> Posted by Christy Stickney, Habitat for Humanity

Can we possibly address financial inclusion without discussing housing microfinance?

Financing for housing is in great demand, frequently cited as clients’ top choice after a business loan, and is the most commonly identified utilization of business financing outside of financing businesses. MFIs consistently report that housing portfolios perform as well as or better than other loan products, and believe that it balances portfolio risk and increases profitability (even though concrete data is often lacking).

Housing microfinance typically refers to non-mortgage housing loans utilized primarily for home improvements, repairs, and incremental building. Loan terms are generally under three years, and interest rates tend to be within the market range for microfinance loans. For the majority of the world’s poor, who build homes incrementally as financing becomes available, housing microfinance is uniquely tailored to match their building and financing patterns. Moreover, improved housing contributes to social benefits of improved health, education, economic stability and security. So why is it that housing microfinance isn’t growing faster, given the compelling advantages to both financial institutions and the clients they serve?

Habitat for Humanity’s Center for Innovation in Shelter and Finance recently undertook a study to determine the status of housing microfinance in Latin America, seeking to identify key factors facilitating or restricting its growth. Thirteen retail financial institutions and five second-tier institutions, providing technical assistance and funding to MFIs in Latin America, participated via phone interview or survey. Building on an earlier study conducted jointly with ACCION International in 2006, the recent report revealed that limitations to growth in housing microfinance continue to be supply-driven. More specifically, MFIs in Latin America are frequently reluctant to allow housing to assume an increased share of their overall portfolios, lest this lead them away from their traditional mission of supporting enterprise development and income generation. Furthermore, MFIs tend to restrict housing microfinance to their existing clientele, as a type of reward or incentive to increase client retention. This restriction results in a strategy of limited growth potential given that borrowers’ debt capacity is already partially compromised with a business loan. Very few of the MFIs surveyed were extending housing loans to other legitimate market sectors, such as low-income salaried workers, wage earners, remittance recipients and pensioned retirees.

Other findings from the study include:

  • Ensuring that clients invest their loans in housing is cited as one of the key challenges to implementing housing microfinance successfully, so as to distinguish the product from a consumer loan and minimize its cannibalization of other loan products.
  • Providing technical assistance in construction to clients remains on the frontier of housing microfinance as successful, scalable models are yet to be proven; nevertheless, approximately half of the institutions interviewed are engaged in partnerships assisting them in testing the delivery of these non-financial services.
  • Welcoming alternative actors within the housing microfinance space will be increasingly critical. Significant non-traditional suppliers of housing microfinance have emerged from among corporations capitalizing on the vast opportunities at the base of the pyramid. Possibly the best known example is CEMEX’s Patrimonio Hoy, which reports having reached over 300,000 Mexican families since its inception in 1998. Patrimonio Hoy employs a savings-first strategy to provide low-income families with access to building materials at competitive prices as well as microfinance and technical advice.

The coming decade should see a dramatic increase in housing microfinance as a diverse array of providers is attracted to a financial service that’s good for business and good for clients.

Image credit: Flickr user Images_of_ Money

Christy Stickney is an independent development consultant.  She has worked in international development for over 22 years, and most recently with Habitat for Humanity International, as Director of Housing Finance for Latin America and the Caribbean.  During her 10 years with Habitat, Christy oversaw a variety of programs seeking innovative approaches to housing microfinance, financial education, raising investment capital, leveraging remittance flows, and mobilizing government subsidies – all for improved housing.  Prior to joining Habitat, Christy worked eight years with Opportunity International, where she directed technical assistance and financial support to poverty-focused loan and savings programs around the world, followed by a year-long consultancy with the Agros Foundation.  She has lived throughout Latin America and the Philippines, and is currently based in San Jose, Costa Rica.

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