Housing Microfinance and the 6 S's: Site

Although the other 5 S’s of a building come, are modified and go over time, Stewart Brand wrote in How Buildings Learn: What happens after they are built that “Site is eternal.” [1] Site is a prerequisite for (or part of) any housing finance intervention. The level of formalization in the land market determines the legal status of “site” and how it is accessed. This then influences the development of formal housing finance (mortgage market). When a vibrant mortgage market that reaches down to low income households is absent, there will be a rise in demand for housing microfinance to fill the gap and finance alternative housing processes.

Site and Risk in Housing Finance

Mortgage markets require the ability of the lender to put a lien on the property (site) over the loan term. This requires legal title that is dependent upon a land registration process. It also requires a legal framework giving the lender the practical ability to sell the property in the case of default by the borrower. Risk is mitigated by ensuring that the net resale value of the asset (property inclusive of the site and structure) is greater than the amount owed by the borrower. Over-reliance on the asset as a means of reducing risk can be problematic, however, if the resale value of the asset decreases to below the outstanding loan balance.

Housing microfinance usually does not require legal tenure (if it does, it may be more like a micro mortgage). It relies instead on land security, being some kind of evidence that there is low risk of the owner being removed from the land against his/her will. This could be a document showing purchase, inheritance or customary ownership and may include a signed statement from local leaders that the owners has a right to the land that they wish to use for construction or making home improvement. In the absence of formal land registration, there is often a recognized parallel land system. Whereas formal land and mortgage systems prevent the sale of property (site) when it is mortgaged, it is often possible to sell property in a parallel land market by simply generating a new document of sale. This is a potential risk for housing microfinance providers even if they are generally satisfied that the client will not be forcibly removed.

Reducing Risk

Because the site itself cannot be effectively leveraged to reduce risk in housing microfinance, risk mitigation falls back on standard microfinance methodologies. These include ensuring affordability of the housing microfinance loan through rigorous income assessment, assessing character and sometimes using guarantors both as security and a form of social pressure. The process is highly reliant upon the work of credit officers, as opposed to legal documents. Understanding the history of the settlement in which client’s housing project is located, the land and human settlement policy framework and local politics helps to assess whether there is a potential risk of removal from the land. Evidence of commitments in the community and an understanding of the character and personal history of a borrower may also help asses the risk of the borrower selling the site, disappearing and leaving the financial service provider with an uncollectible account.

Site and Effective Demand

When housing microfinance is undertaken in the form of a home improvement loan on a client’s existing housing project, site is a pre-requisite to obtaining a loan. In African rural areas, this is usually not a problem. With some exceptions, most rural households in Africa have access to land through customary rights or agreement with local leaders. In urban areas, however, a significant portion of the poor and low income households rent their accommodation and do not own land. This excludes them from access to housing microfinance, making  effective demand solely from those who have secure land. This can potentially influence the social performance of a housing microfinance product based on the practically ability of low income households to obtain land in a suitable location to match their livelihood strategies. If low income households find it very difficult to acquire land due to whatever reasons, then housing microfinance that relies on a borrower’s access to land will serve clients with relatively higher incomes compared to the very poor in the community. Site (or rather access to it) also influences the market and demand for various potential housing microfinance products.

One way of serving populations who do not have access to land is to offer land (site) as a loan product. This could be the purchase of land on its own, or a package of services that include land and housing. One approach is for an institution to acquire a large piece of land through a formal process, or through mobilization of members, and then parcel it out as part of a housing package. In African urban centers, such land is commonly found on the outskirts of the city and far from employment opportunities for non-skilled workers and the vibrant local economies of informal settlements. Although access to land and housing may be secured using this method, it is at high cost to the institution and it can sometimes be a risk to a household’s livelihood sustainability if the location of the site does not support their income strategies and/or results in significant added expenditures.

Another option for land as a loan product would be to support the acquisition of land through existing informal processes. In this case, a client might identify land for sale in an area of his/her choice and access a loan to purchase it. In some cases, the site may also include an existing structure. This type of transaction takes place frequently in informal settlements, but is usually “off the radar” to those who only focus on formal processes resulting in title. There is no reason why housing microfinance could not support such transactions as long as the institution is comfortable that a reasonable level of security exists and that any risk can be mitigated in other ways.

A third housing microfinance option for serving those who do not have access to their own site would be supporting the construction or improvement of rental units. This could clearly lead to allegations of supporting “slum lords,” but it must also be recognized that renting is a viable livelihood strategy for many low income households in informal settlements. Increasing the quantity and quality of rental stock in low income areas can certainly have multiple benefits, impacting the renter, landlord and overall housing environment. It is not uncommon for low income households living in informal settlements to rent out rooms, providing accommodation for one family and an additional steady source income to the other.

Conclusion

Macro level factors related to site (land policy and legal frameworks) are a major factor in determining how low income household access land. Macro land-related issues also influence what types of housing finance options are (or could be) available and who can access them. Providing site (land) as a product or part of a product could potentially make housing microfinance more inclusive in some environments. Likewise, housing microfinance products that target rental uses also ultimately benefit those who do not have access to land or rent as part of their livelihood strategy.

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

The 6 S's and Housing Process

I previously wrote about a housing concept from Stewart Brand’s How Buildings Learn: What happens after they are built. (See Incremental Building and Housing Microfinance Part III, posted on 13th September 2009) Brand built upon  work by Frank Duffy and identified “The 6 S’s” of a building: Site, Structure, Skin, Services, Space and Stuff.[1] How the Six S’s are integrated into a building varies, depending on whether the building was constructed through a formal or informal housing process and the degree of access to housing finance. As Brand states, “The flow of money through a building acts to organize that building.”[2]

Let me start with a brief look at the 6 S’s:

• Site: This is the location of a building. In the western setting, it is almost certain to be legally and specifically defined. In other parts of the world, there may be no legal title. Many countries have yet to conduct cadastral surveys for the vast majority of land, making formal title nearly impossible and resulting in  alternative forms of land tenure. Site has a tremendous impact on the building process in terms of the eventual form of structure and  the availability of housing finance options.
• Structure: Brand writes that “The foundation and load-bearing elements are perilous and expensive to change – so people don’t. These are the building.” [3] The structure of a building is  defined by its foundation plan and, as Brand notes,  is not likely to be significantly altered. Structure can be added incrementally through additions and extensions, using either formal and informal housing processes.
• Skin: The skin of a building is what meets the eye. It has a functional purpose of protecting the structure and providing insulation, security and safety, but it also frequently has aesthetic purposes. It is not uncommon for waddle and daub traditional houses in Africa to have an extra layer clay added to the outside to protect the structure. This is sometimes painted in designs with different color clays. “Keeping up with the Jones’” knows no socio-economic boundaries and often involves improvements or changes to the skin of a building.
• Services: Services include heating, electrical wiring, gas fittings, plumbing communication or other utilities and services in and around a building. Efforts are often made to hide the majority of services behind the skin of the building with the exception of access points like sockets, plumbing fixtures, etc.
• Space: The space plan includes the non-load bearing walls which delineate how space is used within the structure, as well as elements such as ceilings, doors and windows. Years ago I remember my father taking a sledge hammer and tearing out a wall between our dining room and kitchen to join the rooms and add a wood-burning stove. At the time, I didn’t think of it as a modification of the space plan and addition of a service, but that’s exactly what he was doing.
• Stuff: These are the things we put into the house and usually take with us when we move. Furniture, appliances and personal items all fall into this category. “Stuff” is clearly separate from what we usually consider as the building, but you will almost never see a building that is being utilized without it!

How Buildings Learn addresses the change and adaptation that takes place in a house or structure after it is built. Owners personalize and adapt buildings to their needs and wants over time. Brand uses the 6 S’s as a frame for identifying the types of transitions through which buildings pass. Brand looked at the change process primarily in the context of the formal housing sector. Although there are many similarities, there are also a number of differences when viewed through the lens of informal housing.

The 6 S’s in a formal housing process:

• Instant House: Whether built as new construction or bought as a pre-existing building, all of the 6 S’s (except “stuff”) are usually complete at the time of purchase. The incremental process of change begins after the owner has acquired a complete unit. At the time of sale, one owner’s ending point with a building becomes the next owners starting point, but it almost always starts as a complete unit in terms of the S’s.
• Built to Standards: The S’s themselves are built to standards, with inspection being a requirement. The formal housing process is highly regulated and the builders, sellers and just about everyone involved must be licensed and /or conform to standards. This is in an effort to guarantee quality and safety.
• Financed with Formal Housing Finance: The mortgage market is designed to facilitate the purchase of complete units with repayments over a long period of time. The structure, skin, services and space plan must meet quality standards and there must be legal tenure for the site, because mortgage financing is based on the presumed legal ability to resell the asset (the building) in case of default. Mortgage financing supports the acquisition of the 6’s in one complete unit, but it is also dependent on the ability to do so according to local quality standards and regulations.

The 6 S’s in an informal housing process:

• Incremental Construction: Most informal building processes are incremental. The time from the start of construction to when a building is complete with all of the 6 S’s can often be measured in years. Many buildings never have a complete set of the 6 S’s in their entire lifespan. In the incremental building process, structure is king. Buildings often sit on an untitled site and are occupied with incomplete skins, space, services and stuff. The S’s are added for the first time as the building is already in use by the owners.
• Questionable Standards: Even where regulations and standards exist, low income households often cannot afford to comply with them. This results in houses being built outside of standards. Builders are usually people who may have some knowledge of simple construction, but have not received formal training or licensing and are difficult to hold liable for the quality of work. There are few guarantees or avenues for recourse in the case of a poor quality construction.
• Financed Through Informal Sources: Houses built using informal process are  commonly built by people who do not qualify for loans from a bank. The site may not be legally viable as collateral and an informal building process undertaken by builders of indeterminate skill may appear risky to conservative bankers. As a result, owners build using whatever sources of finance they can access. This is often self-financing through savings, but could also include small loans from family, friends or places of employment. With the growth of the microfinance industry it is not uncommon for small business loans from MFIs to be diverted into housing. Whatever the source of funds, it tends to be piecemeal and the incremental building process becomes an exercise of prioritizing the 6 S’s and then adding and improving them gradually. The flow of money does indeed determine the building process.

Owners usually don’t choose whether they want to use a formal or informal housing process. The policy, regulatory and finance environments linked with predominant sources and levels of income essentially predetermine the process that will be used in practice and how the 6 S’s will be acquired. How Buildings Learn demonstrates that incremental building is more common than often imagined within the formal housing sector. Although housing microfinance is often thought of as a tool to support informal housing processes, its use in terms of the 6 S's it is not too different from home improvement loans delivered through formal lending institutions to support housing modifications complete with building permits, inspections and qualified builders. When housing microfinance is applied to informal housing processes, however, the effect is to speed up the initial acquisition of the 6 S’s and to allow the dweller to move towards and eventually own a complete building. As Brand showed, however, buildings continue to transform long after initial “completion.”

[1] Brand. S. (1994) How Buildings Learn: What happens after they're built. New York: Penguin
[2] Brand, p. 85
[3] Brand, p. 13

A Tale of Two Products Part Four: The Performance

INTRODUCTION

In this tale of two products we have looked at the power of housing paradigms on housing microfinance product development and two different product and partnership designs in  Uganda and Kenya. The Uganda product was a flexible housing loan that was delivered by the MFI with institutional support from the Housing NGO, but without branding the NGO to the MFI’s clients or integrating the NGO into the loan process. In Kenya, the product included specific house designs and significantly more construction technical assistance. The Kenyan MFIs product was co-branded with the NGO and staff from the Kenyan Housing NGO  participated in the MFI’s housing microfinance loan process. Having looked at paradigms, products and partnerships, we now move on to performance.

SLOW STARTS

The partnerships between the Housing NGO and MFIs in Uganda and Kenya has very similar start-ups. All of the partners attended the same housing microfinance market research workshop and used similar tools and techniques in their market research and product development. Memoranda of Understanding were signed within one month of each other and the amount of loan capital provided by the Housing NGO was the same. The actual transfer of capital to the Ugandan and Kenyan MFI partners took place at approximately the same time. Although Kenya and Uganda have slightly different operating environments, as East African nations they are relatively similar  when compared to each other, as opposed to Latin American or Asia countries, or even South Africa. The product development process, time lines, capital committed and even the missions of the institutions were essentially the same. The only salient differences were some product features and the partnership design.

Getting from the transfer of capital to actual loan disbursements started quite slowly with each partnership. The MFI in Uganda (designated “UMFI” for this tale of two products) was going through some internal transitions that slowed down the implementation of its flexible housing loan. Implementation of the construction loan at “KMFI” (not actual name) was also delayed in part due to post-election violence. The Housing NGO offered additional institutional technical support to the MFIs to get the products up and running in each country and the MFIs finally started disbursing housing microfinance loans at about the same time..

HIGHLY VARIED PERFORMANCE

Once loans started being disbursed and minor process issues were addressed, performance between the two partnerships became markedly different. UMFI began experiencing high demand for its flexible housing loan and used up the initial loan capital from the Housing NGO. The partnership was refinanced with additional capital, which was quickly put to use. Loans disbursed are approaching 500, but have been controlled due to limitations on available capital.

The KMFI product continued to struggle, despite KMFI being a significantly larger MFI than UMFI. Disbursements never picked up and the partnership was terminated before the loan capital had been fully utilized. Total disbursements of the construction loan during the partnership between KFMI and the Housing NGO were less than 50.

Neither product truly “took off.” The KMFI product performance was significantly poorer than UMFI’s in terms of generating and meeting demand. Even UMFI, however, has failed to take housing microfinance to scale beyond the capital provided by the Housing NGO. It has intentionally limited disbursement to the funds available at a concessionary rate through the partnership rather than seeking additional funds from other sources to scale up and meet the actual demand for the product.

WHAT CAUSED THE DIFFERENCE IN PERFORMANCE?

The partners themselves have various interpretations of their performance. One explanation for the KMFI performance was that the institution focused on and incentivized their core  business loan products rather than the housing microfinance product. Certainly that may be a factor, but I can’t help but believe that having both the Housing NGO and MFI interacting directly with clients may have led to some confusion around the product and between the institutions. We may never really know.

I also believe that  higher  levels of construction technical assistance (particularly using standardized designs) make it more difficult  to generate and sustain effective demand for housing microfinance in Africa. This has been my own experience so far; the greater degree of flexibility of the housing component of the product, the greater the ability to generate effective demand. When comparing higher and lower levels of construction technical assistance in housing microfinance, however, Franck Daphnis has stated that “No empirical evidence currently suggests that one approach is correct and the other is not.” [1] My own hypothesis would be that housing microfinance in Africa with less construction technical assistance will generate more effective demand, a higher rate of loan disbursement and lower cost for the institution. When choosing between a hypothesis from me and Franck Daphnis’ experience, however, Daphnis is the more reliable choice. Even this tale of two products, although true, is largely anecdotal in nature rather than part of a larger empirical study.

CONCLUSION

This brings my tale of two products to a close. The Housing NGO, UMFI, KMFI and their housing microfinance partnerships really exist, although I have not used the actual names of the institutions. The product with minimal construction technical assistance and no direct contact between the housing NGO and the MFI clients did in fact disburse approximately 10 times more loans in the same period than the product with a higher level of CTA and both institutions interacting directly with MFI clients. There were some who predicted this very outcome based on the product and partnership design, even before the first loans were disbursed. Whether that says something definitive about the types of housing microfinance products and their performance is yet to be determined. It is something for more study and I hope that some  empirical studies comparing product types in the African context will be coming in the future as housing microfinance continues to develop on the continent.

[1] Daphnis. F. & Ferguson, B. (eds). (2004). Housing Microfinance: A guide to practice. Bloomfield, CT: Kumarian Press, p. 11.