Patrick MCALLISTER of Habitat for Humanity pointed out that today the World Bank estimates 1.2 billion people are in need of improved shelter; by 2013 that number will have risen to 3 billion, requiring at least 300 million new homes to shelter them. Also, by 2030 the majority of all people in all continents will live in urban areas and 2 billion may live in slums. In short, McAllister concluded that most of these people will go to the market for their shelter needs, with a smaller proportion relying on socialized housing or charities. Therefore, all efforts of financial institutions to invest in low-income housing are much needed. Today, an estimated 20% of all microfinance loans (in loan volume) are thought to be used for housing, but only about 2% are dedicated housing microfinance loans. According to Habitat for Humanity, 52% of housing microfinance loans go to home improvement, 30% to small construction, 14% to large construction and 4% to land purchase.
He explained the approach of Habitat for Humanity, using the ‘Building Assets, Unlocking Access’ initiative in East Africa as an example. Technical advice is provided at all levels, from the financial institution developing a dedicated housing product to the home owner using the loan, whether for land purchase or actual construction. To date, the program has mediated USD 21 million in housing loans in Uganda and Kenya. Habitat for Humanity assists financial partners such as MFIs in the design and marketing of adequate housing finance products, but also in creating linkages with the construction sector so as to add value to the financial product. Where loans are financing construction of a home, both borrowers and MFIs are encouraged to work with trusted and competent builders and labourers so that quality is delivered at affordable rates. Those engaged in improvement (roofing, doors and windows, tiling, electricity, water, sewage, paint) are often advised on the procurement of materials and hiring of professionals for work not done by themselves.
Housing loans by MFIs are differently structured than standard microcredit products. On the capital side, housing loans often are financed by special capital placements from international investors whereas most of overall funding comes from local deposits, savings, and banks. And whereas in overall lending 45% of loans carry a group guarantee, this is only true for 20% of housing loans. On the other hand, 22% of housing microfinance loans are accompanied by mandatory technical assistance, whereas this is only the case in 8% of standard microcredit loans. Housing loans have an average tenure of 27 months compared with 19 months for all microcredit loans, and 53% of housing loans are smaller than USD 2,000, compared with 62% for all loans. Interest rates are comparable at 25-30% per annum in local currencies. In short, housing microfinance loans are getting larger and their tenures longer compared with standard microcredit, and are more likely to include technical advice, but the price of the loans have not yet fallen as may be expected.
The speaker then illustrated the lending and building process. Not all building or improvement projects follow all stages, but it may be useful to identify the various stages so that both lender and borrower can be made of aware of where technical assistance can be useful to prevent mistakes or misunderstandings. Starting with assistance in securing land and tenure, the process identifies assistance of securing or improving essential services; obtaining the finance required for the project through savings, subsidies or loans; obtaining quality building materials, design and technical detailing of the building; the actual construction process; and obtaining permission and support from the local community. Lastly, McAllister showed the correlation between the average amount borrowed and the destination of the loan. In fact, most loans in home improvement remain around the USD 1,000 mark. Small improvements include: procurement of incidental building materials, power metering systems, internal finishes, water storage and septic tanks, paint and plaster, improving the cooking facilities, addition of poultry house, and small repairs to roof and walls. Loan amounts rise sharply, however, when it comes to adding a second floor or the completion of rental units. Then the loan amounts average USD 5,000.
Davide FORCELLA, researcher at the Centre for European Research in Microfinance (CERMi), explained that one cannot pursue sustainable cities without a sustainable countryside: over-exploitation of resources, environmental degradation, and pollution present a threat to public health. Innovative financial products could support the sustainability of both cities and countryside. One could think of climate-smart agriculture in the form of land restoration, biodiversity conservation, climate change adaptation, but also of ecotourism and improvement of quality and quantity for agriculture productivity. Moreover clean energy and energy efficiency also contribute to rural sustainability and resilience increase. In fact, MFIs have pioneered green finance and are readily expanding their exposure. Among the MFIs reporting on their social performance in the MIX Market, in 2014 approximately 19% MFIs declared to have developed environment-friendly financial products, 34% declared to have environmental risk management activities, while 40% declared to have environmental awareness raising activities, with positive growing trend in the last years. When it comes to regional distribution, it is noticeable that Latin America, Africa and South Asia are the regions with the higher number of MFIs declaring to have green credits in their portfolio.
At the suggestion of moderator Grzegorz GALUSEK, both presentations were in the Q&A format, meaning that there was no strict division between presentation and discussion. An issue discussed at some length was the general obligation to show land titles or deeds for purposes of securitization of loans. In many circumstances that turns out to be a major obstacle because of conflicting ownership claims, inaccurate administration and documentation and a reluctance on the part of banks to go for repossession. As yet, no convenient solutions for borrower and lender have been found in such cases. Another topic was about the gradual transformation among lenders from clearly defined green loans in certain areas such as waste management to a more overall appreciation of food print reduction and climate change finance.
This session was organized in partnership with Convergences.