Dec 15, 2017

The Microfinance Gateway was a media partner for European Microfinance Week, the annual event hosted by e-MFP. The Gateway sat down with Christoph Pausch e-MFP Executive Secretary, to discuss this year's conference theme: housing finance.

Gateway: Why is the traditional financial sector reluctant to finance housing in developing countries?

Christoph: It's a multi-faceted problem. Effective housing finance, including microfinance, requires a degree of commitment - staff needs special training on conducting assessments of construction projects and verifying land titles; the institution often needs to develop relationships with local masons and home builders; and the institution needs to understand laws and government programs pertaining to housing and home building.

For microfinance institutions, there is also an additional financing challenge, since a housing portfolio requires managing a longer-term portfolio and longer-term funding, which introduces risks, such as interest rate volatility, that most MFIs aren't used to dealing with. And lenders don't feel much competitive pressure to offer housing loans - many studies have shown that a large portion of clients redirect their microenterprise loans for home improvements. In the absence of strong competitive pressures, many MFIs have found it simpler to continue with the status quo rather than embark on what may to them appear to be a costly endeavor with unknown returns.

There are also obstacles coming from other stakeholders. In many countries, regulations governing microfinance institutions often restrict lending to entrepreneurial activities, in the process excluding housing. Meanwhile, on the funding side, there's a dearth of long-term low-cost funding, especially in local currency, needed to build sustainable housing loan portfolios. Lastly, a number of legal and contextual factors come into play - in many countries, records for land titles exclude poor and rural households, and the problem is especially acute in informal "slum" settlements. Similarly, laws and systems governing use of land as loan collateral - critical for micro-mortgages - are inefficient or inaccessible to all but the richest households.

Yet don't let the obstacles seem daunting - the opportunities for housing finance are definitely there, and there is much that the microfinance sector can do to greatly expand it.

Read the full interview here

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