Scale is still the problem in housing microfinance

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A perennial and vexing question posed to all HMF practitioners is how to scale up delivery. The need for HMF is frustratingly obvious given the major housing challenge (crisis?) in many developing countries including in Africa. Demand is seemingly endless given our urbanisation rates and the current housing shortfall. The underlying rationale whether making money or poverty alleviation means everyone wins. But even with these seemingly good ingredients, to many it fails to grow beyond at best some exceptional practices in a few regions of the world where there is the rare dedicated HMF lender. In fact more likely when examining HMF is that it is an oddity of microfinance practice or if deliberately being done, a small highly supported and scrutinized pilot project.

People have spoken and written on this issue. The seminal book on Housing Microfinance by Frank Daphnis in one of the contributed chapters pointed at a number of do’s (macro-economic stability, recognition of incremental build by policy, selection of financial institutions with a track record, capacity building and promoting research on best practices) and don’ts (premature inappropriate regulation and interest rate subsidies). Bruce Ferguson more than eight years ago wrote of competitive interest rates, strategic alliances with building materials suppliers and diverse local funding sources for onward lending, as possible ingredients to going to scale.

Yet many of these are not particularly problems specific to HMF lending. Looking to one of the finance sector’s major revolutions, general microfinance, this seems more so. While comparisons with general microfinance are not always welcome, especially to HMF purists trying to distinguish it as a product of its own, the links are un-questionable. It is thus perhaps useful to go back into history. The “microfinance revolution” was according to some not so much a revolution of ideas, but a paradigm shift in thinking of development banks. They had known for long of the informal lending practices for small business, but it was when there was sufficient ideological and policy weight in supporting these did the shift happen, and subsequent implementation became the success it is.

This shift in the 1970s saw development theory emphasizing targeted credit to small farmers and business. This was a move away from 1960s developmen t paradigm which had instead targeted large scale capital transfers to support large industrial and infrastructure projects that will modernize economies and catalyse them to “take off”. Microfinance also fitted in nicely with new policies of market extension instead of state intervention, and the deregulation policies and decline of many development banks of the 1980s definitely created a niche for its growth. Its successful commercialisation on the other hand is attributed to the fact that it provides a service that poor people are willing to pay for, leaving subsides and donations for capacity building and training.

Maybe herein lies the solution with regard to HMF going to scale. We fully know it happens, but this has not resulted in large scale development. We then probably need a similar paradigm shift to catalyse this revolution. It could be required of the private sector, in terms of how it perceives HMF, including at a wholesale lending level where a shift in priorities to provide greater funding for HMF is needed. Retail lending also requires changes to products and how they are designed and structured, to better support HMF. Finally, the shift may lie in the public sector. Here particularly important in this regard is regulations governing the finance sector such as building regulations and land.

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22 responses to “Scale is still the problem in housing microfinance

  1. I would argue that the reason HMF is not scaling in Sub-Saharan Africa is because of the models being used. “Housing Microfinance” often takes the form of trying to move real estate development or formal housing processes down market rather than offering a simple housing financel product that fits with the housing processes already being used by the poor. There seems to be a lot of investment in models that are unlikely to scale or truly respond to effective demand from the multitudes of low income self-builders, while other products that have shown some promise in doing so have insufficient capital. I don’t see the issue of housing microfinance not reaching scale as a public sector or regulatory problem at all, if you acknowledge that there is a huge market of low-income self-builders who could use housing microfinance to increase the speed of the building projects but have no access to it. Financial Service Providers still fail to understand that market. This may be because institutional leaders do not truly accept the market as being a legitimate housing process. Housing Microfinance products then go up market quickly or become too cumbersome for low income, self-building households, miss their target and fail to scale.

  2. Thanks for this. You make an important, but no less vexing point. By, as you say, trying to “move real estate development down market”, there is in essence an attitudinal problem; a failure to accept how housing is done by the poor. This does beg the question, what is it about how housing is done that makes it so rigid in this respect? Why is the current formal housing process so important and why should it be so important to replicate it? And why as you hint at, is it so entrenched in Financial Service Providers? If there is a genuine demand as we all acknowledge, they should be jumping into it head first, innovating and churning out products, as we know them to be so good at.

  3. One other underlying (and potentially strong) reason for HMF takeoff being so limited is strictly financial. If returns on HMF loans are significantly lower than traditional microfinance portfolios (as I suspect they are), the incentive for MFIs to scale up HMF would be limited. There are three factors behind this: 1) HMF loans have longer terms and thus are more rate-sensitive (greater share of repayment goes to pay interest rather than principal); 2) these loans don’t generate short-term returns for the borrowers (unlike high-margin returns in market trading, for example), so their price elasticity is probably higher (borrowers less willing/able to pay high interest for HMF); and 3) HMF has relatively high operating expense due to greater efforts needed during the assessment and monitoring phase (not only must you assess income & repayment capacity, but also the construction plans, and then monitor whether those plans are actually being implemented and funds not diverted elsewhere). Hence, HMF products would seem to bring lower overall returns.

    If this theory is right (not sure it’s been evaluated – has it?) and this puzzle is to be solved, MFIs need to focus on significantly shrinking the HMF product cost basis and lowering its financing cost. At the same time, the high returns from traditional MF need to fall (think appropriate pricing and all that). Combined with the need to diversify portfolios, these two convergent trends should shift MFI incentives towards scaling HMF.

  4. Interesting comment and thanks Daniel. The question of how different HMF products are performing would be a vital area of research . I am not sure if anyone has done it and would really love to see these figures. The Center has done a very rough cut at looking at MFI’s books in a limited number of lenders in a our State of Housing Micro Finance in Africa report (which with some luck we should have out by the end of the month). Purely from lending volumes, some MFIs it seems have managed to solve the puzzle. In one commercial lender for example, the HMF portfolio is growing in tandem with other MF products and has a glowing report on its performance. This success surely should partly be because the HMF product price is right and they have struck the right balance with regard to product diversity as you mention. However this will need greater investigation. On the other hand, some MFIs have not achieved this success. HMF products are launched but see declines over time, with some even closing down these product lines.

  5. Hi guys, good discussion. Daniel points out an important issue. Imagine being on the board finance committee of a MFI and facing the prospect of a proposal to allocate scarce capital to a HMF product. One one hand you assume unlimited growth potential to a well performing, six-twelve month, high interest rate enterprise loan. But now your CEO is proposing that capital be moved towards a housing product of 3-year loans with interest rates a tick or two lower? It sounds like a losing proposition.

    Unless… there isn’t unlimited growth of that traditional product. In more mature and competitive markets at least, we’re starting to see this to be the case. The risk/return prospects of expanding microenterprise products to more microentrepreneurs is starting to compare more favorably with new products that may grow with existing clients’ needs. Or, indeed, target new clients who may not be microentrepreneurs but need financing for their housing.

    PS – Michael, I enjoyed your timeline perspective on development finance thinking and how microfinance fits into that. Compared to the infrastructure project mentality, microfinance brought something fresh and counter-intuitive. Scott’s point about real estate, I think, identifies that same mental hurdle for housing. We’ve often tried to squeeze HMF into something that still results in a ground-breaking or ribbon-cutting ceremony. But smaller more humble improvements led by households themselves will also be celebrated. It just might occur at the dinner table under an improved roof; and the professionals may not be invited.

  6. Thanks Patrick for weighing in. The trade off, in as far as general micro-finance is the preferred platform for housing micro-finance will ever be present. A recent comment from a general micro-financier in Zambia was along the lines that HMF was a way to get ahead in what is now a cut throat microfinance market, the market maturity you talk of. But again should we confine ourselves to the general microfinance platform as the only way to scale up HMF lending although it may be the most obvious choice? The CEMEX model, where HMF is at the core of the lending operation comes to mind.

  7. Michael, certainly we shouldn’t confine ourselves. But I think we need to recognize that the corporate downscaling model (such as Cemex) face similar opportunity costs too. There are other market opportunities a Cemex or similar entity must forego to expand or focus on a program like Patrimonio Hoy.

  8. One other angle I was thinking of and which i have no concrete evidence of; how much does the rationale “of product diversity” become part of the formula for investment in HMF within these commercial enterprises. The reasoning would go along the lines that, making HMF an additional product is an inherent good, in that it potentially stimulates demand for another arguably different need all together. Apart from risk reduction, the terminology of customer loyalty also often features in literature supporting this argument. This argument can hold particularly true for “low hanging fruit” such as the home improvement products commonly introduced in many banks and micro-finance institutions. The argument does, to an extent, blur the hard edges of an “either/or” investment decision of general micro-finance vs HMF.

  9. everybody wants to a roof over his or her head, cannot understand why we need to be subjected to this scrutiny, otherwise this sharks will always be there as I am looking for my own shark as i do not have a place i can call home for my childres. at 45 never had a house but my job is secured no one is interested to listen to me. my salary after deduction is R10250.00 (R17000.00). that is why there are people buying or robbed by crooks who are abusing their situation.

  10. Michael, Patrick —

    interesting discussion. I wonder whether this might be a symptom of broader market trends. For least-developed countries (and financial sectors), retail-level loans are short-term and high-cost (microcredit and also informal loans). Loans secured by collateral are limited and also costly. No market infrastructure exists to provide low-cost funding for low-risk, long-term loans.

    At the other end of the spectrum, the opposite is in play, with long-term, low-cost loans (e.g. mortgages) taking the lion’s share of the retail lending. I suspect part of this also reflects household needs, so that if you look at Findex numbers (from World Bank), you’ll find that loans for health and other emergencies predominate in poor countries, while loans for home purchase dominate in rich countries. Interestingly, reporting of home construction loans is more or less similar across the board, from Zimbabwe to Czech Republic, until you get to OECD countries, where they drop off the map.

    So, home construction loans suggest a lot of demand. Findex doesn’t show where these loans come from. Almost certainly not MFIs and certainly not banks either. In a country like Chad, 10% of respondents said they have an outstanding loan for home construction, and that’s not an outlier. Where do these loans come from? Informal markets? Friends & family? How are they used? A mystery worth solving.

  11. Providing improved housing to the millions living in inappropriate housing is a multidimensional issue. Scaling up the numbers accessing improved housing is even more challenging.

    Those of us developing solutions to the provision of housing appropriate to the poor but economically active consumer need be mindful of the diversity of the market and not fall into the trap of finding “the” solution. Some examples from Tanzania, Scott has been instrumental in developing a successful house improvement loan program in Dar es Salaam, others in Dar are finding success in adapting traditional real estate methods to bring new core-house developments and loans to low income housing consumers, others are finding ways to “regularize” traditional (or habitual) land occupation and then applying traditional redevelopment and finance models. None of these “models” are directly transferable to other jurisdictions, some of the principles behind the successes (and failures) may be helpful in assisting in the design of solutions in other locals. There are many other examples of successes (and failures) in providing appropriate housing interventions, these need to be identified and promoted. Interestingly they all seem to be combinations of good real estate principals, good lending principals, and good marketing principals.

    To achieve scale (defined as having a significant positive impact on the housing environment for the millions of inappropriately housed, economically active households in the world) business cases for the successful models need to be developed and promoted to the private sector. Identifying small, local, social entrepreneurs then encouraging, and assisting them to enter the pro-poor real estate or finance markets would be a first step in moving HMF from the realm of NGOs developing housing and MFIs using “boutique” loan products to commercially viable businesses. Moving to, and demonstrating commercial sustainability will result in international commercial investment that is necessary to bring HMF to scale.

    1. Hi Jamie, as you say, it is about a mixture of solutions often very context driven, to truly go to scale. The collection of information on experiences and extracting the broad principles of successful models is happening in a small way. But it can be difficult to know the detail of what is going on, and would love to see this whether from commercial or NGO based organisations. I like the distinction between NGO and MFI driven HMF on the one hand, and what you refer to as “small, local, social entrepreneurs”. Have you come across any such HMF providers? Incidentally, Scott has a great website on his experiences in Tanzania http://hmfwgtz.blogspot.com/

  12. Hello Mzukisi, I totally sympathise with your plight. The fact that you have a steady income of over R 10,000 take home, yet as you point are already 45 years of age and do not own a house is sad.What is true is, banks have not adequately serviced people such as yourself. Secondly, the government assistance has been mainly through “RDP” houses for the very poor, and not people earning as much as you are. Recently, there was an announcement that a program, known as the FLISP, will assist in helping people obtain loans. My colleague had series of discussions with many people in your position on our website, and I would urge you to have a look at them on this link to understand your options.
    http://tinyurl.com/be9et68

  13. That 10% say they have an outstanding loan in Chad for housing purposes is interesting, appreciably higher than what we have been seeing from the Finscope financial inclusion data for some African countries. The Finscope data does tell us a couple of other things. Answering “where they get the money from”, informal lending products (that is non-bank or MFI products) are generally quite prolifically used in many African countries. For example, 17% Uganda; 35% Kenya; 27% Rwanda; 35% Tanzania; 11.3% Zambia etc etc use informal sources (of course the vast majority have no access, formal or informal). In terms of “what they use the money for” there has been some limited analysis of the housing component on the use of this money. You are however right in implying that a lot of this money is used for health and other emergencies (both savings and borrowed). In Malawi for example, spend is prioritised according to medical, living, farming, business, education and fees etc etc in that order, with buying and building a house being much lower down the priority list. Check out the Finscope data on http://tinyurl.com/bcfowja for some interesting stuff on this.

  14. Michael – thanks for sharing the Finscope data. I’ve heard that there are some differences. Will look into this more for methodology, etc., and maybe do a blog on what the differences & similarities between Findex and Finscope tell us. For now, thought I’d share something I quickly put together using Findex:

    http://public.tableausoftware.com/views/PlanetRating-marketcapacity/HousingDashboard?:embed=y

    As a brief observation, what really stands out is that home purchase lending is really low until countries reach a high level of development. However, home construction shows no such relationship. Quite a few poor countries have a lot of borrowing for this purpose — more than can be explained by borrowing from financial institutions, I think.

    A technical note: I’ve standardized the y-axis, so you can make direct visual comparisons. Click on individual points to see the data, or download it directly.

  15. Thanks Daniel for this. Home construction does need a finance product to support it, and you are right there is borrowing going on; informal sources, diverted loans officially for other purposes, etc. There is also quite a lot of use of savings. The data you have is interesting. Quick question, for absolute clarity, what is by definition, an “outstanding loan to purchase” vs “outstanding loan for construction” … I would be surprised if a FINDEX vs FINSCOPE is not already in the pipeline somewhere, as its a great idea.

  16. Michael – it’s pretty straightforward. The FIndex questionnaire includes the following question:

    Do you currently have a loan you took out for any of the following reasons? (Read A-E)
    A To purchase your home or apartment
    B To purchase materials or services to build, extend, or renovate your home or apartment*
    C-E: health, emergencies, education, etc.

    Note that option B isn’t included in surveys of high-income countries, which of course explains all those zeros at the far end of the scale. Makes sense, though. Were the option included, I think the actual figures would still be quite low.

  17. Hello Dan – nice conversation here. I like your tableau visualisations – we’re currently building a series of dashboards for seventeen countries. It would be great to share with you and get your insights – HMF data is most difficult to find. That said, I was interested with Findex, which seems to have some very high figures: 14% of the urban population in Malawi have an outstanding loan to purchase a home, compared to about 11.5% of urban households who have an outstanding loan for home construction. Swaziland too, has very high urban figures. Any thoughts why? I’ve put a table together in our 2012 yearbook (http://housingfinanceafrica-old.dev/document/2012-housing-finance-yearbook-2/ – see page 6) but I’m still confused with some of the figures.

  18. It all comes down to the theory of the leaking bucket. There is too much emphasis on private sector growth as a means to economic development and sustainability. Maybe as Philip Kotler, the marketing guru says, one must start with the customer. It’s probably a question of marketing forming part of the organizational strategy and not a tool to market our services or products. I also think that, if HMF has been the age old question then well Research and Development could play a key role in the area of microfinance. Perhaps the other solution could be to integrate community efforts and assets in order to enhance economic growth. For instance, communities always wait for the government to tar a gravel road or fill in potholes, when the neighbourhood could easily pull in resources and do it by themselves. I think that it is not just a question of offering people financial education, but also pulling them out of their latent stage into realization that they have the capacity to achieve many things. Of course, leaving the community to build by themselves without technical support is the reason why we have so many slums mushrooming in cities. Then again, what is the role of the local government and municipalities?
    In conclusion:
    •We need private, public partnerships to resolve the question of HMF.
    •We need more resources to be pumped into the area of R&D.
    •Executives need to also appreciate the key role that marketing plays from the moment the product idea is conceived.
    •Communities must be integrated.

  19. Michael Kihato on 5th March 2013 at 8:41 am

    Dear Moonq, thanks for this. I think HMF lies at the core of your suggestion for “integrating community efforts” as that’s precisely what it does; harness an individual and community based self build effort. And yes, technical support is crucial to doing this; technical support is ultimately about customer satisfaction and risk mitigation for the lender. On the question of R&D, would you have any insights on this? Are there some initiatives that you are aware of in this regard?

  20. Hi All and Michael thanks for this provocative thread. Reading the various arguments put forward by the various contributors, all well versed in their respective fields. So from a practitioner’s perspective and one that has in various roles endeavoured to advance HMF as a defined product line.
    Consider the following:
    MFI’s operate in predominantly unsecured credit environments, reliant to a large degree on social and psychological ideals as security.
    Cost of funds remains largely the same whether garnered via deposits or via funding lines from the DFI market (where rates are risk based on capacity of MFI to repay / recover from their clientele, using key indicators such as PAR; Equity etc.)
    Many MFI’s operate loan profiles with short loan terms i.e. 18 months and less. Few have ‘medium’ term loans reaching over 36 months that contribute significantly to the book overall so as to impact on average loan term and attrition rates. This is caused by the strength of their own balance sheet and debt terms provided.
    So Scott in response to your comment regarding focus, yes there are large scale development issues at hand, simply at an attempt to breach the backlog. Yet at the same time, what is glaringly evident across most MFI portfolios is that they are effectively in the HMF space, they just don’t know it.
    As most provide cash flow based loans and/or group based ‘collateral’ lending; with objective of looking to assist small scale entrepreneurs grow their businesses. This ‘mission statement’ doesn’t cover housing, which is largely viewed as high risk for a variety of reasons, most unfounded. So what is taking place at relatively high rates is the ‘diversion of loan purpose towards housing needs. As most MFI aren’t geared to actually tracking growth in their clients businesses, the clients are able to ‘get away’ with this diversion. I have seen this in more than one country and have spent countless hours coaching my staff, on exactly where the funds are going. When confronted the clients openly acknowledge they haven’t used the funds for stated purpose, per application, but the manner in which they have applied the proceeds has helped their business grow indirectly; in providing the family with proper shelter.
    Others use proceeds to extend business outreach through construction of rental units; small ‘spaza’ shops and other non housing related construction projects – but this falls directly into small scale incremental development.
    So in reality do we need to identify and create a new ‘class’ of microfinance? Or is this more of the same but packaged differently?
    Yes, in essence we do, as this will address the pricing and security vagaries the MFI and its funding resources.
    Property can be securitised, if costs are within reason; business assets / cash flow – not!
    So how do we address housing microfinance and build the scale that is so obviously possible.
    An enabling land tenure whereby ownership is possible, this would enable MFI’s and DFI funders to provide lower interest rates. But Africa largely still functions on ‘fiefdomlike’ principles, with Government or related bodies holding title to all land. Actual ownership in Africa pales into insignificant numbers when compared to the global population.
    This sadly is a political environment that requires intervention at very high levels. How does one find ways around this, moral security and tenure rights tend to be at the forefront.
    Housing finance by the nature of the product demands more supervision, understandably with the risks when associating a brand to a product. More so is ensuring the use of funds is applied to housing and not diverted elsewhere, especially if a preferential rate has been granted.
    Monitoring and assessment input, upfront, during and post loan term are a heavy cost to bear. Some MFI’s do see the social benefits and apply the costs and loss of revenue as a form of corporate social investment. But this is the exception and takes an open minded Board of Directors and stakeholders to appreciate the impact.
    DFI funding terms are another difficult environment to deal with, as typical loan terms are 3 – 5 years. Deposit funds raised through savings and investments from the target market are hardly ever long term and subject to annual fluctuations, such that the MFI cannot risk the impact on liquidity regulations to rely on these funds to cover any long term debt facilities extended to clients.
    The tenure of debt facilities made available to the MFI’s to apply to HMF, even incrementally, where loan terms can extend to 5 years in order to meet affordability / impact levels. This is largely the biggest inhibitor to reaching scale.
    Ideally debt tenure needs to be 5 years+ (ideally in the 7 – 12 year range).
    Convincing investors and fund managers (mainly investment bankers) to change their thinking and ‘proven’ models is a hard task indeed. But it is what is needed at the MFI level in order to reach scale within their portfolios.
    So a paradigm shift is needed in the engine room.
    Then comes the next concern to the lender, the control and use of materials, some advocate total control of materials (Cemex has been discussed in the thread, but this model is quite prescriptive on use of materials, but then as Cement Company, it stands to reason and is an acceptable trade off). Does Africa present the same commonalities with Central / South America – no it doesn’t.
    Also the vast variety of materials used in construction across the continent varies; building control measures exist but aren’t monitored or don’t exist at all in certain areas. So how does a HMF lender manage the risk of use of funds through acquiring quality materials – they are / will be hard pressed to do so, if a visit to any trading markets is to be used as a measure.
    The sole intent of monitoring goes beyond controls, but rather to ensure sustainable building takes place; hereby setting the cornerstone to the development of a secondary market within the domestic property chain.
    I am not going to comment on the risk parameters / profiles commercial banks apply when granting credit into certain sectors of the housing finance space, be it formal or informal.
    Banks have their own risk profiles and external shareholders to pacify, most are publicly traded stock.
    But MFI’s are in a different space and can fulfil that ‘gap’ funding, if they are structured and funded appropriately.
    Added into this mix, is the differentiation between NGO and ‘for profit’ commercial MFI operations, as these fly in the face of each other despite striving to the same eventual outcome of enabling ‘home ownership’.
    I have worked solely in the commercial space and have worked in two different companies where various models were considered, detail of which is too involved to handle in this forum – suffice to say the differences centred on control and management; use of skills and technical ability.

  21. Michael Kihato on 22nd March 2013 at 8:18 am

    Hi Ken, very comprehensive and you raise a whole bunch of issues here. A couple of comments: the land tenure issue, is the “fiefdomlike” land ownership issue on the continent a problem necessarily? The strengths of HMF I would have thought is its ability to deal with “not full but sufficient” tenure. In other words, in as far as the land occupiers has some form of tenure rights, even if they are subject to the uncertainties of customary authority, that is something HMF can very well work with; how has been your experience with this?. The other thing I was thinking is based on your comment about the “risk of acquiring quality materials” the the lender faces; can housing support services as a necessary accompaniment to HMF lending resolve this?

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22 responses to “Scale is still the problem in housing microfinance

  1. I would argue that the reason HMF is not scaling in Sub-Saharan Africa is because of the models being used. “Housing Microfinance” often takes the form of trying to move real estate development or formal housing processes down market rather than offering a simple housing financel product that fits with the housing processes already being used by the poor. There seems to be a lot of investment in models that are unlikely to scale or truly respond to effective demand from the multitudes of low income self-builders, while other products that have shown some promise in doing so have insufficient capital. I don’t see the issue of housing microfinance not reaching scale as a public sector or regulatory problem at all, if you acknowledge that there is a huge market of low-income self-builders who could use housing microfinance to increase the speed of the building projects but have no access to it. Financial Service Providers still fail to understand that market. This may be because institutional leaders do not truly accept the market as being a legitimate housing process. Housing Microfinance products then go up market quickly or become too cumbersome for low income, self-building households, miss their target and fail to scale.

  2. Thanks for this. You make an important, but no less vexing point. By, as you say, trying to “move real estate development down market”, there is in essence an attitudinal problem; a failure to accept how housing is done by the poor. This does beg the question, what is it about how housing is done that makes it so rigid in this respect? Why is the current formal housing process so important and why should it be so important to replicate it? And why as you hint at, is it so entrenched in Financial Service Providers? If there is a genuine demand as we all acknowledge, they should be jumping into it head first, innovating and churning out products, as we know them to be so good at.

  3. One other underlying (and potentially strong) reason for HMF takeoff being so limited is strictly financial. If returns on HMF loans are significantly lower than traditional microfinance portfolios (as I suspect they are), the incentive for MFIs to scale up HMF would be limited. There are three factors behind this: 1) HMF loans have longer terms and thus are more rate-sensitive (greater share of repayment goes to pay interest rather than principal); 2) these loans don’t generate short-term returns for the borrowers (unlike high-margin returns in market trading, for example), so their price elasticity is probably higher (borrowers less willing/able to pay high interest for HMF); and 3) HMF has relatively high operating expense due to greater efforts needed during the assessment and monitoring phase (not only must you assess income & repayment capacity, but also the construction plans, and then monitor whether those plans are actually being implemented and funds not diverted elsewhere). Hence, HMF products would seem to bring lower overall returns.

    If this theory is right (not sure it’s been evaluated – has it?) and this puzzle is to be solved, MFIs need to focus on significantly shrinking the HMF product cost basis and lowering its financing cost. At the same time, the high returns from traditional MF need to fall (think appropriate pricing and all that). Combined with the need to diversify portfolios, these two convergent trends should shift MFI incentives towards scaling HMF.

  4. Interesting comment and thanks Daniel. The question of how different HMF products are performing would be a vital area of research . I am not sure if anyone has done it and would really love to see these figures. The Center has done a very rough cut at looking at MFI’s books in a limited number of lenders in a our State of Housing Micro Finance in Africa report (which with some luck we should have out by the end of the month). Purely from lending volumes, some MFIs it seems have managed to solve the puzzle. In one commercial lender for example, the HMF portfolio is growing in tandem with other MF products and has a glowing report on its performance. This success surely should partly be because the HMF product price is right and they have struck the right balance with regard to product diversity as you mention. However this will need greater investigation. On the other hand, some MFIs have not achieved this success. HMF products are launched but see declines over time, with some even closing down these product lines.

  5. Hi guys, good discussion. Daniel points out an important issue. Imagine being on the board finance committee of a MFI and facing the prospect of a proposal to allocate scarce capital to a HMF product. One one hand you assume unlimited growth potential to a well performing, six-twelve month, high interest rate enterprise loan. But now your CEO is proposing that capital be moved towards a housing product of 3-year loans with interest rates a tick or two lower? It sounds like a losing proposition.

    Unless… there isn’t unlimited growth of that traditional product. In more mature and competitive markets at least, we’re starting to see this to be the case. The risk/return prospects of expanding microenterprise products to more microentrepreneurs is starting to compare more favorably with new products that may grow with existing clients’ needs. Or, indeed, target new clients who may not be microentrepreneurs but need financing for their housing.

    PS – Michael, I enjoyed your timeline perspective on development finance thinking and how microfinance fits into that. Compared to the infrastructure project mentality, microfinance brought something fresh and counter-intuitive. Scott’s point about real estate, I think, identifies that same mental hurdle for housing. We’ve often tried to squeeze HMF into something that still results in a ground-breaking or ribbon-cutting ceremony. But smaller more humble improvements led by households themselves will also be celebrated. It just might occur at the dinner table under an improved roof; and the professionals may not be invited.

  6. Thanks Patrick for weighing in. The trade off, in as far as general micro-finance is the preferred platform for housing micro-finance will ever be present. A recent comment from a general micro-financier in Zambia was along the lines that HMF was a way to get ahead in what is now a cut throat microfinance market, the market maturity you talk of. But again should we confine ourselves to the general microfinance platform as the only way to scale up HMF lending although it may be the most obvious choice? The CEMEX model, where HMF is at the core of the lending operation comes to mind.

  7. Michael, certainly we shouldn’t confine ourselves. But I think we need to recognize that the corporate downscaling model (such as Cemex) face similar opportunity costs too. There are other market opportunities a Cemex or similar entity must forego to expand or focus on a program like Patrimonio Hoy.

  8. One other angle I was thinking of and which i have no concrete evidence of; how much does the rationale “of product diversity” become part of the formula for investment in HMF within these commercial enterprises. The reasoning would go along the lines that, making HMF an additional product is an inherent good, in that it potentially stimulates demand for another arguably different need all together. Apart from risk reduction, the terminology of customer loyalty also often features in literature supporting this argument. This argument can hold particularly true for “low hanging fruit” such as the home improvement products commonly introduced in many banks and micro-finance institutions. The argument does, to an extent, blur the hard edges of an “either/or” investment decision of general micro-finance vs HMF.

  9. everybody wants to a roof over his or her head, cannot understand why we need to be subjected to this scrutiny, otherwise this sharks will always be there as I am looking for my own shark as i do not have a place i can call home for my childres. at 45 never had a house but my job is secured no one is interested to listen to me. my salary after deduction is R10250.00 (R17000.00). that is why there are people buying or robbed by crooks who are abusing their situation.

  10. Michael, Patrick —

    interesting discussion. I wonder whether this might be a symptom of broader market trends. For least-developed countries (and financial sectors), retail-level loans are short-term and high-cost (microcredit and also informal loans). Loans secured by collateral are limited and also costly. No market infrastructure exists to provide low-cost funding for low-risk, long-term loans.

    At the other end of the spectrum, the opposite is in play, with long-term, low-cost loans (e.g. mortgages) taking the lion’s share of the retail lending. I suspect part of this also reflects household needs, so that if you look at Findex numbers (from World Bank), you’ll find that loans for health and other emergencies predominate in poor countries, while loans for home purchase dominate in rich countries. Interestingly, reporting of home construction loans is more or less similar across the board, from Zimbabwe to Czech Republic, until you get to OECD countries, where they drop off the map.

    So, home construction loans suggest a lot of demand. Findex doesn’t show where these loans come from. Almost certainly not MFIs and certainly not banks either. In a country like Chad, 10% of respondents said they have an outstanding loan for home construction, and that’s not an outlier. Where do these loans come from? Informal markets? Friends & family? How are they used? A mystery worth solving.

  11. Providing improved housing to the millions living in inappropriate housing is a multidimensional issue. Scaling up the numbers accessing improved housing is even more challenging.

    Those of us developing solutions to the provision of housing appropriate to the poor but economically active consumer need be mindful of the diversity of the market and not fall into the trap of finding “the” solution. Some examples from Tanzania, Scott has been instrumental in developing a successful house improvement loan program in Dar es Salaam, others in Dar are finding success in adapting traditional real estate methods to bring new core-house developments and loans to low income housing consumers, others are finding ways to “regularize” traditional (or habitual) land occupation and then applying traditional redevelopment and finance models. None of these “models” are directly transferable to other jurisdictions, some of the principles behind the successes (and failures) may be helpful in assisting in the design of solutions in other locals. There are many other examples of successes (and failures) in providing appropriate housing interventions, these need to be identified and promoted. Interestingly they all seem to be combinations of good real estate principals, good lending principals, and good marketing principals.

    To achieve scale (defined as having a significant positive impact on the housing environment for the millions of inappropriately housed, economically active households in the world) business cases for the successful models need to be developed and promoted to the private sector. Identifying small, local, social entrepreneurs then encouraging, and assisting them to enter the pro-poor real estate or finance markets would be a first step in moving HMF from the realm of NGOs developing housing and MFIs using “boutique” loan products to commercially viable businesses. Moving to, and demonstrating commercial sustainability will result in international commercial investment that is necessary to bring HMF to scale.

    1. Hi Jamie, as you say, it is about a mixture of solutions often very context driven, to truly go to scale. The collection of information on experiences and extracting the broad principles of successful models is happening in a small way. But it can be difficult to know the detail of what is going on, and would love to see this whether from commercial or NGO based organisations. I like the distinction between NGO and MFI driven HMF on the one hand, and what you refer to as “small, local, social entrepreneurs”. Have you come across any such HMF providers? Incidentally, Scott has a great website on his experiences in Tanzania http://hmfwgtz.blogspot.com/

  12. Hello Mzukisi, I totally sympathise with your plight. The fact that you have a steady income of over R 10,000 take home, yet as you point are already 45 years of age and do not own a house is sad.What is true is, banks have not adequately serviced people such as yourself. Secondly, the government assistance has been mainly through “RDP” houses for the very poor, and not people earning as much as you are. Recently, there was an announcement that a program, known as the FLISP, will assist in helping people obtain loans. My colleague had series of discussions with many people in your position on our website, and I would urge you to have a look at them on this link to understand your options.
    http://tinyurl.com/be9et68

  13. That 10% say they have an outstanding loan in Chad for housing purposes is interesting, appreciably higher than what we have been seeing from the Finscope financial inclusion data for some African countries. The Finscope data does tell us a couple of other things. Answering “where they get the money from”, informal lending products (that is non-bank or MFI products) are generally quite prolifically used in many African countries. For example, 17% Uganda; 35% Kenya; 27% Rwanda; 35% Tanzania; 11.3% Zambia etc etc use informal sources (of course the vast majority have no access, formal or informal). In terms of “what they use the money for” there has been some limited analysis of the housing component on the use of this money. You are however right in implying that a lot of this money is used for health and other emergencies (both savings and borrowed). In Malawi for example, spend is prioritised according to medical, living, farming, business, education and fees etc etc in that order, with buying and building a house being much lower down the priority list. Check out the Finscope data on http://tinyurl.com/bcfowja for some interesting stuff on this.

  14. Michael – thanks for sharing the Finscope data. I’ve heard that there are some differences. Will look into this more for methodology, etc., and maybe do a blog on what the differences & similarities between Findex and Finscope tell us. For now, thought I’d share something I quickly put together using Findex:

    http://public.tableausoftware.com/views/PlanetRating-marketcapacity/HousingDashboard?:embed=y

    As a brief observation, what really stands out is that home purchase lending is really low until countries reach a high level of development. However, home construction shows no such relationship. Quite a few poor countries have a lot of borrowing for this purpose — more than can be explained by borrowing from financial institutions, I think.

    A technical note: I’ve standardized the y-axis, so you can make direct visual comparisons. Click on individual points to see the data, or download it directly.

  15. Thanks Daniel for this. Home construction does need a finance product to support it, and you are right there is borrowing going on; informal sources, diverted loans officially for other purposes, etc. There is also quite a lot of use of savings. The data you have is interesting. Quick question, for absolute clarity, what is by definition, an “outstanding loan to purchase” vs “outstanding loan for construction” … I would be surprised if a FINDEX vs FINSCOPE is not already in the pipeline somewhere, as its a great idea.

  16. Michael – it’s pretty straightforward. The FIndex questionnaire includes the following question:

    Do you currently have a loan you took out for any of the following reasons? (Read A-E)
    A To purchase your home or apartment
    B To purchase materials or services to build, extend, or renovate your home or apartment*
    C-E: health, emergencies, education, etc.

    Note that option B isn’t included in surveys of high-income countries, which of course explains all those zeros at the far end of the scale. Makes sense, though. Were the option included, I think the actual figures would still be quite low.

  17. Hello Dan – nice conversation here. I like your tableau visualisations – we’re currently building a series of dashboards for seventeen countries. It would be great to share with you and get your insights – HMF data is most difficult to find. That said, I was interested with Findex, which seems to have some very high figures: 14% of the urban population in Malawi have an outstanding loan to purchase a home, compared to about 11.5% of urban households who have an outstanding loan for home construction. Swaziland too, has very high urban figures. Any thoughts why? I’ve put a table together in our 2012 yearbook (http://housingfinanceafrica-old.dev/document/2012-housing-finance-yearbook-2/ – see page 6) but I’m still confused with some of the figures.

  18. It all comes down to the theory of the leaking bucket. There is too much emphasis on private sector growth as a means to economic development and sustainability. Maybe as Philip Kotler, the marketing guru says, one must start with the customer. It’s probably a question of marketing forming part of the organizational strategy and not a tool to market our services or products. I also think that, if HMF has been the age old question then well Research and Development could play a key role in the area of microfinance. Perhaps the other solution could be to integrate community efforts and assets in order to enhance economic growth. For instance, communities always wait for the government to tar a gravel road or fill in potholes, when the neighbourhood could easily pull in resources and do it by themselves. I think that it is not just a question of offering people financial education, but also pulling them out of their latent stage into realization that they have the capacity to achieve many things. Of course, leaving the community to build by themselves without technical support is the reason why we have so many slums mushrooming in cities. Then again, what is the role of the local government and municipalities?
    In conclusion:
    •We need private, public partnerships to resolve the question of HMF.
    •We need more resources to be pumped into the area of R&D.
    •Executives need to also appreciate the key role that marketing plays from the moment the product idea is conceived.
    •Communities must be integrated.

  19. Michael Kihato on 5th March 2013 at 8:41 am

    Dear Moonq, thanks for this. I think HMF lies at the core of your suggestion for “integrating community efforts” as that’s precisely what it does; harness an individual and community based self build effort. And yes, technical support is crucial to doing this; technical support is ultimately about customer satisfaction and risk mitigation for the lender. On the question of R&D, would you have any insights on this? Are there some initiatives that you are aware of in this regard?

  20. Hi All and Michael thanks for this provocative thread. Reading the various arguments put forward by the various contributors, all well versed in their respective fields. So from a practitioner’s perspective and one that has in various roles endeavoured to advance HMF as a defined product line.
    Consider the following:
    MFI’s operate in predominantly unsecured credit environments, reliant to a large degree on social and psychological ideals as security.
    Cost of funds remains largely the same whether garnered via deposits or via funding lines from the DFI market (where rates are risk based on capacity of MFI to repay / recover from their clientele, using key indicators such as PAR; Equity etc.)
    Many MFI’s operate loan profiles with short loan terms i.e. 18 months and less. Few have ‘medium’ term loans reaching over 36 months that contribute significantly to the book overall so as to impact on average loan term and attrition rates. This is caused by the strength of their own balance sheet and debt terms provided.
    So Scott in response to your comment regarding focus, yes there are large scale development issues at hand, simply at an attempt to breach the backlog. Yet at the same time, what is glaringly evident across most MFI portfolios is that they are effectively in the HMF space, they just don’t know it.
    As most provide cash flow based loans and/or group based ‘collateral’ lending; with objective of looking to assist small scale entrepreneurs grow their businesses. This ‘mission statement’ doesn’t cover housing, which is largely viewed as high risk for a variety of reasons, most unfounded. So what is taking place at relatively high rates is the ‘diversion of loan purpose towards housing needs. As most MFI aren’t geared to actually tracking growth in their clients businesses, the clients are able to ‘get away’ with this diversion. I have seen this in more than one country and have spent countless hours coaching my staff, on exactly where the funds are going. When confronted the clients openly acknowledge they haven’t used the funds for stated purpose, per application, but the manner in which they have applied the proceeds has helped their business grow indirectly; in providing the family with proper shelter.
    Others use proceeds to extend business outreach through construction of rental units; small ‘spaza’ shops and other non housing related construction projects – but this falls directly into small scale incremental development.
    So in reality do we need to identify and create a new ‘class’ of microfinance? Or is this more of the same but packaged differently?
    Yes, in essence we do, as this will address the pricing and security vagaries the MFI and its funding resources.
    Property can be securitised, if costs are within reason; business assets / cash flow – not!
    So how do we address housing microfinance and build the scale that is so obviously possible.
    An enabling land tenure whereby ownership is possible, this would enable MFI’s and DFI funders to provide lower interest rates. But Africa largely still functions on ‘fiefdomlike’ principles, with Government or related bodies holding title to all land. Actual ownership in Africa pales into insignificant numbers when compared to the global population.
    This sadly is a political environment that requires intervention at very high levels. How does one find ways around this, moral security and tenure rights tend to be at the forefront.
    Housing finance by the nature of the product demands more supervision, understandably with the risks when associating a brand to a product. More so is ensuring the use of funds is applied to housing and not diverted elsewhere, especially if a preferential rate has been granted.
    Monitoring and assessment input, upfront, during and post loan term are a heavy cost to bear. Some MFI’s do see the social benefits and apply the costs and loss of revenue as a form of corporate social investment. But this is the exception and takes an open minded Board of Directors and stakeholders to appreciate the impact.
    DFI funding terms are another difficult environment to deal with, as typical loan terms are 3 – 5 years. Deposit funds raised through savings and investments from the target market are hardly ever long term and subject to annual fluctuations, such that the MFI cannot risk the impact on liquidity regulations to rely on these funds to cover any long term debt facilities extended to clients.
    The tenure of debt facilities made available to the MFI’s to apply to HMF, even incrementally, where loan terms can extend to 5 years in order to meet affordability / impact levels. This is largely the biggest inhibitor to reaching scale.
    Ideally debt tenure needs to be 5 years+ (ideally in the 7 – 12 year range).
    Convincing investors and fund managers (mainly investment bankers) to change their thinking and ‘proven’ models is a hard task indeed. But it is what is needed at the MFI level in order to reach scale within their portfolios.
    So a paradigm shift is needed in the engine room.
    Then comes the next concern to the lender, the control and use of materials, some advocate total control of materials (Cemex has been discussed in the thread, but this model is quite prescriptive on use of materials, but then as Cement Company, it stands to reason and is an acceptable trade off). Does Africa present the same commonalities with Central / South America – no it doesn’t.
    Also the vast variety of materials used in construction across the continent varies; building control measures exist but aren’t monitored or don’t exist at all in certain areas. So how does a HMF lender manage the risk of use of funds through acquiring quality materials – they are / will be hard pressed to do so, if a visit to any trading markets is to be used as a measure.
    The sole intent of monitoring goes beyond controls, but rather to ensure sustainable building takes place; hereby setting the cornerstone to the development of a secondary market within the domestic property chain.
    I am not going to comment on the risk parameters / profiles commercial banks apply when granting credit into certain sectors of the housing finance space, be it formal or informal.
    Banks have their own risk profiles and external shareholders to pacify, most are publicly traded stock.
    But MFI’s are in a different space and can fulfil that ‘gap’ funding, if they are structured and funded appropriately.
    Added into this mix, is the differentiation between NGO and ‘for profit’ commercial MFI operations, as these fly in the face of each other despite striving to the same eventual outcome of enabling ‘home ownership’.
    I have worked solely in the commercial space and have worked in two different companies where various models were considered, detail of which is too involved to handle in this forum – suffice to say the differences centred on control and management; use of skills and technical ability.

  21. Michael Kihato on 22nd March 2013 at 8:18 am

    Hi Ken, very comprehensive and you raise a whole bunch of issues here. A couple of comments: the land tenure issue, is the “fiefdomlike” land ownership issue on the continent a problem necessarily? The strengths of HMF I would have thought is its ability to deal with “not full but sufficient” tenure. In other words, in as far as the land occupiers has some form of tenure rights, even if they are subject to the uncertainties of customary authority, that is something HMF can very well work with; how has been your experience with this?. The other thing I was thinking is based on your comment about the “risk of acquiring quality materials” the the lender faces; can housing support services as a necessary accompaniment to HMF lending resolve this?

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