A recent presentation by Lafarge at a housing microfinance academy they organised together the International Finance Cooperation (IFC) in Nairobi, emphasized a critical ingredient to successful housing microfinance: incremantalism. An all too common conversation between an MFI housing microfinance loan officer and a customer was re-enacted to illustrate the point:
– The customer: I want a loan to build a 100sq.m house right now, the same house as my neighbour
– The loan officer: I am sorry, you cannot afford a loan for a 100sq.m. house. Better you come when you have more revenues
– The customer: Ok … (thinking: I will do it on my own)
So the customer goes off and does it on his own anyway, obtaining the money from other funding sources, or opting for a personal loan from another lender. Because of his affordability constraints, he is not likely to get enough to build the 100sq.m he wants. So, he hires a “friendly” builder who will do his bidding to construct a larger house.
Incrementalism is fundamental to the effectiveness of HMF lending. Low income households cannot afford to finance the entirety of their housing needs all at once. However, with successive HMF loans, the housing ideal can be realised over time and within the constraints of the borrower’s affordability. A good HMF lender works to understand the borrower’s particular needs, and then phases a series of affordable loans into an incremental building process that matches, adapts and works with the borrower’s income streams, to ultimately build their house in stages, step by step. Different borrowers will structure their housing needs differently, and the HMF lender needs to understand and respond to this. If for example accommodation is needed urgently, the HMF lender will phase the construction process to ensure that a core house is realised as an early output which, although modest, can accommodate the family as the loan is paid off and more of the house is completed. Or if the area is insecure, the first loan disbursement ensures the site is secured so that the subsequent building process is not jeopardised. All this is done within the household’s ability to service monthly instalments.
The quest for grander projects – or the whole house ideal – often means the borrower goes too big, too quickly, and ultimately at greater expense. The larger loan becomes unaffordable, and the failure to build incrementally means the borrower is left with a half-finished structure that may not be of much use. Further, in an attempt to resolve the problem and finish the building when the loan funds are exhausted or near exhaustion, the borrower often cuts corners using inferior materials and building methods. Or alternatively, a spiral of greater indebtedness ensues, as other sources of often more expensive loans are urgently sought to remedy the initial mistake.
For HMF to work, it has to be clearly anchored on incrementalism – the lender must understand this as a key risk management factor. This means that the lender should also ensure that the borrower has adequate housing support services (HSS) so that they are properly advised and guided. Small is good, and with time can become big and grand. HSS can, relatively simply, build-in future growth by for example using designs that allow for extensions to the core structure. Many projects also provide house plans that can be later used by the household. Finally, HSS ensures that the house is built, and finished within budget, an import issue for often financially vulnerable households.