> Posted by Patrick McAllister, Asia-Pacific Housing Finance Director, Habitat for Humanity
The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Housing remains one of the most pressing issues in Asia. United Nations estimates show that more than 500 million people, or one in eight, still live in slums on the continent. That figure will surge as the Asian population increases from the current 4 billion to 5 billion by 2050, according to Asian Development Bank projections. Low-income people can improve their living conditions, but with much difficulty if they are excluded from the markets that provide goods and services to their wealthier compatriots, including affordable financial services that can be used for home repair and improvement.
Despite recognition in recent years that low-income people need a variety of financial services to manage their surprisingly complicated financial lives, progress in offering new products has been slow. The lack of financing to repair or improve homes is a case in point. Evidence of the need is clear, both from the statistics on the shortage of decent houses, and from the actions of low-income families themselves: studies have shown that 20 to 30 percent of microfinance loans intended for income-generating activities are actually diverted towards home improvements.
Perhaps things are about to change. Recent research by Habitat for Humanity’s Center for Innovation in Shelter and Finance (CISF) shows that in 10 MFIs around the world, offering housing microfinance loans is good business: risk is more diversified, administration costs are lower, and client retention and repayment rates are higher. Reasons for these trends certainly include the higher loan size and longer terms of housing loans. It could also be that MFIs are watching these new products closely, or are still in a “honeymoon period.” But speaking to customers and MFI staff, one gets the sense that perhaps the most important reason is the increased motivation by clients to repay loans that are tied to a family’s most valuable asset – their home.
Housing microfinance loans are beginning to appear in several countries in the region, including India, the Philippines, Cambodia, Indonesia, and Nepal. Most of these are small pilot efforts by MFIs testing the waters, amounting to, at most, 1 or 2 percent of their outstanding loans. To give an indication of the potential here, increasing this to just 10 percent across all Asian MFIs could lead to 4 million families with improved homes. Including children and other family members, this equates to roughly 20 million people with improved lives through financial inclusion.
Of course, as with so many things, if it was easy it would already have been done. Financial inclusion in this area is not as simple as allowing people to use loans for home improvements. Successful new products must take into account preferences regarding amount of loan, length of tenure, repayment frequency, prerequisites, acceptable uses, and interest rates. Some especially valuable design features are those that contribute to the successful completion of construction projects, like assisting with budgets and planning. This type of assistance is valuable to the client and has the added benefit to the MFI of validating the loan request.
Home improvement lending also calls for a significant increase in the capacity of MFIs in the form of specially trained loan officers, product specialists, systems to approve and monitor housing loans, dedicated loan capital, construction knowledge, and, perhaps most important, leadership by MFI management. Such leadership exists at MFI Tulay sa Pag-unlad, Inc. (TSPI) in the Philippines, which has structured its dedicated home improvement lending by hiring engineers and providing loans directly to materials suppliers and laborers, thereby ensuring loans are fully utilized for the intended construction.
However, many MFIs are being hindered in offering greater quantities of housing microfinance loans because their own internal processes are not conducive to the product. For example, an MFI field officer may be resistant to marketing housing microfinance loans if the loan evaluation process of checking a client’s construction proposal and budget adds steps and time to their work, potentially reducing their productivity. Relatively minor changes in compensation can be made to remedy this and ensure field staff are compensated for all products.
MFIs may be constrained by external factors as well, like regulations. In India, for example, a traditional mortgage bank making a home loan to a client can refinance at preferred rates for secured loans at around 10 percent interest per annum. An MFI making a loan to a low-income person has to borrow at 14 percent or more, because without an employment title (often unavailable to low-income homeowners) the loan is considered unsecured. These costs are passed on to borrowers. Regulatory changes could allow the collateral available to low-income families, like entry in land registry or tax receipts, to be used to secure a home improvement loan eligible for refinance. This would make the cost of the loan more affordable for the home owner. Such a change would encourage MFIs to expand home improvement loans for their low-income customers.
The responsibility for financial inclusion lies with regulators, investors, financial service providers, and civil society organizations to ensure the availability, accessibility, and suitability of a range of affordable financial products. Leadership is needed to remove barriers present in many countries that discourage or prevent housing microfinance loans. Having a safe, decent home opens the doors to better health and performance in school, greater economic opportunities and increased community cohesion – exactly what financial inclusion is all about.
For more information on Financial Inclusion 2020, sign up for project updates.
Mr. McAllister leads Habitat for Humanity’s strategy in housing finance in the Asia-Pacific region. This includes promotion of innovative investment vehicles, microfinance, savings and financial education. He has previously worked in retail banking and with the US Department of Housing and Urban Development, creating alternatives to foreclosure for low-income borrowers and securitization of mortgage assets.
Image credit: SEEP
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