Microfinance For Housing
Microfinance For Housing
Microfinance For Housing
Bennett
Christopher Bennett
Urban Studies 137: Final Paper
Microfinance for Housing & Collective Land Purchase: Evaluating a Novel Strategy
More than 1 billion people live in slums worldwide, and inhabitants of these
blighted urban environments are often unable to access the credit needed to improve their
habitat or to move elsewhere.i Microfinance institutions have developed financial
products collectively know as microfinance for housing (MFH) to fill this gap. Yet MFH
is far from scale, in large part due to substantial legal and political hurdles within the land
sector. Land tenure and titling is often ambiguous in slums, and when tenants face
constant threat of eviction it signals they are less than credit-worthy.ii Since the evidence
on whether formal titling can remedy the situation is mixed, new innovations are needed.
This paper evaluates one- collective land purchase- by first extending the existing
literature on group versus individual liability to the world of MFH. Just as Grameen’s
joint liability scheme improves the prospect of uncollateralized loans, collective purchase
through trusts and cooperative might decrease collateral and risk barriers. Through case
studies from Nairobi, Kenya, I evaluate the extent to which self-organized collective land
purchases by poor slum-dwellers have succeeded- both for lending institutions and for the
land-buying cooperatives and trusts that relocate. I argue that while collective purchase
has clear benefits- it transforms individually insolvent borrowers into a collectively
solvent organization and offers benefits beyond those of household-level MFH loans- it is
still hamstringed by three substantial challenges: incomplete settlement, tenure security,
and unfavorable regulation. I conclude by suggesting ways in which lessons learned in
group lending might enhance the success of this strategy in the future.
Microfinance for Housing
Significance
The one billion people living in slums are trapped in blighted urban environments
that lack access to even the most basic of services, such as toilets, sewers, water taps,
electricity, health clinics, and primary schools.iii Families in this so-called ‘bottom
billion’ must contend with overflowing sewers, contaminated and expensive water,
expensive and dirty indoor cooking and lighting fuels, and overcrowded public schools
miles away. Microfinance for housing (MFH) is a subset of microfinance offered to meet
the housing needs of these poor households who want to either improve their existing
houses or to move to a new settlement and yet do not meet the requirements of the formal
banking sector. In “Micro-finance of housing: a key to housing the low or moderate-
income majority,” Bruce Ferguson describes the three reasons that households in
developing markets are typically ineligible for traditional household finance products.
First, traditional mortgages require collateral, yet most households have only para-legal
proof of ownership or none at all.iv Second, mortgages require regular monthly periods
over a series of several months, yet this is poorly suited to low-income households that
are often self-employed, have variable income, and face crises that absorb much of their
short-term income.v Third, existing financial institutions gain profit only from large
mortgages, and so have no incentive to make the smaller loans appropriate for low-
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Bennett
income households. The bottom billion is the most obvious target market for MFH
products, but they are not the only ones who qualify. Slightly wealthier households-
dubbed the ‘missing middle,’- are also candidates for MFH; they range from well-to-do
households in slums to commercially subdivided neighborhoods in sprawling developing
cities. These households require a mortgage loan of modest size and medium duration,
yet the size of these loans is often below the traditional threshold of profitability.vi
MFH Products
There are a few salient differences between MFH loans and traditional micro-
enterprise finance (MEF). One is that the amount of the MFH loans is higher and the
payback time is much longer. Typically, they consist of small mortgage loans in the range
of $300-$4,000 for home improvement.vii Yet loans offered to wealthier households,
dubbed ‘mini-mortgates’, are much higher. Smaller loans are generally short to mid-term,
in the range of 3-36 months, while larger loans can take up to 10 years to repay. Because
of the larger risk and more substantial relationship involved in these loans, MFIs have
developed innovative ways of screening lenders. One strategy is to only allow clients to
take out an MFH loan once they have graduated from a certain number of regular loans;
for example, Grameen started offering them some years ago as a reward for successful
repayment of MEF loans. Another strategy is to require a mandatory savings or payroll
deduction program to reduce risk.
Scale
While traditional housing finance comes only from banks, MFH can also come
from MFIs, non-government organizations (NGOs), cooperatives, credit unions, and non-
banking financial institutions (NBFIs).viii Organizationally, they run the gamut from MFIs
like FINCA, Grameen, SEWA, and Accion, to Foundations like Jamii Bora in Kenya,
Banks like CARD in the Phillipines, and NBFIs like Finamerica in Colombia. There are
few accurate estimates of MFH’s global scale. Merrill et al. reports based on a 2005-6
survey that ACCION’s MFH loans were the largest of any organization, at some $117
million. However, many other organizations had a higher percent of their portfolios as
housing loans; in the case of SEWA, it was 27%.ix If the one billion figure referenced
early is a rough benchmark for demand, then supply is currently an order of magnitude
behind. Like microfinance as a whole, MFH faces substantial barriers to scale; these
include limited information and capacity on loan products as well as broader capital
market failures.x MFH must operate within the context of the shelter sector, however, and
therefore relies upon the availability of legitimate land and infrastructure- a significant
and unique barrier. The rest of the paper explores this last challenge in depth.
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