What Do We Mean When We Talk About Financial Inclusion and Housing?

Housing and banking go together. It stands to reason: a family’s house is likely to be the most significant investment they will make in their lifetime. It is expensive, and as a lump sum, beyond most households’ capacity to pay. To save up is unrealistic: a household needs to have somewhere to live before they’ve saved the full amount that the house in which they live would cost to buy. And so, the mortgage loan was invented. As a straightforward instrument, the mortgage loan enables a household to buy, and live in now, a house that they then pay for over time, smoothing their repayments to match their affordability, over something akin to their lifetime – 20 years in developed markets, shorter terms in many markets in this continent. By stretching repayments over 20 years, a Kenyan household earning an income of about KES 55 650 (US$543) would be able to afford the cheapest newly built home in Kenya, estimated to cost about KES 1m (US$9 769).[1] At that salary, buying an asset without a financing mechanisms is simply not possible.

Across Africa, however, access to formal financial products and services is limited. [2], a nationally representative survey of usage and perceptions of financial services conducted in a number of countries in Africa and beyond, finds that just over a third of adults in SADC are formally banked. Two thirds make use of any financial product or mechanisms, formal or informal financial, and are therefore considered financially included.  In countries such as Mauritius, South Africa and Namibia, financial inclusion is relatively high and is dominated by the formal financial system: 85% of Mauritian adults are formally banked and another 3% use other formal, non-bank products; 80% of South African and 70% of Namibian adults are included in the formal financial system.  But in other countries, access is much more limited: in Tanzania, only 57% of adults are formally banked, and of these, only a quarter are banked; in Malawi, only 34% of adults are formally included; in Mozambique the number is 24%.  Across the SADC region, among the 66% of adults who are financially included, only about half use credit.

In part as a result of this, mortgage lending is low: the ratio of mortgage lending to GDP across the continent is generally below 5%, with the exception of some Southern and Northern African countries.  Of course mortgages are not the only mechanism that can finance housing.  Yet the 2014 Findex Survey conducted by the World Bank globally finds low levels of housing lending in Africa, with less than 10% of people over the age of 15 having an outstanding home loan, including mortgages or other unsecured loans. And yet, we know that Africa’s cities are among the fastest growing on the planet and that the continent is urbanising rapidly. The demand for housing is clear, and by extension, so too must be the demand for housing finance.

So how do we promote housing when banking is so limited?

Of course, affordability is a critical issue. Even with a mortgage, the monthly repayments are higher than the vast majority of households can afford. The World Bank (2011) estimates that in Kenya, only about 2.4% of the population could afford a mortgage loan for the cheapest newly built house .[3] While the figure rises to 11% for urban areas, this is still a fraction of the population.

We need to be real, and creative, about affordability. 

First and foremost, financial inclusion is about developing products that are affordable for specific market segments – recognising the relative affordability for savings and credit of each market segment and then building appropriate products accordingly. Market segmentation is therefore critical as it demonstrates a diverse array of opportunities for private sector engagement.  To enable such market segments to participate in a housing process, however, the financing of that process must itself be disaggregated into affordable steps. This requires attention to the value chain and identifying viable niches in the context for a longer term vision. In traditional markets, the whole house is paid for all at once with a mortgage. Clearly, this model cannot work for all households; the housing value chain must be broken up into smaller, incremental steps.

So how do we do this? As illustrated below, each link in the housing delivery chain offers specific housing finance “moment” – an opportunity to finance a piece of the chain affordably, to a wider market, rather than financing the whole chain all at once to a narrower, higher income market.  The realisation of effective housing markets in Africa is dependent on appropriately targeted housing finance products that improve housing affordability and overcome constraints in access that currently make adequate housing unaffordable to the vast majority.  This is what financial inclusion in housing is all about. And as this is achieved and the appropriate products are developed, investors can respond with appropriate products and services that make the delivery of such incremental housing finance possible.

Several housing finance experts (for example Irene Vance, Franck Daphnis, Bruce Ferguson, Scott Metzel, and others) have written about the opportunities in incremental housing financing, tied most often to housing microfinance. The assumption is often that housing microfinance is tied to home improvements – so an existing house or plot of land is required, financed somehow by other means. But housing microfinance can also be used for housing construction – to purchase the plot of land, build a core house or the first room, or undertake major additions. Incremental housing construction can offer asset investment opportunities to low income earners and create a new market for lenders and the housing sector. The housing development happens in response to the financial capacity of the borrower, creating effective demand for loans that previously didn’t exist.

By way of example, Bankable Frontier Associates undertook an analysis of housing affordability by market segment and explored the potential, aggregated urban demand for housing finance. Using FinScope Zambia data from 2009, the analysis split the population into a number of segments. Conventional mortgages, they estimated, could serve roughly 11% of the population, or 120 000 households assuming housing costs could be reduced to enable a monthly instalment of US$315. Beneath this frontier they identified a market for micro mortgages – smaller mortgages offered at a shorter term of 60-120 months, that could expand the mortgage market by a further 200 000 households. Below this, almost 600 000 households could afford a housing microfinance product, an unsecured loan that could finance incremental housing development. At the bottom end of the market they estimated that around 210 000 created a market for low-end savings and microfinance products.

The potential of financing incremental housing is that borrowers create the demand for repeat loans – housing microloans, and later micro mortgages and even conventional mortgages, as the borrower addresses his or her housing needs incrementally, over time, loan by loan.

Mortgage lending is just developing in Africa – it is still early days, and it will not meet the breadth of demand for housing by any stretch of the imagination. Thinking about financial inclusion that makes sense for housing across the population on the continent more broadly means that we need to step away from the conventional mortgage and the conventionally financed house.

This is imperative not only for households that wish to improve their housing situation and build housing assets, it is also critical for the development of mortgage markets more broadly. The success of the mortgage market will depend on a functioning property market and a housing ladder that has enough rungs: housing for the variety of prices that households can afford to finance. Current new-build supply is still too narrowly focused – in most markets, there are maybe two or three distinct product bands – and operates at insufficient scale to actually meet the variety of demand that a financially included population might even begin to express. In part because of a fixation of mortgages, the housing construction value chain across this continent is under-developed, limiting construction to housing for which there is limited affordability rather than addressing the the breadth of potential demand with appropriately priced and delivered products.

Developing the housing value chain by re-configuring the housing moments creates new opportunities for lending, and therefore greater financial inclusion, by creating more rungs in the housing ladder, a better targeting of a wider demand side, while also offering time to build up a diverse property market. Instead of limiting our targets to greater mortgage lending on the continent, the impetus for financial inclusion in housing should engage with opportunities in incremental housing financing – seeing this as an opportunity to address lower income earners and their current repayment capacity, while contributing incrementally to the development of mortgagable stock in the longer term.

(Visit our housing microfinance project page for more information. For examples of effective incremental housing financing, see the work of KixiCredito in Angola, and Select Africa / Habitat for Humanity Malawi. Habitat for Humanity in Kenya undertook a market mapping and housing value chain analysis. Cities Alliance has also argued a persuasive case for incremental housing.)

[1] Assuming a mortgage interest rate of 16% over 20 years, at 25% instalment to income.  For details on Kenyan mortgage interest rates see www.calculator.co.ke/mortgage-rates

[2] FinScope Surveys; FinMark Trust (2015) FactSheet on Financial Inclusion in SADC

[3] World Bank (2011) Developing Kenya’s Mortgage Market