Housing microfinance: Is the glass half empty or half full?
Donors, governments, microfinance networks, and foundations
have promoted housing microfinance (“HMF”) for a decade.
Considerable operational experience has accrued on this practice
over this time. Meanwhile, many emerging economies have grown
rapidly, which has changed housing markets and the context for
HMF. The moment, then, is auspicious for a re-examination of
housing microfinance and its record.
How have microfinance institutions performed at housing
lending? Is HMF still relevant to the enormous challenge of
low-income housing and urban development in emerging countries
and, if so, how can it be expanded to massive scale?
This paper answers these questions by analyzing recent survey
data on housing microfinance, examining the housing economies
and HMF practice in three countries that display a wide range of
experience (Peru, Mexico, and Brazil), and profiling
cutting-edge cases of market-based low-income housing delivery
that include HMF. This paper mainly deals with Latin America,
where HMF has advanced the most, but also draws on evidence from
other regions. A short description of the emergence of HMF
prefaces this investigation:
HMF has become “hot” largely for two reasons:
First, HMF has the potential to serve most low and moderate-income households.
These families neither want nor can afford a large long-term
traditional mortgage to purchase a developer-built complete
unit. Instead, these households build progressively, by
acquiring and upgrading title to a lot, building a makeshift
shelter, replacing this makeshift shelter with permanent
materials and expanding it, and lobbying government for services
(Ferguson, 2003; Greene and Rojas, 2007). A series of small
short-term loans can fund the steps in this progressive housing
process with payments affordable to households.
The prototypical HMF loan consists of a
small, short-term unsecured credit (US$500-$2,500 with a term of
two to five years, depending upon context) to a
homeowner to expand or remodel their informally-built
house. Sometimes, microfinance institutions (MFIs)
offer somewhat larger loans (US$3000-$7000) at longer terms
(five to 15 years) for a family to construct a new home (often
on a lot that they already own), occasionally secured by a
mortgage. Small home improvement credit, however,
the main market for which microfinance institutions have created
a housing microfinance product.
However, small credits could also finance a wide range of
other housing investments useful to low and moderate income
households. These include lot purchase, title regularization,
construction of a floor/joist/roof structure that the homeowner
builds out, adding rental
units onto the homeowner’s property through horizontal or
vertical expansion, individual and communal
infrastructure, the vertical or horizontal buildout of a
developer-built core unit or humid core (a bathroom/kitchen area
containing plumbing and electricity) in pre-programmed steps, or
the completion (adding fixtures, cabinets, electrical equipment,
additional plumbing, painting etc.) of an unfinished condominium
shell in a high-rise building. This paper will mainly deal with
the supply and demand for small home improvement loans, which
has become virtually synonymous with “housing microfinance.”
However, these other possible applications of housing
microcredit will be considered when strategizing how to expand
HMF to relevant scale.
Social support programs joined with GDP growth have
stimulated a rapid increase in household income of families in
the bottom half of the income pyramid in many emerging countries
over the last decade -- including Peru, Mexico and Brazil. This
paper will also examine how this rise in family income has
diversified housing investment of low/moderate income households
beyond small home-improvement and the implications for HMF.
Nonetheless, the potential market for small
home-improvement loans remains huge and, often,
relatively uncontested; 50% to 80% of the population in most
emerging countries build their homes progressively. Market
studies typically show that one-quarter of these families want
and can afford a small home-improvement credit at any one time.
Although each individual project is small, the huge numbers
result in an impressive total market potentially financed by
such credit -- $331.8 billion worldwide according to the World
Resources Institute (see their paper in this issue of GUD
magazine). Traditional mortgage finance institutions have
typically lacked the low-cost community-based systems necessary
to lend to this market. Hence, microfinance institutions have
frequently faced little institutional competition in extending
HMF to these families.
A second reason that HMF has become a developmental
“hit” involves its fit with the microfinance industry. Small
home improvement credit offers a useful product that
microfinance institutions can add to their core business –
micro-enterprise lending. MFIs can successfully apply their
existing loan methods and installations for micro-enterprise
loans to small home improvement loans with little or no
modification. Roughly 20% of funds nominally borrowed for micro
enterprise go to housing improvement in the absence of an
explicit housing product.
HMF also fits well with the transformation of many MFIs from
NGOs into financial institutions that are regulated because they
take deposits from the public. The aspiration to own or build a
house has historically proved the main motivation for families
to save in developed countries (where “savings and loan”
societies have traditionally linked these functions) as well as
emerging nations (where savings clubs and housing cooperatives
have emerged for the same purpose). Hence, adding a
home-improvement credit as well as a savings products makes
sense for MFIs seeking to take deposits – the least-expensive
type of funding -- and become regulated financial institutions.
Small serial credits largely for building materials to
a homeowner unit – which has come to be called
“housing microfinance” – began expanding a decade ago mainly
because of these synergies with the microfinance industry. By
this time, roughly 200 microfinance institutions worldwide had
become commercially viable (Robinson, 2001). Increasing
competition had caused microenterprise loan markets to tighten
in some countries (e.g. Bolivia, Bangladesh). Diversifying into
home-improvement lending and savings products appeared useful
next steps for leading MFIs and their networks. Major figures
– such as Hillary Clinton – lauded the achievements of the
“microfinance revolution”, and the concept of “housing
microfinance” enjoyed legitimacy by association.
In addition, a series of events, papers, and a book (Daphnis
and Ferguson, 2004 – republished in Spanish in 2006) on housing
microfinance during this period disseminated awareness of HMF
throughout the international housing community and microfinance
networks, and brought these two audiences into communication for
the first time.
This conjunction of factors pushed and pulled the
microfinance industry into low-income home lending. The next
two sections of this paper assess how MFIs have done at this
data on the current state of housing microfinance within the
Two recent studies present comprehensive empirical data on
the state of housing microfinance. Both focused on Latin
America, the region where this practice has advanced the most.
The first –
by Accion (presented in Messarina, 2006; and Merrill and
Messarina, 2006) – surveyed 10 of its regional affiliates in Latin America. The second
by Micro Service Consult Gmbh (GmbH, 2005)
was commissioned by Housing Microfinance Ltd., a financial group
planning to issue securities to finance low/moderate income
housing in order to assess market demand from MFIs for funding.
The GmbH study surveyed 25 of the top MFIs in Latin America on
their housing credit products and plans.
Although conducted independently for different purposes,
these two studies arrive at highly-similar conclusions.
Discussing each in turn:
From 2002 to 2005, the HMF portfolio of the ten Latin
American Accion affiliates surveyed grew from US$38 million to
US$117 million, and home improvement lending increased from
US$20 million to US$74 million. Interestingly, almost as many
of these Accion affiliates offered home purchase loans (70%) as
home improvement loans (80%), indicating that microfinance
institutions (“MFIs”) are seeking to serve moderate-income
households that buy a new unit as well as low-income households
that upgrade a lower-cost housing solution.
The HMF portfolio grew from 12% of the total portfolio of
these 10 microfinance institutions to 19%, but still represented
only 9% of the total network portfolio of Accion. Repayment
rates on the HMF portfolio of the surveyed MFIs were superior to
that on microenterprise lending. This datum bears out the
impression of many microfinance lenders that households
prioritize repayment of housing credit over microenterprise
These 10 MFIs surveyed by Accion stated that HMF loan demand
is immense. Most of these MFIs do not market this product,
although some competition is beginning to emerge from building
materials suppliers and finance companies. This finding jibes
with the conclusion of a market study conducted in three Mexican
cities (Capital Advisors, 1999) that bordered the US that the
effective demand for HMF totaled four times that for
micro-enterprise finance in this same geographic area. Fifteen
percent of Mexican households surveyed by this study both wanted
and could afford a small loan at market rates with short terms
for home improvement. The general sense of lenders is that
roughly half the households of Latin American countries are
interested in improving or adding to their homes, although only
about a third of this half of the population can afford
market-rate finance in a given moment.
The Accion study concluded that HMF has proved useful to
build customer loyalty, but is not a core product of these ten
MFIs. The core mission of these MFIs continues to be fostering
economic development through micro-business lending. In
general, these MFIs do not view housing as an integral part of
this core mission.
The GmbH study showed that 17 of the total 25 MFIs surveyed
had products for low-income housing, while the remaining eight
were seriously considering developing such a product in the
short run. These institutions had extended a total $84.2
million for housing loans. Overall, housing loans represented
8.8% of the total micro loan portfolio of these MFIs. Housing
credit accounted for over 15% of the portfolio in only three of
these MFIs. Despite this small share, many of these MFIs valued
housing credit because it fits with well within their overall
business strategy. HMF helps to diversify their portfolio, and
meets the housing credit need of their existing client base of
All 17 MFIs with a housing product surveyed by the GmbH study
make loans for home improvement, but only nine offered finance
for purchase or construction of new homes. Maximum maturities
lie between 10 and 20 years for MFIs offering new home loans and
between two and five years for MFIs offering home improvement
loans. The average loan amount was $1,925. Almost all
institutions funded their housing loans at least partly from
their own equity. Eleven of these 17 institutions used credit
lines mainly from national public banks and international
development banks for refinancing their housing portfolio.
The institutions surveyed by the GmbH study were interested
in roughly doubling their housing credit volume over the next
three years, although their core mission continued to be
micro-enterprise credit. This expansion would raise their
housing loan volumes from 8% to 10% of their total loan
portfolio to 15% to 20% – a significant increase but hardly a
dramatic one relative to the immense demand for this product.
These MFIs surveyed by GmbH said the “lack of availability of
appropriate funding” was the most important constraint for the
expansion of their housing portfolio. However, donors,
investment banks, and others have flooded the microfinance
industry with liquidity. Hence, such “lack of funding”
statements may sometimes indicate other problems (such as high
costs and inefficient operation that make funding at competitive
rates unprofitable for these MFIs) and, therefore, deserve
analysis on a case-by-case basis. These MFIs cited lack of
institutional capacity and technical know-how as the second most
important problem in limiting the expansion of their home
lending. Given the multiplicity of sins that “lack of
appropriate funding” often indicates, technical assistance to
remedy institutional and operational problems appears to be as
important as simply more or better funding.
Other recent studies of HMF within MFIs by International
Habitat for Humanity (Stickney, 2006) and the Cooperative
Housing Foundation (Schumann, 2006) come to findings consistent
with these conclusions.
perspective of promoting HMF in MFIs, the glass is half full
Hence, these studies show rapid growth of HMF loan volume
within MFIs, although from a minuscule base. MFIs have
discovered that HMF is profitable and has immense potential for
expansion. Thus, HMF – particularly small home improvement
loans – is now well established as a recognized niche product
for MFIs. From the perspective of many MFIs, their housing
product is on track to fulfill its institutional missions: to
diversify risk, support development of savings products and the
transition to a regulated deposit-taking financial institution,
and offer an additional product popular with their core
The “lack of funding” constraint – which MFIs cite as the
main bottleneck to expand housing microfinance – is also on its
way to solution. For example, Mexico’s second-tier housing
development bank, the Sociedad Hipotecaria Federal (“ SHF”),
which previously offered liquidity only for mortgage loans
mainly for middle-income home purchase, has had an HMF window
since 2005 and now offers a subsidy that can be joined with the
HMF loan (as discussed below). The government of Colombia has
also tried to start a secondary market for housing microfinance.
Investment groups and capital market institutions are
establishing financial vehicles to fund home credit of MFIs.
The paper by James Magowan in this issue of Global Urban
Development Magazine describes the considerable progress in
issuing securities on public markets for on-lending to MFIs to
finance low/moderate income housing in emerging countries.
These major achievements deserve recognition and further support
in order to consolidate them.
However, three interrelated factors seriously limit expansion
of HMF within MFIs:
First, an explicit housing product typically has a slightly
lower interest-rate and longer tenor, and can cannabalize their
existing microenterprise loan business. That is, the MFI’s
microentrepreneur clients could nominally borrow for housing to
fund their business and get better terms than they would under a
microenterprise credit. Thus, the end result of developing an
explicit housing product might mainly be lower profits, unless
marketed to a new clientele or unless the MFI monitors the use
of the funds for housing.
Second, the Accion and GmbH studies confirm that microfinance
institutions consider housing an adjunct secondary product.
From the perspective of most MFIs, housing credit deserves
little attention and is unrelated to their core mission of
“promoting economic development.” Many studies as well as
common experience show that most households build wealth mainly
through homeownership and housing investment plays a crucial
role in national economies. Nevertheless, microfinance
institutions continue to relegate housing to a trivial role in
their business strategy aimed, supposedly, at “economic
development.” With a few notable exceptions, MFIs lack the
interest to make housing a major focus.
Most fundamental, however, the microfinance industry offers
far too small an institutional base in most countries for the
expansion of housing microfinance to a scale relevant to demand,
even if MFIs were interested in this role. The next section
explores this fundamental institutional bottleneck in Peru,
Mexico, and Brazil.
perspective of satisfying household demand and addressing the
low-income housing and urban development emergency of the next
three decades, the glass is more than half empty
The supply of HMF is still only a minuscule fraction of
demand. Even if HMF continues to grow at current rates within
MFIs, the total loan volume will be trivial relative to demand
in most contexts over the next 20 to 30 years – that is, the
peak of the world’s low-income housing/urbanization emergency
(see Cohen, 2005).
The following profiles the housing economies and HMF practice
in Peru, Mexico, and Brazil in order to illustrate the range of
experience in ramping up HMF and to explore alternatives for
addressing low-income housing needs on a market basis at massive
Peru is a
country of 27.5 million people, with 54% living below the
poverty line. The population of the capitol – Lima – has
increased from 1.5 million in 1960 to around 6 million
currently. Gross national product grew at 5.35% in the third
quarter of 2005, with inflation of 3.65% on average in 2004. As
regards housing demand, 57% of the residents of Lima want to
improve their house. In the south of Lima, 42% of roofs are of
zinc or fiber. In the south and east of Lima, 26% of floors are
made of earth. The housing deficit has been calculated at 1.2
million units, and is increasing at 90,000 units annually (Gwinner,
Government has a number of housing programs (Gwinner,
2005b). One of these – BanMat – makes “loans” for building
materials. However, arrears rates are about 80% on these
credits. A second program – MiVivienda - is funded by a 5% tax
on salaries. MiVivienda channels these monies through a
second-tier finance institution, COFIDE, to first-tier housing
lenders that – in turn – extend below market-rate credit to
around 14,000 middle-income households per year for the purchase
of new developer-built homes costing US$25,000 to $50,000. A
third program, Techo Propio, operates by joining a direct demand
subsidy (i.e. a grant) with the household’s downpayment and – if
necessary – a loan for purchase of a new home, construction of a
home on a lot owned by the family, or rehabilitation of their
existing home. The subsidy amount varies from US$1,200 for home
improvement to US$3,600 for purchase of a new home. Techo
Propio currently delivers around 3,000 subsidies per year to
households earning around US$400-$500 per month.
Overall, Peru has housing conditions and a set of
governmental housing programs that are fairly typical of Latin
American countries. The great bulk of the housing subsidy and
finance system – the MiVivienda program in the case of Peru –
focuses on middle income families and fuels the commercial
homebuilding and mortgage industries. These programs contain
significant subsidies per unit that limit their scope and production to a small share of
the population – mainly middle-income families. The implicit
government policy for the low-income majority is for these
households to invade land or purchase a lot in a clandestine
subdivision or low-income community and to build their home over
many years without formal-sector support.
In short, Peru is particularly fertile ground for small
serial home credit. A conservative estimate is that pent-up
market demand totals US$1.1 billion for housing microfinance
loans from 550,000 existing low income households, and is
increasing at $20 million annually from 9,000 new low-income
MiBanco – the largest microfinance institutions in Peru and
in Latin America, – has responded by creating one of the largest
and fastest-growing housing microfinance businesses in emerging
countries. MiBanco was formally launched in 1998 as a licensed
bank when it assumed the loan portfolio of Accion Communitaria
del Peru, a nonprofit NGO operating in Lima. Today, MiBanco is
the largest microfinance bank in Latin America and one of the
largest banks in Peru. MiBanco has recently won an award as one
of Latin America's most successful commercial banks.
The impetus for creating a housing product dates back to the
experience of senior management in helping to finance and
rebuild houses in northern Peru destroyed or damaged by an
earthquake in the early 1970s (Brown, 2003). Funding
limitations precluded extending credit for housing before the
organization became a commercial bank. In 2000, however,
management began designing a product for market-rate finance of
home improvement, called MiCasa. Management decided that the
MiCasa loans would be offered through the same branch network
with the same staff as their other loan products. The core part
of the credit process – the evaluation of the client’s capacity
to repay -- would be essentially the same for housing as the
bank’s micro enterprise loans. There were two targets for
MiCasa loans: MiBanco’s traditional customer base of micro
entrepreneurs, and low-income, salaried workers living in the
same communities. By adding low income workers to its target
market, however, MiCasa has ended up serving poorer households
than the micro-enterprise portfolio of the institution.
Credits – averaging US$1,600 – are extended for up to five
years at interest rates of around 45% in the Peruvian currency
(Soles), a somewhat lower rate than that for micro enterprise
loans. Borrowers, however, typically pay off
ahead of the loan maturity; actual terms average 20 months.
MiCasa was envisioned as a microcredit product without technical
assistance for construction. Currently, however this program
assists households with the construction process through an
initial design and budget, one visit at the start of
construction to help orient the work, and a technical report on
the feasibility of construction. MiCasa serves households,
extends credit, and collects repayment through its regular
system of loan officers, each of whom manages a portfolio of
around 250 loans and gets paid largely on commission based on
loan origination and collection performance.
Loans are secured mainly by cosigners,
personal collateral, and temporarily taking
custody of households’ proofs of ownership until credits are paid off, rather
than mortgages (only about 10% of MiCasa loans are secured by a
mortgage), which are time-consuming and expensive to secure and
impractical to execute in low-income areas where home resale
markets are thin. Thus, assiduous methods of loan collection
and maintaining good credit in order to get access to more
finance constitute the main incentives for repayment.
MiCasa has grown rapidly. In 2001 – its first full year of
operation – MiCasa made 5,000 loans. In 2006, MiCasa made
13,498 loans. As of April 2007, MiCasa had 20,903 loans
outstanding in total, and was making new loans at the rate of US
$2.5 million per month. Arrears exceeding 30 days were 1.81% --
low by Peruvian and international standards. Return on equity
was 7% to 9% per annum – which, when leveraged by the
institution’s capital-to-asset ratio, resulted in profits of
over 20% per year. From April 2006 to April 2007, the MiCasa
loan portfolio grew at virtually the same rate (42%) as that of
the loan portfolio of MiBanco as a whole (40%). MiCasa
constituted 12% of the total portfolio of MiBanco.
According to the manager[i]
of MiCasa, effective demand for these micro housing loans is
huge, and far exceeds the supply of loans under the MiCasa
program. This manager notes that the first priority of
MiBanco as a whole continues to be micro enterprise lending,
although the institution also actively markets MiCasa.
Recently, MiCasa has attempted to establish alliances with
building materials suppliers, which are still at a beginning
stage. For example, MiCasa has opened an office of five people
within a building materials supply store associated through
overlapping ownership interests with one of the largest cement
producers of Peru -- Cimento Lima. This office has extended
credit of around US $300,000 for purchases of building
materials. Large international companies - such as Ace Home
Center (US based) and Sodimac (Chile based) increasingly
dominate the building materials retail sales environment in
MiCasa also has a pilot urban upgrading loan project. Under
this program, loans have been extended for a total of around
US$300,000 for infrastructure provision, including installation
of water and electric networks, to six groups of households in
various low income communities, which collectively agree to
repay the loan. These loans are being repaid on time, and two
of the six groups of households have repaid their loans fully.
Although the partnership with the building materials supplier
and the urban upgrading loan project are still embryonic, the
manager of MiCasa believes that these initiatives hold the
future to expansion of housing microcredit in Peru.
With the success of MiCasa, a number of other local financial
institutions – particularly cooperative credit societies (Casas
Municipales) and other MFIs – have now introduced housing
products similar to MiCasa and are beginning to explore this
market. This competition has contributed to forcing down
interest rates on housing microfinance loans, from around 70%
per annum three years ago to 45% currently.
Of the three countries profiled here, Peru represents the
“best case” for the argument that housing microfinance can
become relevant to the scale of the urbanization/low-income
housing challenge. On a flow basis, Peruvian MFIs appear to be
extending roughly the amount in HMF loans – US $20 to $30
million per annum -- necessary to cover demand from new
families. However, little progress has been made in satisfying
the huge pent-up demand from the past. The housing micro credit
volume extended by all Peruvian MFIs over the last decade totals
less than US $150 million compared to a pent-up market demand of
With a population of 110 million, Mexico has 30 million
households, growing at a rate of 750,000 families per year.
Forty percent are low-income,
earning up to three minimum salaries – about
US$450 per month.
Mexico has made
great progress in traditional mortgage finance over the 15 years
since the Tequila Crisis of 1994 virtually destroyed the private
housing finance system led, at that time, by commercial banks.
An institution funded by pension contributions of private
workers mandated by federal law, INFONAVIT, lends at
below-market interest rates largely to low-income
formally-employed workers and still dominates the Mexican
mortgage market, accounting for roughly 60% of mortgage loans.
In 2002, the federal government created a second-tier housing
development bank – SHF – to lead the development of private
market-rate housing finance. Under its organic law, SHF enjoys
the support of the federal treasury necessary to build a private
housing finance system, which phases out over a period of 12
years in order for the private sector to assume full
responsibility. SHF has been the main funder and de-facto
regulator of 17 mortgage banks, called housing “SOFOLES” (SOFOLES
can lend but not take public deposits for a single asset type –
in this case, housing) that filled the gap in mortgage finance
left by the exit of commercial banks after the Tequila Crisis.
These housing SOFOLES have innovated successfully in their
origination and collection methods, and became the main home
lenders to moderate and middle-income families. The success of
housing SOFOLES has, since 2004, begun to re-attract commercial
banks back into home lending. The largest housing SOFOLES are
now turning into commercial banks so that they can take deposits
from the public and better compete in a more contested mortgage
market. Other housing SOFOLES are branching out into new
products – including unsecured lending for home improvement – by
converting into a new category of financial institution, called
a “SOFOM”, which allows diversification of asset types without
taking deposits from the public.
INFONAVIT, SHF/SOFOLES, a number of other government housing
finance institutions, and – recently – commercial banks have
joined to increase mortgage lending dramatically in Mexico over
the last eight years, which has more than tripled to around
500,000 loans per annum. These mortgages mainly finance the
purchase of new homes built by sophisticated commercial housing
development companies, which have become some of the most
efficient and largest-scale homebuilders in the world. This
system is constructing many new residential subdivisions of
10,000 to 20,000 houses with complete infrastructure on the
periphery of the major metropolitan areas of Mexico. These new
commercially-developed homes mainly consist of core units that
the family can expand horizontally and vertically in
striking successes, roughly 40% of households – who are largely
low- income and employed informally – lack access to
institutional housing finance and fall outside Mexico's housing
system. As a result, a large market exists for small home
credits for home improvement. Based on a market study (Capital
Advisors, 1998) that shows 15% of Mexican households want and
can afford such loans, unsatisfied HMF pent-up demand in Mexico
is roughly US$9 billion, and growing at US$330 million
The Mexican MFIs sector is somewhat underdeveloped. The MIX
– a microfinance database – lists only 27 institutions versus 40
in Peru, a country of only about one quarter of Mexico’s size
(Elias, 2008). Seeking to diversify from its customary
middle-income clientele, SHF has established a facility for
offering credit for first-tier lenders to fund HMF loans and has
recently added a subsidy program that can be joined with these
home microcredits. One Mexican MFI – Financiera Independencia –
is assertively expanding the HMF market, mainly through joining
SHF’s HMF credit and subsidy facilities. Box 1 profiles this
1 -- Financiera Independencia in Mexico; leveraging housing micro
finance with government subsidies without contaminating
mortgage finance, government grants, and a household
down payment has worked well for assisting middle-income
households and stimulating
mortgage lending and commercial homebuilding
for this segment. Such “direct demand subsidy programs”
have a long history in emerging countries, particularly
Latin America (Ferguson, 1996).
combining housing microfinance with government subsidies
has proved elusive for low-income households. MFIs
frequently distrust governments and are concerned that
the availability of subsidies will dilute borrowers’
willingness to pay on microcredit. In turn, government
housing bureaucracies frequently emphasize increasing
housing production numbers, pay much less attention to
cost recovery (e.g. repayment rates on loans), and do
not understand the perspective of MFIs. Largely for
these reasons, attempts to join HMF with housing
subsidies have failed in Columbia, Nicaragua, and
elsewhere. A Mexican MFI, Financiera Independencia, and
the federal government second-tier housing Bank, SHF,
have succeeded in joining these two sources of funding
on a large scale for the first time.
Financiera Independencia is an MFI incorporated in
Mexico as a Sociedad Financiera de Objeto Multiple (“SOFOM”).
Since its inception in 1993, FI has grown to include a
network of 128 branches in 30 of the 32 Mexican states.
The institution offers four products, including a credit
line for home improvement called CrediConstruye.
CrediConstruye in 2007 funded by a US $80
million line of credit from SHF that expires in 2011.
FI is the first MFI to use this SHF housing microfinance
facility. Borrowing households must
have low incomes –
below 4 minimum salaries (approximately
US$600 per month). Loans must be used
for home improvement and all are extended
in the form of a voucher that can be
exchanged for construction materials. The average loan
size is US$600. Loan terms are two years with an
interest rate of 43% per annum.
Virtually all of these loans are joined with a subsidy,
typically of US $400 per household, under the Esta Es Su
Casa program of the Mexican federal government.
CONAFOVI – the apex housing policy organization of the
Mexican federal government – has delegated the
administration of this subsidy to SHF.
December 2007 after one year of operation,
had disbursed US $32.7 million in loans to 20,000
rates for 90 days were 2.5% – low by both
Mexican and international standards.
anticipates quadrupling loan volume and number of
borrowers served by the end of 2008.
management of FI has found no problem with borrowers
and microcredit, and attributes the smooth operation of
the program to the SHF grant process. While housing
agencies unfamiliar with banking operate most housing
subsidy programs, SHF is a second-tier housing Bank with
long experience working with the private sector. SHF
has largely succeeded in developing a private housing
finance market for middle-income households in Mexico.
The institution has now begun to focus on bottom-of-the
pyramid housing finance markets.
Sources: interview with management of FI, June 24,
2008; and Elias, 2008.
CreditConstruye program of FI shows that joining
housing microfinance with housing subsidies can, indeed,
dramatically increase loan volumes without contaminating credit
Government subsidies, however, are a limited resource. Even
if the FI/SHF partnership with accompanying subsidies were to
quadruple to $120 million in loans per annum as planned
2008, it would satisfy only a miniscule fraction
of the US$9 billion of pent-up demand for small housing credits
Mexican MFIs have shown little interest in housing. In summary,
the relatively underdeveloped Mexican MFI industry lacks the
capacity and interest to satisfy a significant fraction of
demand for HMF in that country.
The efforts of the SHF and FI
are highly promising, but have a long way to go to reach a scale
relevant to this market.
While small housing credits are a niche
secondary product for most MFIs, they are vital to
the business of Mexico's enormous building materials
manufacturers and retailers, such as CEMEX (the third-largest
cement manufacturer in the world) and Home Depot of Mexico.
These modern corporations must provide consumer finance for
their products to be competitive. The experience of the
Patrimonio Hoy program of CEMEX of Mexico illustrates the likely
evolution of housing microcredit in large markets, such as that
of Mexico – see Box 2 for a description. This case has received
wide attention within the building supply and manufacturing
corporate sector in Latin America, in particular, but also
throughout emerging countries.
In effect, Cemex’s Patrimonio Hoy program
merges small credits with other components of the
low-income housing value chain – including building materials, a
savings program, and technical assistance in construction. The
integration of these elements greatly expands the market for
each one. Typically, no one organization can provide all these
elements. Hence, as Patrimonio Hoy demonstrates, this
integration comes from alliances among various entities –
corporations, citizen-sector organizations, and government.
The expansion of housing microfinance to scale depends
fundamentally on the creation of such business alliances. Irene
Vance’s paper on HMF in Guatemala in this issue of Global
Urban Development Magazine provides a good second example of
creation of a low income housing value chain through business
alliances organized by a commercial bank. A third intriguing
example is that of a building materials manufacturer, Corona, of
which provides very small
credits (US$400) to the poorest households for ceramic tile to
replace dirt floors, also documented by a paper in
this issue of Global Urban Development Magazine by
Home Depot of Mexico – the largest retailer in this country –
also provides consumer credit for 12 to 18 months for purchase
of its building materials, although without integrating other
aspects of the progressive housing process. The consumer credit
extended by the Patrimonio Hoy program of Cemex, alone, has
exceeded US$400 million, compared to the US$120 million in loan
volume to which FI aspires by the end of 2008 for its
Thus, consumer credit for the purchase of home construction
materials represents, by far, the main source of low-income
housing finance in Mexico and has an enormous institutional
platform for growth – the world-class Mexican building materials
manufacturing/retail industry. In comparison, home improvement
lending through microfinance institutions is miniscule and only
one commercially-viable MFI is aggressively pursuing this
- Patrimonio Hoy in Mexico
The Patrimono Hoy Program of CEMEX,
the giant Mexican cement maker, serves do-it-yourself
homebuilders, who account for 40 percent of the
consumption of cement in Mexico. CEMEX research showed
that low-income homebuilders in Mexico take four years
to complete one room, and 13 years to complete a 4-room
house. This slow rate largely reflects the lack of
formal-sector support. So, many households join
informal savings clubs (tanda) in which each
family pays US$10 to a pool and one member is selected
each week by lottery until all have received money.
However, this informal savings and self-help
construction has strong drawbacks when unguided.
Building materials dealers often sell these households
poor quality materials left over from large customers at
high prices. Homebuilders who lack construction skills
often waste materials by buying too much or too little.
They also hoard these materials, which leads to their
deterioration by weather and loss from theft. Home
design and construction is often poor quality. Finally,
tanda savings often end up getting used for
festivities rather than invested in construction
CEMEX Patrimonio Hoy program addresses these problems
with self-help construction with the business goal of
expanding CEMEX sales in this market. It first
organizes small groups of families who commit to a 70-
to 86-week saving program. As informal tanda, each
group’s members take turns collecting payments and
playing the role of enforcer. To ensure that savings
get spent on construction materials, however, families
receive raw materials rather than cash. Deliveries
start after only two weeks, before families have saved
much, and subsequent deliveries are made each 10 weeks.
Thus, CEMEX is, in effect, advancing microcredit to
these families in the form of building materials.
CEMEX operates this program through establishing “cells”
– four-member offices – located in low-income
communities. CEMEX arranges with local building
materials suppliers to deliver high-quality product and
uses its cells to orient groups of households in the
construction process. Rather than use advertising, CEMEX
hires local “promoters” – 98 percent of them women – to
inform local households about the program.
local women are the key to establishing the
relationships and developing the trust necessary for the
program to work in the challenging environment of
informal communities. The program sponsors parties and
other events to celebrate completion of a room or a
average do-it-yourself homebuilder in Mexico spends
US$1,527 and takes four years to build an average size
room of 100-square-feet. But participants in Patrimonio
Hoy can build the same size room, with better quality,
in less time – 1.5 years – and at two-thirds the cost
(US$1,038, which includes the cost of materials,
technical assistance from an engineer or an architect,
and Patrimonio Hoy club fees). Patrimonio Hoy reached
100,000 people in its first two years of operation, and
planned to expand this number to 1,000,000 by 2008.
Patrimonio Hoy operates without subsidy. SHF – the
secondary housing-finance liquidity facility of Mexico
charged with leading the development of market-rate home
credit – has established a window for housing
microfinance that works with Patrimonio Hoy and other
first-tier lenders. CEMEX has operations in 23
countries, and management are interested in expanding
Patrimonio Hoy outside Mexico.
Sources: interview with management of Patrimonio Hoy;
and Prahalad, 2005.
In contrast to Peru and Mexico, Brazil has virtually no
commercially-viable microfinance institutions. Nonetheless,
small credit for housing is a huge industry
and finances roughly one-fifth of housing units in
the Sao Paulo area,
comparable to the number of units funded by
Brazilian institutional mortgage finance in this metropolis.
These small housing loans mostly take the form of consumer
credit channeled by building materials retailers for the
purchase of their products. However, this building-materials
consumer credit industry is fragmented, disorganized, and
charges relatively high interest rates. An examination of
Brazilian housing finance and its building materials consumer
credit industry provides important insights into small serial
credit for progressive housing in an environment without
One million Brazilian households form each year and enter the
market for housing (Ferguson, Cherkezian, and Motta, 2007).
Over half of this demand for new housing comes from low and
moderate-income households earning below five minimum wages
– about US $650 per month. Self-financed progressive housing accounts for
62% of new Brazilian housing investment. Much of this
self-financed progressive housing development occurs in the
As in Peru and Mexico, economic growth joined with social
have expanded the lower middle-class and decreased
the number of households in abject poverty over the last three
years, stimulating demand for housing investment. According to
The Economist, “between 2000 and 2005 the number of
Brazilian households with incomes of US$5,900 to $22,000 grew by
half, from 14.5 million to 25.3 million, while those receiving
less than US$3,000 a year fell sharply to just 1.3 million.”
Although growing at a rapid rate recently, mortgage finance
is still small in Brazil, both relative to the share of housing
funded and to GDP. Table 1 compares mortgage finance as a share
of GDP in Brazil with that of other countries.
Partly because of the low penetration of institutional
mortgage finance, many Brazilian households pay for a
surprisingly large share of their housing in cash. Downpayments
of 30% to 50% are common. A wide variety of “alternative”
sources of housing finance have also developed.
The main sources of institutional mortgage finance are the
SBPE (Sistema Brasileiro de Poupanca e Emprestimo) (averaging
about 20% of mortgages for purchase of new homes) and the CEF
using FGTS funds (averaging about 60% of mortgages for purchase
of new homes).
Table 1 --
Mortgage Finance As a Share of GDP
Mortgage finance as a share of GDP
Galindo and Lora in Inter-American Development Bank 2005; and
Unitus/Lehman Brothers, 2007.
The remaining medium and long-term home funding (20%) comes
from three “alternative” non-bank sources: direct financing from
developers, real estate “consorcios” (federally-regulated
savings clubs that pool funds gathered each month and allocate
them to one or more members to buy a house), and housing
cooperatives (groups formed by groups such as churches that help
to organize the process of saving, accessing land, construction,
and home purchase of their members).
The SBPE (Sistema Brasileiro de Poupanca e Emprestimo)
provides a government guarantee to individual savings deposits,
but places limits on the rates paid for these savings that are
below market. In turn, banks are required to lend most of these
sums in the form of long-term mortgages at below-market rates.
FGTS (Fundo de Tempo de Garantia de Servicos) collects each
year about 4.5% of GDP through a levy of 8.5% on formal
private-sector wages -- a greater share of the economy than any
other housing finance/pension mandatory contribution system in
Latin America . These amounts are credited to accounts of
individual workers and accrue interest at a low rate. The CEF (Caixa
Economica Federal) –
a government-owned institution that is the largest retail bank
in Brazil –
lends the great bulk of FGTS funds in the form of below-market
rate credit. CEF offers two programs; one for borrowers acting
as individual households, and the other for borrowers acting
within the context of a group.
The SBPE has mainly financed middle-class housing, with an
average loan amount of R. $81,503 (2006)
– about US$27,000. The FGTS/CEF has largely funded moderate-income
housing, with an average loan amount of R. $20,021 (2006)
about US$6,500. In terms of numbers, the SBPE reportedly
financed 115,823 housing units in 2006, while FGTS financed
304,882 in this year –
a boom year for housing construction and finance that saw
volumes and numbers of units financed reportedly increased by
over 50% from the averages of 2001 to 2005.
begun to build a sizable mortgage finance industry and a modern
housing economy with some world-class homebuilders (e.g. Gafisa)
modelled on their Mexican counterparts (e.g. Geo, Urbe) that
serve these countries’ emerging lower middle-class as well as
upscale markets. Nonetheless, as new annual household formation
in Brazil runs at one million, these two main mortgage sources (SBPE
and FGTS) left a gap of more than half of all new households
unassisted by mortgage finance even in the boom year of 2006.
In terms of both numbers and volume, the bulk of FGTS finance
went to “microcredit” (“microcredito”) for a package of building
materials, with an average loan size of R. $4,901 (about
US$1,630). However, these government-funded housing
microcredits have a number of serious problems that make their
label of “microcredito” misleading. Most fundamental, they
occur at highly-subsidized rates of interest. In addition, many
households consider such government loans as partly gifts, and
do not pay them back. Such unscrupulous competition from the
government has almost completely undermined commercially-viable
microfinance institutions in Brazil.
The total amount funded under this housing “microcredito”
program – R. $827 million (US$276 million)
– is also insignificant relative to the annual investment in progressive
R. $62 billion (about US$20 billion), let alone the additional
sums needed to improve the inadequacies of the existing housing
As a result, private consumer credit for building materials
purchase is big business in Brazil. Brazilian Federal law
requires that commercial banks invest 2% percent of their demand
deposits in “microcredit” of some sort. The law also regulates
the amount, maximum interest rate, and term of this microcredit
funded by commercial banks. As regards housing, these banks
either offer this housing microcredit directly to their
depositors or channel this microcredit through building
Two studies have recently examined this industry, one
commissioned by Ashoka (Leonardo Letelier and Soares, 2007) and
one contracted by Cities Alliance and the municipality of Sao
Paulo (principal investigators: Frederico Celentano and Alex
The Ashoka study surveyed 12 local building-materials stores,
237 households and conducted a number of household focus groups
in two favelas in Sao Paulo. Virtually all households in these
two favelas owned their own home. The municipality has provided
basic services in these favelas and 91% of households intended
to improve their homes through expansion and/or remodeling.
Families prioritized price, financing, store brand, and distance
from their house as the main factors in choosing stores to
purchase building materials.
Half of all purchases were made in cash. Families financed
about a third of purchases mainly using consumer credit but
sometimes with a credit card, either their own or of a friend.
These stores reported that their sources of financing typically
qualified customers for a maximum of US$1,500 in credit
the average cost for the building materials to add one room.
These building materials stores offered credit of their own by
accepting two to three monthly installment payments.
These stores also channeled bank credit for materials
purchase at market rates (3.5% to 6% per month) with 12 to 48
monthly installments, and offered negligible amounts of highly
subsidized FGTS housing “microcredit” (at 0.5% per month, with
up to 96 monthly installments) due to its
scarcity (and reported nonpayment rates of 30% on
such “microcredit” government programs). These interest rates
for consumer credit compared to market-rate mortgage interest
rates of around 15% per year at the time, with inflation
running around 4% per annum. For many reasons, Brazil has
historically had some of the highest real interest rates in the
world, which plague economic activity, in general, as well as
the housing industry, in particular.
Households accepted the market rates of consumer credit
charged for building materials purchase as the cost of doing
business. In fact, 40% of households surveyed were unable to
remember the interest rate at which they took consumer credit.
In comparison, moneylenders typically charge much higher rates
10% per month in Brazil –
while credit card companies charge stiff penalties when debt is
carried from month to month, resulting in effective interest
rates of as high as 140% per year.
In addition to credit for building materials, the Ashoka
study reported that roughly half of households expressed a
strong interest in specialized labor for construction. Families
had hired qualified workers for roughly a quarter of work
conducted in the past, wanted to reduce the amateur level of
construction, and –
because of increasing household incomes
were willing to pay for more professional help in the future.
Prior to the research, Ashoka investigators thought that
community members frequently helped each other with
construction; e.g. barbecues to pour foundations. In fact, they
found little evidence of such mutual self-help.
The Ashoka study concludes by recommending a pilot project in
one favela in the greater Sao Paulo metropolitan area that joins
consumer credit, discounts on building materials negotiated with
local stores, and technical assistance to families in
construction. This pilot project is currently in a start-up
phase and briefly described in this issue of Global Urban
The Cities Alliance/Municipality of Sao Paulo study conducted
focus groups of building materials retailers and low-income
households throughout the municipality of Sao Paulo. The
locations of household focus groups spanned a wide range of
low-income communities, including high-rise government-assisted
low-income housing projects, government-assisted subdivisions of
core units, shantytowns (“favelas”), and central city rental
The focus groups confirmed progressive construction as the
main method of housing investment for all of these low-income
communities. The demand for HMF came not
only from informal communities (favelas) but also
from government projects
– both high-rises and subdivisions of core units. Virtually all residents
of these government projects wanted to remodel their apartments
or core units, which had been delivered without internal or
external finishing. Even 58% of the renters of central-city
tenements owned by others wanted to improve the units in which
A number of factors, however, tended to deter housing
consumer credit. Informal employment, the inability to qualify
for formal credit, and lack of or credit history registered in a
credit bureau were most mentioned. Largely as a result, most
low-income households paid for most of their building materials
purchases (70%) in cash, and used credit finance for most of the
Most low-income households used construction contractors much
more than their own labor or family or friends, and also wanted
credit in order to pay for specialized construction labor. The
focus groups showed a strong interest in technical assistance in
planning and design of construction.
The Cities Alliance/Municipality of Sao Paulo study also
conducted extensive interviews with public and private financial
institutions offering credit for building materials purchase and
with building materials stores. Private banks typically
targeted their credit towards their account holders or the
clients of building materials stores with which they had formed
business alliances. Public agencies and financial institutions
targeted credit to low-income households earning up to three
minimum salaries. Maximum amounts financed varied from US$2,000
to US$10,000. Interest rates for private-sector institutions
ranged from 2% to 6.5% per month, and maximum terms from 12 to
48 months. Not surprisingly, households with no credit record
tended to receive smaller loan amounts, higher interest rates,
and shorter terms within these ranges.
Virtually all of the financial institutions that extended
building materials credit required verification of household
income and confirmation of no liens on the property registered
in the local cadastre. Commercial banks often insisted that
borrowers open an account in that institution, while other
programs often demanded that a guarantor cosign the loan.
Profit levels varied dramatically among stores. The stores
surveyed sold mostly to homeowners (40% to 60%), then to renters
(10% to 30%), and finally to construction contractors (5% to
10%). Small stores purchased most materials very frequently
– either weekly or every two weeks. These frequent purchases allowed
small stores to save money by maintaining a small stock, but did
not permit negotiating better prices through bulk discounts with
suppliers. A key bottleneck in their business model is finance
to buy larger quantities at one time from suppliers, and the
capacity to negotiate better prices through bulk discounts.
These building materials stores lend based on knowledge of
their client base and relationships of trust developed over
time. Households pay largely in order to maintain their credit
with the stores and place in their community. This logic
closely parallels that of microfinance institutions. However,
these stores’ consumer credit lacked the rigorous methods of
microfinance institutions, was highly fragmented, and suffered
from lack of integration into other aspects of the store’s
The Cities Alliance/Municipality
of Sao Paulo study
arrives at a number of key conclusions. Consumer credit finances
approximately 20% of housing investment in Sao Paulo
and is a huge business involving virtually all the major
financial institutions of the country. However,
enormous demand for small serial credits for housing remains
unsatisfied. The study finds that housing microfinance
could be greatly expanded to facilitate progressive housing
consumer credit practices were revised to adapt to
the needs of clients.
In particular, interest
rates, terms, and the products and services must better suit
customers. The extremely high interest rates charged to
households without credit records in Brazil – 4% to 6.5% per
month – are clearly unsustainable, and threaten to provoke a
consumer debt crisis.
should allow the finance of specialized construction labor
rather than just building materials.
While building materials retailers must offer or channel
consumer credit to be competitive, they are not specialists in
extending loans to low-income households and conduct this aspect
of their business casually without integration into their larger
business. Thus, there is a strong need for microfinance
expertise, which could be acquired by forming business
The market for
small housing loans goes far beyond construction materials for
improvement of homeowner units in informal communities
– i.e. prototypical housing microfinance. There is huge
market demand in Brazil for small loans to finish, remodel, and
improve government-assisted housing projects
both high-rise apartments and core-units subdivision
that essentially deliver an unfinished shell unit. Even most
renters of central-city tenements (“corticos”) have expressed
interest in credit to fix up their units.
strategic directions necessary to expand housing microfinance to
a scale relevant to demand and need
The evidence examined in this
paper suggests that current approaches to HMF will result in
miniscule supply relative to market demand, and have little
impact in meeting the low- income housing/urbanization challenge
of the next two to three decades. HMF requires fundamentally
new strategies to achieve massive scale:
the institutional platform for support of small
credits for the low-income housing/upgrading process by using
the building materials and supplying industry as the base and
employ MFIs as intermediaries.
Small home improvement loans have become a niche secondary
product useful to many MFIs. In most countries,
however, microfinance institutions lack the capacity and
the interest to expand low-income housing credit to massive
In contrast, homebuilders and building materials
manufacturers and retailers must provide home credit for the bottom of the income
pyramid, as a large portion of their sales come from this
segment. Modern corporations such as CEMEX of Mexico provide a
much broader, powerful, and more robust institutional platform
for small home credit than do microfinance institutions,
particularly in large countries. Although
they recognize they must channel credit to grow
their core business, building materials retailers and
manufacturers frequently do not want to become lenders to poor
families and communities.
In big emerging economies such as Mexico, Brazil, India, and
Indonesia, some microfinance institutions may come to specialize
as niche lenders for large distribution networks of suppliers of
inputs to the progressive housing process or for large
commercial banks. Various studies have suggested the use of
MFIs as intermediaries for housing microfinance, particularly in
Asia (e.g. Monitor Group, 2007). This option has many
attractions. It builds on the comparative advantage of MFIs
their ability to keep in close relationship and work with low
income households. In comparison, large building materials
manufacturers and commercial banks face great difficulties in
working directly in low-income communities.
with other key inputs to the low-income housing value chain
through business partnerships and new business models.
key to creating value and, thus, markets in affordable housing
is not only to lower the costs of each step in the value chain
but also, more importantly, to innovate and join products and
services together into new business models that
address larger segments of the problem (Ferguson, 2008). No one
corporation or organization
contains the range of products and services necessary to support
progressive housing comprehensively. Hence,
assembling appropriate packages requires business alliances
among microfinance institutions, building materials retailers
and manufacturers, banks, homebuilders, citizen-sector
organizations, and government. Credit is only one of various
important pieces of this puzzle.
In large markets dominated by modern building materials
retailers and manufacturers, these large corporations are the
most likely candidates to organize such business partnerships.
small home improvement loans to extend credit for the enormous
variety of low/moderate income housing investment in emerging
microfinance” has come to be synonymous with small home
improvement loans for building materials to expand a homeowner’s
unit. This is largely because microfinance institutions found
that they could apply their existing loan methods and
organizations to such loans with virtually no modification.
However, housing markets in emerging countries have evolved
rapidly in the last decade. Low-income families earn more and a
large new group of households
about 20% of the population of dynamic countries including Peru,
Mexico, Brazil, India, and Indonesia
have graduated into the lower middle class. Small serial home
loans can fill many of the new market niches created by this
dynamism. For example, market assessments of Brazil show large
demand for small credits to finish or expand government-assisted
shell units –
either in high-rises or core units in subdivisions
professional labor rather than just building materials.
However, Brazilian banks and consumer-credit providers lack
products useful for these needs.
The very small share of rental housing (less than 20% of
housing stock) creates enormous problems for many low/moderate
income families in many Latin America and Caribbean countries.
Elsewhere – such as much of sub-Saharan Africa
most urban households rent, but no institutional financing or
means of formal support exists for rental housing. Alan
Gilbert's seminal study of rental housing in emerging markets
has shown that the main rental supply comes from informal
low-income communities. In this regard, small credit could be
extended to build or remodel accessory spaces and units for
A couple of US comparisons illustrate useful approaches to
rental HMF. In the US, prudent lenders and mortgage insurers
(e.g. FHA) apply the same favorable underwriting standards for
owner-occupied single-family homes to owner-occupied apartment
buildings of up to four units. Similarly, microfinance
institutions, building materials retailers and manufacturers,
banks, citizen-sector organizations and governments could
support such small owner-occupied apartment buildings in low and
moderate income communities.
South Shore Bank – the premiere community lender in the US
revitalized the south side of Chicago through financing local
businesspeople to purchase and rehabilitate run-down rental
buildings in this area. Community lending by MFIs, banks, and
building materials retail credit programs should also include
loans for multi-story rental buildings in low-income areas as
well as prototypical housing microfinance
i.e. small home improvement loans to owner-occupants.
The governments of densely-populated dynamic East Asian
cities (e.g. those of China) have little choice except to build
shell condominium units in high-rises for low-income housing.
Small credits could be used to build out the shell so that the
unit becomes habitable.
In low-income South Asian countries
such as Pakistan –
government has largely opted for the “sites and services” model
for low-income housing projects. Typically, this means a plot
of raw land in a distant subdivision with, at best, communal
water and dirt roads without legal title to the property. The
case of Saiban in Karachi (see the paper by Bruce Ferguson on
urban land development in this issue of Global Urban
Development Magazine) demonstrates the many ways that small
home credit can improve this dismal reality when joined with
other parts of the low-income housing value chain.
In many sub-Saharan African countries (e.g. Rwanda and
Kenya), few urban low and moderate-income households
individually own the land on which their houses sit, which is
often communal tribal property or owned by others. In such
contexts, some MFIs have begun to accept evidence of security of
individual tenure (rather than ownership rights)
– such as land leases – for underwriting small housing credits (Unitus/Lehman Brothers, 2007) .
can play an important role in financing low-income
urban land development –
bottleneck to housing the poor (see Ferguson, 2008 in this issue
of Global Urban Development Magazine; Freire, Ferguson,
Cira, Lima, Kessides, and Motta, 2007).
into the core mission of MFIs
(a recommendation of the Accion study presented by Messina, 2006), in
particular, in smaller countries and markets where MFIs may well
continue to play a lead role. In this regard, MFI networks must
bring to the attention of individual MFIs the crucial importance
of housing to their core mission of “giving people the tools
they need to work their way out of poverty” (Accion’s stated
mission). More frequently than in high-income nations, housing
generates income through rental of spaces and accessory units,
provision of the location for many micro- businesses, and as the
main social security in old age in emerging countries with
precarious or no pension systems. Most fundamental,
homeownership is the main means used by families to build
wealth, which many studies show is the main route out of
poverty and to upward mobility.
Raising the profile of housing credit in the MFI industry
will require more technical know-how on this topic
that is, putting the “housing” back into “housing
microfinance.” It will also involve formation of business
alliances with other key players in the low-income housing
industry including government, an institution that MFIs have
long sought to avoid (as discussed directly below).
government housing subsidies through second-tier housing banks
experienced in working with developers and financial
institutions in the form of small grants that complement housing
microcredit. MFIs in Colombia, Nicaragua, and elsewhere have had trouble
joining housing microcredit with government subsidies to help
the poor. In essence, these MFIs fear
with good reason –
that involving politicized government housing agencies will
dilute the willingness to pay of households on microcredit.
Historically, the MFI industry has grown out of a rejection of
grants and subsidized credit for rural development and a
recognition that only market-rate credit can sustainably finance
micro-business (Robinson, 2001). Housing, however, is a “merit
good” in which the public sector inevitably retains some
responsibility. The colossal effort of the US government begun
in 2008 to rescue this country’s housing and related finance
sector is a vivid case in point.
In this regard, the SHF/Financiera Independencia partnership
in Mexico demonstrates how to join effectively housing
microcredit with small subsidies. One key is for government to
delegate administrative and executive functions for housing
subsidy programs to a second-tier housing finance institution
with a good track record in extending market-rate credit and in
working with developers, first-tier lenders, and others involved
in housing supply.
Another approach is that of the Kuyasa fund of Cape Town,
South Africa. This organization makes loans to families that
have received a government housing subsidy that allows them to
increase the size of their unit from an average of 23 square
meters to 54 square meters (Unitus/Lehman Brothers, 2007).
technical assistance to financial institutions for HMF along
with appropriate funding
mainly from domestic sources but also from international
groups with experience across countries and regions.
The GmbH survey of 25 Latin American MFIs found that
appropriate funding is the main factor necessary to increase
their housing lending. The paper in this issue of Global
Urban Development Magazine by James Magowan details the
characteristics of such “appropriate funding.” More and better
funding can certainly help in many instances.
With some frequency, however, declarations of “lack of
appropriate funding” indicate deficits in the know-how,
information systems, and business alliances necessary to engage
in low-income home lending. Packages of funding and technical
assistance from international sources with experience in a range
of countries have an important role to play in supporting HMF.
Such international support can disseminate important
innovations. As capacity develops, this funding and TA best
comes mainly from local sources.
is a consultant and former Senior Housing and Urban Economist at the
World Bank, and a member of the Advisory Board of Global Urban
Development. He previously served as an Urban Development and
Housing Project Officer at the Inter-American Development Bank, and
has published widely on housing and
urban development in developing countries and the U.S.
Interview with Jesus Ferreyra, the senior manager of
MiBanco most responsible for developing the MiCasa
product, on May 22, 2007.
Cohen, Joel E. “The Human Population Grows Up” in
Scientific American, September 2005.
Daphnis, Franck and Bruce Ferguson (eds). Housing
Microfinance; a Guide to Practice. Kumarian
Foundation. Bloomfield Connecticut, 2004
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