I could not have been happier when I heard that this year the European Microfinance Platform is focusing on housing microfinance.
As a microfinance specialist for the last 21 years—and the last 9 exclusively dedicated to microfinance products for housing—I have witnessed the growth potential of this sub-sector of microfinance, as well as the constraints and limitations to the expansion of housing finance portfolios, amongst which the most important include lack of adequate capital and insufficient knowledge on how to develop differentiated housing finance products.
When we hear that:
* at least 1.6 billion of the global population lives in substandard housing,[i]
* at least half of the global population—3.5 billion people—currently lives in cities, and
* 828 million people live in slums (according to the United Nations’ Sustainable Development Goals),[ii]
both funders and financial institutions alike should take note and pay close attention. Within these concerning figures, which only seem to move upward, an opportunity is evidenced. A good portion of the individuals denoted by these statistics have been or are served by traditional microfinance loans, which are frequently diverted towards efforts to improve housing conditions.
There are many shelter challenges facing low-income households, and, probably, the biggest one remains access to finance. Traditional housing financing methods, such as mortgages and developer financing, are not designed to meet the needs of low-income populations in emerging markets. These households typically have undocumented and volatile incomes and lack the collateral or guarantee for a typical mortgage loan. Indeed, World Bank data demonstrates that fewer individuals in developing countries have outstanding loans directed toward formal house purchases with more loans directed toward housing construction.[iii]
The microfinance sector, which responded to the challenge of serving the financially excluded, has now an opportunity to respond to the vast demand for housing loans that can serve low-income groups, who remain unserved by the traditional financial sector. Microfinance institutions that take up this opportunity can achieve a double bottom line: increasing financial revenues by adding such housing finance products and helping to reduce the housing deficit among low-income households by unlocking a door that is tailored to their needs and capacities. Efforts in this area demonstrate that housing microfinance presents a new, vibrant market opportunity for the financial and microfinance sector at large.
In fact, every day we see more institutions adding differentiated housing microfinance products to their portfolios. Housing microfinance is gaining popularity and earning legitimacy as part of microfinance institutions’ business, helped in part by the desire of institutions’ to not only serve the needs of micro-entrepreneurs but to also further access to health, education and housing—the three big priorities of low-income households around the world.[iv] However, the supply of such services still lags far below the natural client demand.
The uniqueness of housing microfinance is that though it utilizes the same principles applied to other microfinance products, it applies them to the progressive, or incremental, housing improvement process that the majority of the developing world uses to build, expand and repair their houses. Essentially it uses small, non-mortgage-backed loans offered in succession to support the existing incremental building practices of low-income populations. This can include a range of financial services that support informal shelter improvements such as home repairs, expansions, the addition of water and sanitation services, and energy efficiency upgrades.
As I write this blog, I am with representatives of two leading financial institutions, KWFT of Kenya and Centenary Bank of Uganda. We are on our way to visit Mibanco in Peru to learn from the latter institution’s experience with their “mi casa” product which finances the progressive construction needs of low-income populations. Mibanco, which was acquired by Edyficar in 2014, is a Peruvian microfinance bank that currently has more than 100,000 active housing microfinance loans and an average loan size of US$2,500, though the maximum loan amount is US$15,000. The mi casa product is currently reaching 66% of clients with incomes of up to twice the national minimum wage, and the majority of the loans are used for small scale, progressive construction.
In 2009, with a housing deficit of more than 1.8 million homes, Peru was grappling with a serious housing shortage that disproportionately affected low-income households. Habitat for Humanity partnered with Edyficar (now known as Mibanco) to develop a dedicated housing microfinance product that complemented their existing housing product which was reaching predominately middle income populations. Habitat’s desire to combat inadequate shelter aligned with the financial institution’s desire to develop a product that could reach a lower-income segment of the population. The resulting partnership produced one of the most successful stories in the sector and paved the way for the work Habitat for Humanity now does through the Terwilliger Center for Innovation in Shelter to support financial institutions in the design and/or refinement of housing microfinance products.
During the 2010 pilot of the housing microfinance product, the institution disbursed 504 loans. The total portfolio value was US$323,579, with an average loan size of US$1,840 and a product delinquency of 2.3 percent. Sixty-two percent of the clients were new. At present, Mibanco disburses around 15,000 loans per month, representing around US$3.7 million each month. With a PAR30 ratio lower than that of the institution’s overall loan portfolio, the housing microfinance products have proven to be more profitable than its other loan products. Now as the institution experiences steady growth and success, it intends to expand its housing microfinance portfolio by extending the product to new demographics and regions.
Despite successful examples such as that of Edyficar/Mibanco or the evidence from a 2015-16 housing microfinance sector survey conducted by the Terwilliger Center for Innovation in Shelter that microfinance practitioners are finding housing microfinance useful to retain loyal clients, to diversify their portfolios, to grow in response to client’s demand, and to achieve social impact,[v] there are several challenges facing financial institutions, funders, and clients that are prohibitive to full realization of the market opportunity these portfolios represent. Some of the most pressing challenges are regulatory complexity, market saturation and competition, political risk and currency volatility, and tenure security. Of the 83 financial institutions that participated in the housing microfinance sector survey at least 40% reported capital constraints as the number one issue preventing them from scaling the housing microfinance product, with at least one institution reporting that it was forced to discontinue its housing microfinance product due to lack of funding despite stating a continuing, “huge demand for housing loan[s].” Similarly, 30% reported unavailability of land or title and 25.6% stated a desire to focus on other products constrained development of housing microfinance products.
In response to one of these challenges, in 2012, Habitat for Humanity launched the MicroBuild Fund, a US$100 million investment fund for housing microfinance. The fund is the first microfinance investment vehicle to demonstrate the viability of housing microfinance by offering financial institutions longer-term capital to grow housing microfinance portfolios for low-income households. In addition, MicroBuild investees receive technical assistance from Habitat’s Terwilliger Center for Innovation in Shelter to help them refine and expand those products. There is, however, a continued need for additional funding of this type and the further support in the design of the products.
The European Microfinance Platform’s focus on housing during 2017 represents a crucial opportunity to advance the conversation around the most pressing challenges facing this emerging, yet nascent sector, and to unlock markets in a way that will support funders, institutions, and clients with one end in mind: reducing the alarming deficit of affordable, safe housing around the globe.
[i] UN-HABITAT. “Up for Slum Dwellers — Transforming a Billion Lives Campaign Unveiled in Europe.” UNHabitat.org. July 2, 2016. unhabitat.org/up-for-slum-dwellers-transforming-a-billion-lives-campaign-unveiled-in-europe/
[iv] Jan Maes and Larry Reed. “State of the Microcredit Summit Campaign Report.” Microcredit Summit Campaign, 2012.