Housing Microfinance and the 6 S's: Skin

When describing a sort of hierarchy of the 6 S’s, Stewart Brand wrote that “Site dominates the Structure, which dominates the Skin, which dominates the Services, which dominate the Space plan, which dominates the Stuff.” [1] Skin is the layer of the building that meets the eye and covers the structure. Brand calls skin mutable. In How Buildings Learn, he demonstrates its mutability with examples of how buildings’ facades change over time. In Sub-Saharan Africa, it is common for houses to be built and occupied with very little in the way of skin, which is then progressively added. This makes the addition or modification of skin a very popular loan use for housing microfinance in Africa.

Traditional houses in Africa usually have skin. When the structure is poles, builders weave bamboo, reeds or sticks through them and apply a mud or clay skin. Plaster of one type or another is the most common skin in Africa, both on traditional and "modern" houses. It is indeed dominated by the structure, because the plaster (skin) must be of compatible material to bind to the structure. In some of my previous work in the Democratic Republic of Congo and Ghana we built low cost houses using mud bricks as structure in communities where this seemed to be the most feasible option. The structure was then plastered with a mixture of cement and the same type of soil that made the bricks. Taking initiative in their self-help, clients would sometimes increase the cement component of the plaster ratio in the belief that it would make the skin stronger. The actual result was a plaster that could no longer bind to the structure and would soon start falling off. As the skin fell, so did repayments. Despite the fact that the clients’ actions directly caused the problem, the house design, selection of materials and technology and the overall process were ours and Turner's Third Law still seemed to apply.

In other communities where the soil was too sandy for mud bricks or where burnt bricks were an option, we built burnt brick or cement block structures. In an effort to reduce construction costs and keep clients’ income directed towards their loan repayments, we had a policy that houses could not be plastered until their loans were paid off. Complaints were seemingly endless when we (the providers) considered skin to be a luxury that a resilient structure made unnecessary. This was a constant source of conflict and we were ignoring a demand for skin as a loan product and as a key part of people’s housing wants and needs. Necessity and importance are not always the same thing when housing is viewed as a personal process as opposed to a shelter or commodity.

Skin is often a secondary or tertiary priority for households in Sub-Saharan Africa, after site and structure. It is extremely common for dwellers to move into a building before there is any skin except the roof covering. This is incremental building in action: An informal finance strategy that prioritizes available funds against housing as a livelihood component. Once the house is occupied, however, housing microfinance frequently assists dwellers to continue their housing process by adding interior and exterior skin. Plaster, paint, tiles, skirting, rough exterior finishing and embellishment on verandas are very common housing microfinance loan uses with demand even from very low income households. Skin brings a sense of pride to the dweller and adds a personal touch to their home that gives housing a deeper meaning than basic shelter. There is tremendous value in this as well as demand. Skin as a loan use is undoubtedly one key to housing microfinance reaching the scale needed to be sustainable and profitable.

My approach to skin has changed drastically over the years from the days when I was trying to enforce “no plastering” policies. Should we allow a household to use a housing microfinance loan to paint their house pink when there is some other item of apparent necessity still incomplete? Why not? They are probably more aware than we as to what is complete and incomplete on their own house. They probably have a reason why they want to paint it and we, as outsiders to their home, have little idea what painting their house pink means to them. Effective demand and a supportive, personalized housing process ultimately go hand in hand.

[1] Brand, S. (1994). How Buildings Learn: What happens after they’re built. New York: Penguin, p. 17.

Housing Microfinance and the 6 S's: Structure

“Structure is the building,” states Stewart Brand in How Buildings Learn: What happens after they’re built. [1] The structure is composed of the foundation and load-bearing walls. It is situated on the site and sets the parameters for skin, space and services. When low cost house construction is undertaken by the dwellers themselves, how structure is built depends upon what materials and skills are both readily available and affordable as well as cultural factors. Even a cursory survey of a settlement can determine what is readily available, affordable and acceptable to low incomes households simply by observing the materials in most frequent use in the structures and what is being sold where people with low incomes are building. How structure is most commonly built in a given locality and the lending institution’s position on it affects housing microfinance design.

My posting in September titled a product-environment mismatch  was essentially about structure. The prevailing structures in northern Malawi where a housing microfinance product was implemented were mud walls or waddle and daub (mud and pole) with no foundation, but the product required a burnt brick structure with a 60 cm foundation. This made for a slow and expensive start-up, because the effective demand was low based on the low number of households with eligible structures (which was much lower than the number of households in need of improved housing or interested in a home improvement loan). In such cases a decision must be made whether to design the product to work with houses having the prevailing type of structure, to require potential clients to build a different kind of structure prior to receiving a loan (as was done in the example) or to allow the loan to be used to build a structure to the desired standards. This is a decision that combines an institution’s housing ideology and its approach to lending.

The first option of working with the prevailing structures is perhaps the most market-oriented. In the northern Malawi example discussed in a product-environment mismatch, roofing was locally considered to be the biggest housing challenge and people wanted better roofs. Working with the prevailing structures might have meant allowing clients to use a home improvement loan to put a durable roof on a house with walls made of mud or mud and poles. From one housing perspective, putting better roofs on existing houses could be viewed as a significant improvement in living conditions. From another perspective, the houses may still be considered sub-standard, semi-permanent and undesirable to the lending institution. From the market perspective, effective demand for this type of product would be people who could afford a loan for a roof, wanted a better roof and desired to take a loan for roofing. Roofing sheets were locally available, so this may have captured the largest effective demand at lowest cost to both the client and the institution.

The second option of requiring potential clients to build a new structure to higher standards may also have some advantages for the lender. From a social perspective, the lender may have a role in improving the built environment by encouraging more durable building methods. When a household builds a new structure, it also shows a high level of commitment to putting resources into their housing. This can be an indicator of reduced risk for the lender. In the northern Malawi example, however, the demand (for roofing loans) moves to households who can afford a loan for a roof, want a better roof, desire to take a loan for a roof and are willing to rebuild their home using a different technology in order to be eligible. There may be a multitude of reasons that people are using the current methods of building structures. Changing this could be challenging and result in low effective demand with high costs and challenges to the lender in reaching sustainability.

The third option of supporting the structure with the loan could be in the form of cash disbursements for the purpose of building a foundation and walls or the institution actually overseeing the construction. This could result in quality structures, although in practice it is easier to assess the quality of an existing structure than to ensure the quality of a proposed one. The challenge of cash disbursements for structure is that it is difficult to gauge the household’s commitment to their housing process when looking at an empty space on a plot of land. There is a higher risk of loan diversion than when working with a household that has already put their own resources into a structure. When the institution oversees the construction, delivery becomes more expensive and complicated for the lender. It is a possible option, but it is perhaps the most challenging of the three from a lending perspective.

In my current work in Dar es Salaam, Tanzania, we have decided not to support structure with our loan and only work with pre-existing structures. Because of the sandy soil in the city, the prevailing material used for building structures is cement blocks. The advantage to this is that the material used is resistant to rain and can be collected on site and structures stand unroofed for long periods of time. When matched with a difficulty in financing roofing, this results in a market for roofing loans on existing structures. The quality of the structure can be viewed prior to approving a loan for its improvement. A household that has brought a structure to roofing level has both invested significant resources that show some level of commitment and it has learned a lot about building their own home as they have sourced materials and worked with builders. At least that is both our espoused theory and theory in use so far.

As Brand said, structure is the building. Lending institutions make decisions, at least implicitly, on their approach to structure through their housing microfinance product design. An understanding of the types of structures built locally, why they are built that way and what are the possible product design alternatives and their implications should be a prominent feature in housing microfinance product development.

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

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.