How much HSS is enough? HSS and better housing quality outcomes
The debate on Housing support services (HSS) and how necessary it is in HMF lending continues. An article from the Accion newsletter, Insight, way back in 2004 set the scene for lively engagement among HMF practitioners. The piece begins with two hypotheses related to HSS:
Microentrepreneurs’ need for technical construction assistance, such as drawing plans, estimating construction costs or supervising construction labor, varies from person to person. Therefore, the construction assistance component of an MFI’s housing loan product (if any)
should be customized to the unique situation of each borrower. A housing microfinance program including an optional construction assistance component can both ensure a high standard of quality in the constructions financed and achieve sustainability (profitability) for the MFI within two years.
The first hypothesis is related to the need for HSS based on the demands of the borrower. This is very difficult to dispute. HSS or any other service for that matter, should after all always be geared to the specific demands of the buyer. The second hypothesis does two things: it correlates the provision of construction technical assistance with higher standards and quality of construction that are likely to be achieved, and asserts that HMF can be done profitably even given the extra costs of providing HSS.
To test the hypotheses, case studies were taken from a pilot HMF product in El Salvador by Fundación Salvadoreña de Apoyo Integral (FUSAI). FUSAI had recognised that many houses built with HMF loans were poorly constructed. Further, loan amounts sometimes did not cover the entire cost of the project, and borrowers often could not afford to pay their loans on time. The pilot loan product twinned with technical support was intended to resolve these issues.
While FUSAI’s pilot acknowledged the first hypothesis, it showed that the main challenge was the difficultly and cost for an MFI to provide a wide range of customised assistance to each borrower. In other words, an approach that emphasises “customized unique solutions” may not be practical. This is a common problem with designing any product. Inevitably, a tension exists between retaining the product’s usefulness and relevance to everyone who uses it, versus making its components generic enough to efficiently produce at scale.
The results of the FUSAI pilot, however, rejected the second hypothesis outright. Analysis of the pilot product showed that intensive construction assistance in fact had no impact on construction quality while greatly increasing the product’s costs. This notwithstanding, the pilot did identify some benefit gained from HSS. This was in helping customers predict the actual costs of home improvements, and allowing borrowers to control their construction budgets and complete their projects with loan funds.
Since this article, we are in many ways wiser. Generally today, there is more support among writers and practitioners for the second hypothesis, recognizing that HSS does indeed ensure better quality housing products. But what still remains unanswered is how to design an HSS product, very much related to the first hypothesis. How much HSS is enough? This is a complex equation taking into consideration cost and financial sustainability and as well as defining what suffices as a good quality house under the circumstances.
In recent, yet to be released, work I am involved in, what has emerged is that that there is a direct correlation between HSS and better quality of the house. In other words, provision of HSS does in fact provide a better quality housing outcome.
However, the answer to “How much HSS is enough” still lingers. While HSS improves housing quality outcomes, often the level and intensity of HSS does not improve this significantly, proportionate to resources put in. As HSS intensity increases, the quality of the house increases, albeit by modest margins. This finding is interestingly similar to one from the pilot case studies from El Salvador above, all those years ago. In that case FUSAI, having examined the results of the pilot study, concluded that they should re-focus technical assistance on other ways of providing more efficient construction advice. The organisation for example developed a series of seven construction pamphlets covering all aspects of home construction. These were to be used by clients to better understand and supervise their builders.
Today, this is the challenge to HSS provision, given there is emerging consensus on its importance. Creating a financially sustainable HSS service means balancing the amount of technical assistance provided with an optimal (not necessarily best) housing result. HSS can be counterproductive, if it becomes too costly or involving for an increasingly diminishing return. Striking the balance in product design is the challenge.
2 responses to “How much HSS is enough? HSS and better housing quality outcomes”
This article begs the very debatable question: what is the role of HMF in home improvements – Is it a supporter or provider? Of course this varies by lender.
I think that the level of HSS that needs to be provided is extremely contextual but providing basic low cost tools (pamphlets, contact persons, other resources) should the borrower need them could be very helpful, assuming that the borrower has some level of literacy and construction knowledge.
However, lenders may not readily have access to the required resources, and HSS may render the loan more costly for borrowers. Lenders may then want to consider partnerships with builders or material providers (such as the Lendcor model in South Africa, or Lafarge in Zambia) and also connect the HSS with the loan amount or with borrower activity (higher loans/repeat borrower may receive x amount of HSS).
So ‘How much HSS?’ I think it really comes down to demographics, location, affordability and access to resources – there is no blanket answer.
Great article Michael, i think you have accurately summed up the tension that exists in achieving better quality from customized HSS versus the need to provide standardized services if you have any hope to provide those services in a sustainable way. One thing that i may add is that i am seeing very large differences in country context and building culture that may help answer the question: in some countries there is a much more mature, robust construction market where artisans are well trained and already provide fairly high quality of work (Kenya is a good example) so we would be pretty safe to assume we wouldn’t need to provide detailed advice to the builders, but general advice on how to manage an incremental building process may be very useful.
And that leads me to a guess as to why the study in El Salvador didn’t lead to better quality – if a family is not adequately informed about how far they can build with what is often a very low amount, they often start to cut corners or make bad decisions about materials so that they can stretch their limited funds farther. An incremental approach, with proper planning is key to achieving a well-built home using micro loans, and that planning may be the single most important HSS service that could be provided in a given context. In any event, it is one of the HSS services that should be provided in every context.