of its doors and windows, these become a common use for housing microfinance loans. In our MAKAZI BORA home improvement loan program in Dar es Salaam, Tanzania, doors and windows may be the most common house component sought, sometimes on their own but often as part of applications for roofing, or other improvements. Some loans have been used for improving existing windows with screens (to keep out mosquitoes) or bars (to keep out other unwanted visitors). Clients with very low incomes have purchased and installed second-hand windows and doors to shut their houses, while clients with slightly higher incomes have used the opportunity of a housing microfinance loan to purchase doors and windows of higher quality and durability.

Ceilings have also been a popular loan use. Like electricity connections, these tend to be for clients who have basically satisfied the rest of their housing priorities as they have worked through their incremental building process. Loans for ceilings are sometimes for relatively wealthier clients, but sometimes simply for clients who are further along in their process as they continue to build and organize their houses according to their own image of what their home should be.

Housing microfinance can be made flexible enough to assist people at all stages of their housing process as they acquire, add, or modify site, structure, skin, services and space. Access to housing finance increases the velocity at which a low income household is able to develop and organize its home. The more flexible a housing microfinance product is, the more utilitarian value it will have for dwellers in their housing process and the greater the potential demand for the product. Although this is a hypothesis to be explored more in-depth at another time, the very awareness of the ability to access affordable housing finance may assist a household in organizing and planning its journey through the 6 S’s.

[1] Brand, S. (1995). How Buildings Learn: What happens after they’re built. New York: Penguin. p. 85.

[2] This is not inclusive of traditional construction methods in rural areas that may use mud walls or a waddle and daub construction, which may still be statistically the most common construction forms in Sub-Saharan Africa.