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.
