In this decade, Africa is undergoing urbanization at a faster rate than Latin America, Asia, or anywhere else in the world. In these burgeoning areas, the majority of people are building their own housing, and doing so in an incremental fashion – adding what they can, when they can, and developing their facilities as their means allow.

There are a few big challenges to this. In Africa’s urban centers, there is a limited supply of affordable housing, and financial services to aid housing development are also scarce. Global Findex Data indicate that access to and usage of credit in sub-Saharan Africa is among the lowest in the world. Specifically looking at mortgages, a recent study from FinMark Trust revealed that across the populations of Zambia, Malawi, Botswana, and Tanzania, less than 1.5 percent of individuals utilize mortgages.

Enter microfinance. Typical mortgages don’t fit well with the financial profile of most Africans. Compared to microloans, they’re generally for longer terms, larger amounts, and they are less flexible. Most mortgages require clients to provide documentation of regular incomes. Many Africans operate in the informal sector and lack regular income streams. In Tanzania, for example, only 28 percent of the population is able to satisfy this income requirement.

Housing microfinance (HMF), although young and small in scope as compared to traditional microfinance services, is already demonstrating that its ability to adjust to unique financial capabilities and client cash flows make it a good fit for many Africans’ housing financing needs – whether it’s used for incremental house construction, renovation, land purchase, or site improvement. And the good news is HMF services are on the rise.

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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Let your New Year’s resolution for 2010 be to subscribe to the Center’s podcast series!

The Center has a growing library of podcasts on topics ranging from microfinance and energy to client protection and housing innovations. The latest include some exciting, and quite musical, pieces by Paul Rippey…

• Asif Dowla, Climate Change and Microfinance
  Asif Dowla talks with host Paul Rippey about the new paper, sponsored by Grameen Foundation and Oxfam USA, on Climate Change and Microfinance. Professor Dowla discusses how MFIs can “climate proof” their financial products, and of the importance of remittances and savings in a changing climate.
• Jacob Moss and the Partnership for Clean Indoor Air
  In this 13th episode, Paul Rippey interviews Jacob Moss of the EPA, who has led the effort to create the Partnership for Clean Indoor Air. Jacob and Paul talk about stoves, including some breakthrough models that might change everything!

Learn and listen more here >

And stay tuned for a new Energy Links podcast coming your way very soon…

I’m blogging today from the annual meeting of the ACCION Network taking place in Buenos Aires, hosted by Columbia Microcredito of Banco Columbia.  We spent a very interesting morning talking about the effect of the financial crisis on microfinance institutions and their clients in Latin America.  We’ve heard from Michel Burbano of Banco Solidario in Ecuador, Carlos Viteri of Financiera Apoyo Integral in El Salvador and Kurt Koenigsgfest of BancoSol in Bolivia.  Some of the points that really hit me this morning are:

• The severity of the crisis differs by country.  It is hitting El Salvador much harder than Bolivia because El Salvador is more integrated into the US economy.  What for MFIs in Bolivia is so far a somewhat challenging time is for MFIs in El Salvador a very serious situation.
• The crisis is still unfolding, but these MFIs have had time to think about how to respond and are already implementing their responses. Their most important message is: stick to your knitting.  Do what you do best.  The biggest concern is the rise of delinquency as clients’ businesses suffer.  The MFIs are responding in many ways.  The most important is focusing on their credit methodology, especially assessing client  ability and willingness to repay. 
• Some adjustments are necessary, including changing staff incentives.  When general delinquency rises, it becomes de-motivating to staff if the same standards are used for incentives as in good times.  BancoSol is investing in intensive staff training to help staff understand how to operate in the new situation.
• The other big concern, of course, is funding.  Among the members of the ACCION Network, this is not (yet) an emergency, but funders are definitely looking more carefully – and they have less money to lend.  Victor Telleria of FAMA pointed out that when funders evaluate MFIs today they cannot use the same benchmarks they use in normal times. When all institutions are under stress, it is important for investors to distinguish between those who are handling the stress well and those at risk of failing.  This is a topic for exploration during the coming Council of Microfinance Equity Funds meeting on May 18.

Stepping back, it struck me that while we’ve understood the special positioning of the microfinance sector during this time of financial crisis, microfinance can actually be a real part of the solution to the downturn.  Microfinance institutions have a great responsibility to assist their clients to survive the downturn – including new clients driven into the informal sector by the crisis.  Moreover, MFIs may be, on average, in better shape than many mainstream financial institutions to keep on working.  Because MFIs now serve so many people around the world, their role as a solution could turn out to be important.

Check out the latest Center podcast on housing microfinance. The second in the series on business solutions to housing microfinance, in this podcast David Levai speaks with Willie Vos, managing director of SouthNet Cygnus. A branch of the South African property developer SouthNet, SouthNet Cygnus is a residential-property developer focusing on the lower-income groups of South Africa. They have taken a unique approach to solving the housing problems at the bottom of the pyramid, integrating differing components of the housing value chain by bringing together not only developers and financiers, but municipal stakeholders and services.

Today, more than half of the world’s population lives in cities, and this trend is not about to change. Among those urban dwellers in the developing world, more than a third lives in a slum or extremely precarious conditions. But numerous socially minded individuals are uncovering new ways to provide decent quality homes at affordable costs to low-income populations – helping small property owners become landlords, providing standardized housing units in recycled shipping containers, lending building material for self-improvements, etc.

In late 2008, fourteen participants invited by the Center for Financial Inclusion and ACCION Global Investments gathered in Washington, DC, with two goals in mind – to dissect the bottlenecks in the provision of affordable housing to the bottom of the pyramid in emerging markets and to identify innovative private-sector-driven solutions.

Representing India, South Africa, Kenya, Mexico, Bolivia, and the United States, these practitioners confronted their analyses of the hurdles in reaching scale and quality in housing finance for the poor as well as their vision going forward. The profiles of the attendees were varied, encompassing real-estate developers, mortgage financiers, building material suppliers, or housing microfinance start-ups. Despite the diversity of their professional backgrounds and their international perspectives with regards to housing, practitioners acknowledged similarities in the problems they face and in the response they are using to address these challenges. Even though housing and habitat have large local constraints that deserve specifically customized responses, lessons learned, whether they are positive or negative, seem to be transferable.

You can find the list of the workshop participants and more information about their companies as well as the key lessons learned here.

For non-housing specialists like me, the workshop offered a unique opportunity to hear from the housing movers and shakers themselves their philosophies, rationales, successes, and challenges. For example, Por Fin Nuestra Casa (PFNC) is a company that Brian McCarthy, a young American, recently started to address the living conditions of Mexican workers employed in maquiladoras, those export focused industries lining south of the U.S.-Mexico border. Working with employers to ensure land tenure, PFNC provides standardized prefabricated housing units hosted in recycled shipping containers, that is to say, a quality home and a livelihood improvement at low cost found in quite an unconventional place!

During the day of the workshop, I was able to record more stories, which you’ll be able to listen to, yourself, in a series of podcast interviews that offer a sketch of these dedicated actors and their work for the “unhoused.”

In the first podcast, I speak with Guillermo Calderon, the founder and CEO of the Mexican building material provider MeXvi. His company’s model, loosely based on Cemex’s Patrimonio Hoy, provides prefabricated houses for the Mexico’s rural poor and specifically targets disaster areas frequently hit by hurricanes. Not only is MeXvi supplying building materials, it also offers credit facilities without need for any collateral to finance the acquisition of these brand new homes. But enough talking on our side; just check out what Guillermo has to say about MeXvi in his own words…