Housing Microfinance: An Opportunity for Affordable Housing Solutions in Mozambique

There are several observable housing-related challenges facing low income households in Africa. Undoubtedly, access to finance remains a critical bottleneck. Traditional housing finance, such as mortgage lending, is not well-suited to the needs, capacities, and housing processes of the low income market. CAHF has reported extensively on the limitations of the mortgage market, noting that in the cities across the African continent, the vast majority of housing is built incrementally by households themselves, step by step. Mozambique is a perfect example of this, and simultaneously demonstrates the need for targeted housing finance products.

The journey of many Mozambican households documented in CAHF’s Housing Investment Chronicles illustrates the common approaches taken by many to finance their houses. This is through a combination of accumulated household savings, earnings from informal savings groups (‘Xitiques’), and in-kind donations.[1] Although housing production is undertaken by public and private sector institutions in Mozambique,[2] most housing is self-built. Mozambique has a large population with low, informal, and irregular incomes and unsurprisingly, the Chronicles highlight that accessing formal finance for housing is not common for the majority of Mozambicans.

Rapid urbanisation contributes significantly to the rise of housing finance needs in Mozambique. Mozambique’s Housing Finance Access Frontier (2016) shows that 90 percent of urban households acquire their dwellings through self-construction, building their homes incrementally. This process is heavily contingent on available savings. Less than one percent of households were found to have a housing loan or a mortgage credit product at a bank.[3] Furthermore, existing underwriting criteria and lending structures of microfinance institutions (MFI’s) and small banks offering various housing loans means that access to unsecured housing loan products is limited low due to a lack of affordability and savings. The Access Frontier Methodology enables one to identify and quantify access barriers, segmenting households into various market zones. In both scenarios (access to mortgages and unsecured housing finance) most households are found to be excluded from the market, by design or by default. This leaves a large potential gap for market development.

The Case for Housing Microfinance

Where mortgage markets are thin and formal housing affordability constrained, the housing microfinance (HMF) product has the potential to bridge the gap in access to housing finance and improve the housing delivery chain for low income groups.[4]  An unsecured lending product built on the back of experiences from the wider microfinance industry, the HMF product enables an incremental housing construction or home improvement process whereby the loan product is limited both in quantum and term to the particular building intervention.  With a shorter amortisation period and a smaller loan size, repayments can be contained within household affordability. Over time, through multiple loans, the household is able to achieve their ultimate housing outcome.  The 2016/17 State of Housing Microfinance Survey reinforces the relevance of HMF as a viable financial product within the broader housing finance market, and its usefulness for lower income populations.[5]

Despite almost three decades of microfinance provision and portfolios, formal “housing microfinance” (as opposed to personal loans, SACCO payments, etc. being used for housing) remains a nascent product in Africa. Survey findings  suggest a considerable marketfor developing and expanding the HMF product, but also highlight considerable institutional challenges.[6] Further constraints relate to how the HMF product integrates with existing housing delivery and home improvement value chains, and how the incremental housing process aligns with municipal development requirements.

Housing microfinance comes in many forms and involves assembling the housing value chain to bring a package of financial and non-financial services to a focussed target market.[7] This requires a  well-coordinated effort amongst a wide array of stakeholders, including commercial banks, microfinance institutions, land developers, material suppliers and policymakers.[8]

Fundamentally, while potential sources of housing finance for middle to low income consumers exist, such as those offered by microlender Socremo and Letshego, most needs in Mozambique remain unmet. The most important source of housing finance—household  savings—limits access to ownership. Secure, formally documented land title and technical assistance with construction processes in Mozambique[9] can be linked to a lending process. These dynamics demonstrate a market opportunity for a housing microfinance product that supports incremental, self-built housing. Designing and developing a product that considers borrower capacity, suits the needs of the poor and leverages existing informal finance mechanisms could be a practical way of responding to the growing housing finance needs in Mozambique.

In 2020 CAHF intends to explore the possibility of developing a HMF product in Mozambique, in partnership with FSD Africa and FSD Mozambique. The objective is to capacitate a financial institution in Mozambique to develop an effectively managed, demand-driven, affordable HMF product. The expected outcomes are to assist in clarifying the institutional development and funding needs for the delivery of a HMF product by an existing financial services provider, and realise the development of new tools, specific to HMF lending, that can be used by other financial services providers seeking to move into this space.

[1] CAHF (2018). Housing Investment Chronicles: Mozambique. Pg. 16.

[2] See CAHF (2019). Housing Investment Landscapes: Mozambique. Pg. 13.

[3] FSDMoz (2016). Access to Housing Finance in Mozambique. https://housingfinanceafrica.org/documents/an-access-frontier-to-housing-finance-in-mozambique/

[4] Habitat for Humanity (2018). Building the Business Case for Housing Microfinance in Sub-Saharan Africa. Terwilliger Centre for Innovation in Shelter. Pg. 8.

[5] Habitat for Humanity (2017). The 2016-17 State of Housing Microfinance: Understanding the Business Case for Housing Microfinance. Terwilliger Centre for Innovation in Shelter. Pg. 11.

[6] Habitat for Humanity (2018). Building the Business case for Housing Microfinance in Sub-Saharan Africa. Terwilliger Centre for Innovation in Shelter. Pg. 60.

[7] Habitat for Humanity (2015). Housing Microfinance Product development: A Handbook. Pg.20.

[8] See I, Vance (2008). Putting the Housing Back into Housing Finance for the Poor: The Case of Guatemala” Global Urban Development. Volume 4, Issue 2, November 2008. Pg. 9.

[9] See CAHF (2018). Housing Investment Chronicles: Mozambique. https://housingfinanceafrica.org/app/uploads/HIC-Mozambique-Final-.pdf P.g. 16.