Has association with microfinance become a liability to the housing microfinance industry?

Housing microfinance has often ridden on the wave of microfinance lending. General microfinance is a valuable brand that has provided the possibility for commercially viable enterprise to help the poorest of the poor. The industry even has its own Nobel Prize winner, not too bad given it started formal lending only in the late 70’s and early 80s. Naturally therefore HMF can share in the limelight of the industry its shares a name with.

In fact, today, the reliance by HMF on established institutions and practices of microfinance is without doubt. HMF has been traditionally defined as a subset of microfinance and the application of a microfinance based approach to finance housing needs. HMF market makers will thus for example seek out already existing microfinance lenders as the natural starting point to incentivise greater HMF lending. The understanding is often that HMF products can be used by general microfinance as a window to create product diversity in their lending portfolios. It is further understood that HMF loans, being larger and for longer terms, bear a greater risk, and sufficient comfort levels can be provided if the organisation can vouch for the borrowing history of the borrower. Such history is often provided by looking at how well the borrower paid microfinance loans in the past. There are acknowledged differences; apart from size and term of the loan, HMF is distinguished in that it is often accompanied by some form of support services to ensure the house build process results in a good house. Nevertheless despite this, few will venture that HMF is an intrinsically different product from general microfinance.

 At an HMF conference in 2010, Bruce Ferguson presciently sounded a cautionary note on total reliance on the microfinance industry as a platform for developing HMF. He called rather for a second wave of innovation through the development of institutions that are explicitly dedicated to HMF. The fact that HMF deals with a housing product, very different in many ways, is key to this observation. Failure to understand this often means that MFIs struggle with HMF lending.

Additionally, sharing a name often means you cannot control the reputation associated with it. Currently, the microfinance industry is going through a period of introspection with its reputation considerably sullied in many parts of the world by unethical lending practices. These have resulted in the poorest of the poor being rendered over-indebted, with the Indian state of Andhra Pradesh with its tragic number of suicides being an iconic representation of the problem. Microfinance according to some has moved from “hero to zero” and is “losing its fairy dust”. Annual reporting on “Microfinance Banana Skins” was initiated in 2009, a sign of the increasing appreciation of the risks inherent in the industry. The positive impacts and benefits of the microfinance industry have also been repeatedly questioned. All this has meant that mention of HMF is often accompanied by a caveat that draws attention to problems in microfinance lending in general, such as has happened in the latest UN Habitat report on sustainable housing.

Like most things, the answer perhaps lies somewhere in the middle. We cannot deny that the microfinance industry has provided HMF an important lending methodology, enabling it to reach people who previously had no access to such financial services. We also cannot deny that the industry has a prolific network across the continent that can serve as a useful platform for HMF lending, especially offered as a novel product, it will often need some kind of established institutional backing. Further, we cannot dismiss the entire industry because of the poor lending practices of some; these do not detract from the soundness of the concept. Indeed the industry is only starting to see a greater regulation through voluntary industry codes of practice as well as government regulation in places like India. It was for a long time, and in many ways, a free-for-all that needed to be reined in. Finally and very importantly, HMF lending is for a house; even the most vigorous of microfinance critics will have to agree that acquisition of decent shelter can only be beneficial to the poor.

General microfinance lenders should not be the only platform for expanding HMF however. Other financial institutions, the most obvious being conventional banks, can also provide a suitable platform for expansion. While they may not have the benefit of historical microfinance lending, they do have the institutional capacity to offer such new product. Some current HMF lending operations originated from land and housing advocacy cooperatives, for example NACHU, in Kenya. These realised and saw the need for a finance product to support member aspirations to own a house. They created HMF products over the years with considerable donor support and today are branching into commercially viable products.  Building materials providers can also serve as the origin of HMF, as CEMEX operations in Latin America has shown. Finally, there is nothing to preclude specialized HMF lenders getting into the industry from the start. Given the accumulation of knowledge on practice, dedicated support for the industry and greater availability of capital, this is a viable option today.