Why housing: incentives for developing a HMF product in MFIs

A couple of blogs ago, a comment from one of the contributors to a discussion thread on scaling up housing microfinance made for interesting reading. The comment went something like this:

Imagine being on the board finance committee of a MFI and facing the prospect of a proposal to allocate scarce capital to a HMF product. On one hand you assume unlimited growth potential to a well performing, six-twelve month, high interest rate enterprise loan. But now your CEO is proposing that capital be moved towards a housing product of 3-year loans with interest rates a tick or two lower? It sounds like a losing proposition.

Again a sentiment along similar lines was expressed in a recent blog from the Centre for Financial Inclusion, where it hinted at a very practical problem facing HMF lending. Field officers may be resistant to marketing housing microfinance loans if the loan evaluation process of checking a client’s construction proposal and budget adds steps and time to their work, potentially reducing their productivity. This is very true in practice. My recent experience in engaging with a HMF product offered in a microfinance organisation that has other product offerings showed that business as usual is a much easier option for people on the ground. In this organisation, let’s call it “MFI 1”, the HMF product struggled for head room, jostling with other products. Add the fact that the person “in charge” of HMF was the same person selling SMME loans and it was clear it would always struggle. In fact, the HMF product ended up as a loyalty reward for faithful customers of business and agricultural loans, rather than a product promoted in and of itself. It consequently did not grow.

What then is the winning proposition for a HMF product in a MFI selling other products? To help in answering this, we use “MFI 2” another organisation in the same city, offering a HMF product. This one has had contrasting fortunes. It has grown fast, firstly and most importantly, because the product was initiated by and funded at a wholesale level by commercial money that targets housing. In other words the organisation has to use their funds for housing loans. This locks in the organisation and its staff into this commitment. Secondly, there are trained housing specialists (sourced from a different organisation which the MFI is in partnership with) who provide support for the loans through housing support services. They understand the housing product, are comfortable with it, and are required and tasked specifically with lending for it. What is interesting when considering the fortunes of the HMF product of “MFI 2”, over time systems and processes to lend for housing have been established. Today they have tapped into the enormous demand for this housing product, so much so, that they have almost become a HMF specialist lender. They are prepared to continue lending HMF products, with or without the dedicated funding for housing.

This is the break-through that the HMF sector needs. The organisation has to be given a chance to develop sufficient efficiencies and economies to develop and sell a product, to the stage where the initial, more risk-tolerant, catalytic funding is no longer necessary. Further, given HMF is in its very early days, industry wide knowledge is not widespread laying greater emphasis on this type of venture funding. There are some funds, such as Microbuild that are playing this role, but they are not nearly enough, and there is definitely greater need for this in the industry.

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