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Housing for All: The Challenges of A ordability, Accessibility and
Sustainability
The Experiences and Instruments from the Developing and Developed Worlds
A Synthesis Report
United Nations Human Settlements Programme
Nairobi. 2008
ii
e Human Settlements Finance and Policies Series
Housing for All: e Challenges of Aff ordability, Accessibility and Sustainability
First published in 2008 in Nairobi by UN-HABITAT.
Copyright © United Nations Human Settlements Programme (UN-HABITAT) 2008
HS/1012/08
ISBN:978-92-1-132025-1 (series)
ISBN: 978-92-1-131992-7
Acknowledgements
is report is prepared by Xing Quan Zhang. Guidance and/or comments by Anna Tibaijuka, Inga Klevby, Oyebanji
Oyeyinka, Don Okpala and Fred Neto. Editing by ierry Naudin and Roman Rollnick. Design and layout by Irene
Juma.
Disclaimer
e designations employed and the presentation of the material in this publication do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country,
territory, city or area or of its authorities, or concerning the delimitation of its frontiers of boundaries.
Views expressed in this publication do not necessarily refl ect those of the United Nations Human Settlements Programme,
the United Nations, or its Member States.
Excerpts may be reproduced without authorization, on condition that the source is indicated.
iii
Foreword
As we move into the new millennium, one trend overwhelms our concerns: the rapid
urbanization with deepening poverty, environmental degradation and increasing slums,
which poses tremendous challenges for achieving adequate shelter for all. e challenges
we face in human settlements cannot be met by governments, private sector or civil
society alone. It requires the actions of all sections of the society.
Human settlements are places of organised human activities. e way in which human
settlements are organised is infl uenced by the pace and breadth of socio-economic
development. Such development cannot take place without linkages and continuous
interactions between physical, institutional, economic and social structures. Human
settlements are the product of deliberate planning or of spontaneous and uncontrolled
economic and social activities. e problems and issues of human settlements cut across
the conventional socio-economic sectors and are of multi-sector and multi-disciplinary
nature.
e national resource allocation and fi nance strategies are evolving towards the
identifi cation of national development priorities and challenges. erefore, a full
understanding of human settlements needs to be looked at in the national policy context,
and its links to fi nance and to policy debate. is approach is increasingly appreciated
by policy-makers and planners when addressing human settlements problems and policy
options. e Human Settlements Finance and Policies series aims to explore the
intricacy of fi nance and policy interrelations and to promote better human settlements
fi nance policy and strategies.
is series addresses the most important issues in improving human settlements. It
draws the intellectual leaders and practitioners from the governments, local authorities,
private sectors and civil society to confront human settlements and fi nance problems
and to exchange views and experiences in tackling human settlements problems and
issues, and to explore and promote innovations in policies, strategies and methods to
address challenges in human settlements. Papers in this series provide opportunities
to move towards a deeper understanding of the broad range of human settlements
and fi nance issues.
Our habitat is shaped by human actions and policies. Policies have profoundly
shaped our cities, towns and villages in the past, they will continue to defi ne the
21st century. Decision-makers face challenges of designing policies that allow their
countries and cities to meet the increasing human settlements challenges. In the new
era I hope that this series will contribute to the policy debate and will enhance the
capacity of member states to design new policies and strategies to address human
settlements challenges. In human settlements policy debate, choices made today will
impact our common future in the habitat of tomorrow.
Dr. Anna K. Tibaijuka
Under-Secretary-General and Executive Director
United Nations Human Settlements Programme
iv
Abbreviations and Acronyms
ACHR – Asian Coalition for Housing Rights
ADB – Asian Development Bank
ASA - Association for Social Advancement
BAAC - Bank for Agriculture and Agricultural Co-
operatives
BAPINDO – Bank Pembangunan
BBD – Bank Bumi Daya
BDN – Bank Dagang Negara
BNI – Bank Negara Indonesia
BRAC - Bangladesh Rural Advancement Committee
BRBD – Bangladesh Rural Development Board
BRI - Bank Rakyat Indonesia
BTN – Bank Tabungan Negara
CBO – Community-based organisation
CDT – Community Development Trust
CEL - Comptes d’Epargne Logement
CHF – Co-operative Housing Foundation
CMHC – Canadian Mortgage and Housing Corporation
CMP – Community Mortgage Programme
CNL – Caisse Nationale du Logement (National Housing
Fund)
CRA - Community Reinvestment Act
CSH – Contractual Savings for Housing
CUDS – Center for Urban Development Studies
DFID – UK Department for International Development
EIU - Economist Intelligence Unit
EXIM – Ekspor Impor Bank Indonesia
EHLP – Expanded Housing Loan Programme
FHA – Federal Housing Administration
FDI – Foreign Direct Investment
FONHAPO – Fondo National de Habitaciones Populares
(National Housing Fund)
FOVI – Fondo de Operación y Financiamiento Bancario a la
Vivienda (Bank of Mexico Trust Fund)
FOVISSSTE - Institute of Social Security and Services
for State Workers (Fondo de la Vivienda del Seguro Social al
Servicio de los Trabajadores del Estado)
FUNHAVI – Foundation for Habitat and Housing
(Mexico)
GBPHBUMC – e General Board of Pensions and
Health Benefi ts of the United Methodist Church
GDS – Gross Debt Service
GHB – Government Housing Bank in ailand
GHIF – e Group for Home & Infrastructure Finance,
Inc.
GLAP – Group Land Acquisition and Development
Programme
GMD – Gender, Media and Governance
GOT – Government of Tanzania
GSIS – Government Service Insurance System
HA – Housing Authority
HDMF – Home Development Mutual Fund
HFC – Home Finance Corporation
HFHT – Habitat for Humanity Tanzania
HIS – Institute for Housing Studies
HIGC – Home Insurance Guaranty Corporation
HRF – Housing Revolving Fund
HUD – US Department of Housing and Urban
Development
IDB – Inter-American Development Bank
IMF – International Monetary Fund
INFONAVIT – National Housing Fund for Workers
(Instituto del Fondo Nacional de la Vivienda para los
Trabajadores)
JPMC – JPMorgan Chase
KUK – Kredit Usaha Kecil (small business loans)
LDU – Direction locale de l’Urbanisme (Local Urban
Planning Directorates)
LGU – Local Government Unit
LEHC - Limited Equity Housing Co-operative
LIHTC – Low-income Housing Tax Credit
LISC – Local Initiative Support Corporation
LTV – Loan to Value
MBS – Mortgage-Backed Securities
MDG – Millennium Development Goal
MFI – Microfi nance institution
MIS – Management Information System
MLGHE – Ministry of Local Government, Housing and
Environment
MMIF – Mutual Mortgage Insurance Fund
MOF – Ministry of Finance
MOH – Ministry of Housing
NACHU - National Co-operative Housing Union
NBFI – Non-bank fi nancial institution
NGO – Non-governmental organisation
NHC – National Housing Corporation
NHDFC – Nepal Housing Development Finance
Company
v
NHMFC – National Home Mortgage Finance
Corporation
NLTB – Native Land Trust Board
NSB – National Statistics Bureau
PEL – Plan d’Epargne-Logement
PELITA – Five-Year Development Plan
PRIDE - Programme Intégré pour le Développement de
l’Entreprise
PRB – Public Rental Board
RDA – Rural Development Administration
SACCO - Savings and Credit Co-operative
SHDLP – Social Housing Development Loan
Programme
SHF – Sociedad Hipotecaria Federal (Federal mortgage
corporation)
SIDA - Swedish International Development Agency
S & L – Savings & Loans institution
SMMS – Secondary Mortgage Market System
SOFOLES – Sociedades Financieras de Objecto Limitado
(Non-banking fi nancial institutions)
SPARC – e Society for the Promotion of Area Resource
Centers
SRA - Slum Rehabilitation Authority
SSS – Social Security System
SU – Support Unit
SUPF – Solidarity for the Urban Poor Federation/Squatters
and Urban Poor Federation
TAWLAT – Tanzania Women Land Access Trust
THB – Tanzania Housing Bank
UHLP – Unifi ed Home Lending Programme
UNCTAD – United Nations Conference on Trade and
Development
UNDP – United Nations Development Programme
UN-HABITAT – United Nations Human Settlements
Programme
UNDESD – United Nations Department of Economic
and Social Development
UNIDO – United Nations Industrial Development
Organisation
UOD – University of Dar es Salaam
UPDF – Urban Poor Development Fund
USAID – United States Agency for International
Development
USG - e Urban Sector Group
VA – Veteran Administration
vi
Table of Contents
Foreword ................................................................................................................................................................ iii
Abbreviations and Acronyms .................................................................................................................................. iv
PART I Introduction .......................................................................................................... 1
Chapter 1: Introduction ........................................................................................................................................ 2
PART II e Challenge of Housing Finance ..................................................................... 2
Chapter 2: e Challenge of Access to Housing Finance for Low-Income Households ........................................ 2
Why Formal Financial Institutions Do Not Work for the Poor .................................................................................... 2
e Mystery of Lack of Money ................................................................................................................................... 3
Lack of a Property Market to Facilitate a Housing Financial System ........................................................................... 3
e Long Process towards Ownership ......................................................................................................................... 4
Lack of Property Rights Restricts Women’s Access to Credit ........................................................................................ 4
Poor Credit Cultures and Information Systems ........................................................................................................... 5
e Absence of Robust Credit Markets in Developing Countries ................................................................................ 5
Asset-Liability Mismatches and Lack of Long-Term Credit ......................................................................................... 5
High Collateral Requirements ..................................................................................................................................... 6
Poor Management of Financial Assets ......................................................................................................................... 6
High Borrowing Costs ................................................................................................................................................ 7
Ineff ective Legal and Judicial Systems .......................................................................................................................... 7
e High Costs of Lending to the Poor ....................................................................................................................... 7
Low Individual Participation in the Banking Sector .................................................................................................... 8
PART III Experiences and Instruments for Low and Moderate Housing ......................... 9
Chapter 3: e Hopes and Challenges of Housing Microfi nance for Low-Income Households ......................... 9
e Formal System Hinders Aff ordable Housing Finance ......................................................................................... 9
Can Microfi nance Meet the Housing Finance Needs of the Poor? ............................................................................. 9
Poverty and the Microfi nance Revolution ................................................................................................................. 10
e Emergence of Housing Microfi nance ................................................................................................................. 11
Providers of Housing Microfi nance Services .............................................................................................................. 12
e Funding Strategies of Housing Microfi nance ...................................................................................................... 15
e Characteristics of Housing Microfi nance Products ............................................................................................ 17
Limitations of Housing Microfi nance ....................................................................................................................... 23
Chapter 4: e Co-operative Approach to Low-Income Housing ...................................................................... 26
Housing Demand is a Challenge for the Conventional Formal Sector ....................................................................... 26
Housing Co-operatives ............................................................................................................................................. 26
Self-Build Housing ................................................................................................................................................... 31
Chapter 5: e Role of Government in Low-Income Housing ............................................................................ 33
e Role of Government in Low-Income Housing ................................................................................................... 33
Direct Provision of Public Housing: the Case of Hong Kong .................................................................................... 33
Government Mortgage Loan Schemes: the Case of Singapore ................................................................................... 36
Government-Sponsored Mortgage Finance: the Case of Fannie Mae and Freddie Mac in the USA ........................... 36
Government Programmes for Improved Conditions in Slums: the Case of Colombo, Sri Lanka ............................... 40
vii
Chapter 6: Financial Instruments for Low-Income Housing .............................................................................. 45
Financial Instruments for Low-Income Housing ....................................................................................................... 45
Community-Based Savings Schemes for Lowest-Income Housing ............................................................................. 45
Compulsory Savings Schemes ................................................................................................................................... 45
Contractual Savings for Housing .............................................................................................................................. 46
Special Housing Funds .............................................................................................................................................. 48
Housing Bonds ......................................................................................................................................................... 51
Housing Banks .......................................................................................................................................................... 53
Rent-to-Purchase Housing Schemes .......................................................................................................................... 57
Trusts ........................................................................................................................................................................ 57
Chapter 7: e Multilateral Financial Institutions and Low-Income Housing Projects ...................................... 61
e Inter-American Development Bank and Low-Income Housing Finance ............................................................. 61
e Asian Development Bank and Low-Income Housing Finance: the Case of Fiji ................................................... 62
e World Bank and Low-Income Housing Projects: the Case of Algeria .................................................................. 64
Chapter 8: Revolving Funds for Human Settlements .......................................................................................... 67
Designing Revolving Funds for Housing Programmes .............................................................................................. 67
e Revolving Fund for House Improvement Loans in the Dominican Republic ..................................................... 67
e Safe Drinking Water Revolving Loan Fund in Oregon ....................................................................................... 71
Chapter 9: Credit Enhancement ........................................................................................................................ 72
Forms of Credit Enhancement ................................................................................................................................ 72
External Credit Enhancement ................................................................................................................................. 72
US Government Mortgage Insurance ......................................................................................................................... 73
Internal Credit Enhancement ..................................................................................................................................... 78
Chapter 10: Case Studies of Housing Finance Institutions and Systems ............................................................. 81
e Development of Housing Finance Institutions in Indonesia ................................................................................ 81
e Development of Housing Finance Institutions in Nepal ...................................................................................... 83
e Housing Finance System in the Philippines ......................................................................................................... 86
References ...........................................................................................................................................................92
Rapid urbanization in the developing world is the most
unprecedented phenomena of the world’s development
in the past few decades. e pace of urbanization has
exceeded many developing cities’ capacity to absorb the
needs of a growing population, despite all innovations and
eff orts. One of the most pressing problems is to provide
adequate housing for all, particularly for the poor.
Poor urban housing conditions are a global problem,
but conditions are worst in developing countries. UN-
HABITAT (2003) reports that 1 billion people live in
life-and health-threatening homes. is represents about
one third of the world’s total urban population, while the
developing world has a substantial proportion of the urban
population living in inadequate housing conditions.
e threat of mass homelessness is greatest in Africa, Asia,
and Latin America because that is where population is
growing fastest. It seems that old paradigms are unworkable,
many existing formal supply channels often hopelessly
inadequate to low income people, and most conventional
approaches largely irrelevant given the magnitude of the
growth of the sub-standard settlements.
However, the commitment and eff orts for the poor people
are often limited, given the limited resources faced by the
developing world. Many developing countries struggle to
solve their housing problems. ey often fi nd that there are
lack of adequate knowledge and experiences in housing.
eir housing poverty is not only linked to economic
poverty but also linked to knowledge poverty and skills
poverty. is is the reason why member states consistently
call for increased normative activities.
In the past century, the world has witnessed great changes
and improvement of living conditions in many countries
along with their economic growth. Various innovations
and instruments arise to tackle the housing problem. ere
is much variation in policies, instruments and innovations
in diff erent countries. ere is a need to fi nd common
ground in search for solutions for housing. ere is a great
need for sharing experiences and practices across countries.
ere is a huge demand among countries to learn from
other countries’ experiences and practices.
is book provides a comprehensive synthesis of various
innovations and instruments in low and moderate
income housing. It focuses on the issues of aff ordability,
accessibility and sustainability, with special reference to
housing fi nance. It illustrates the principal instruments,
innovations and policies in housing provision and housing
fi nance; from specialized housing fi nance institutions to
community based fi nancing initiatives; from mortgage
fi nance to housing microfi nance; from self-build to
cooperative approaches; from market-driven instruments
to government-led initiatives; from revolving funds to
credit enhancements; from experiences of individual
countries to practices of multilateral institutions; from
developing countries to developed countries; from specifi c
instruments and methods to the improvement of systems.
It aims to provide an “all-in-one” synthesis of tools and
experiences and practices in housing provision and housing
fi nance for low and moderate income households.
PART I
Introduction
Chapter 1: Introduction
2Housing for All
Why Formal Financial Institutions
Do Not Work for the Poorw
Rapid urbanisation leads to a crisis of unprecedented
magnitude in urban housing delivery. UN-HABITAT
reports that every year the world’s urban population
expands by some 70 million, most of it in developing
countries where economic capacities cannot cope in terms
of housing and urban services provision. As a result, cities
feature very high proportions of informal dwellings, which
either were constructed to standards that do not conform
to established legislation, or built on land for which the
occupier has no proper title – or both. In some cities, up to
60 per cent of dwellings are in informal settlements. ese
dwellings are appropriate responses of the poor to their
social and economic circumstances. In many countries,
there is de facto security of tenure as governments
discourage evictions, acknowledging their failure to enable
the land and housing market to supply shelter aff ordable
to the poor, and cognizant of the votes wielded by the
occupants of these areas. Housing in such areas can be built
incrementally according to the budget and circumstances
of the households involved. e construction of housing
is fi nanced by informal fi nancial mechanisms, mostly
through household savings, loans from relatives, and other
means.
If Millennium Development Goals (MDGs) are to be
achieved, aff ordable housing is goint to be required
on a massive scale and strategies must be developed
for immediate implementation. e key to providing
housing does not lie solely in the number of humanitarian
programmemes launched by institutions such as
UN-HABITAT, the World Bank, non-governmental
organizations or even governments. It has taken decades
to recognise that marginalized communities have a major
role of their own to play, too. ey must be given the
technical and planning skills and techniques enabling them
to implement acceptable solutions to provide aff ordable
housing. Governments over the last three decades have
tried to address the problem of aff ordable housing. e
United Nations Declaration of 1974 was drafted primarily
to encourage developing nations to expand low-cost
housing on a “self-help” basis, through establishment of co-
operatives utilising, as much as possible, local raw materials
and labour. Many governments around the world have
planned to increase housing delivery along these lines on
a sustainable basis. Progress as observed is very good, such
as in China and Eastern Europe, while remaining slow in
many other countries, and the problem of large informal
settlements is not just still there, it is growing, too.
Despite the increasing expectation that the private sector
should play a very important role in fi nancing the down
market, the formal fi nancial sector is reluctant to serve the
low income sector. e poor are excluded from the formal
fi nancial institutions because they (1) require to have
bank accounts with minimum deposits, discourage small,
regular deposits from poor clients; (2) charge high fees; (3)
fi nancial institutions are located outside the areas where
the poor live and increase the travel cost for the poor to
access such services; (4) the poor do not have formal legal
Chapter 2: The Challenge of Access to Housing Finance
for Low-Income Households
PART II
e Challenge of Housing Finance
3
The Challenges of A ordability, Accessibility and Sustainability
titles to provide collateral security as required by formal
fi nancial institutions; (5) the poor do not have capacity
to make monthly repayment over a long period; (6) the
poor often do not have formal employment. erefore
the formal fi nancial institutions fail to provide fi nancial
services to the low-income sector.
The Mystery of Lack of Money
It is a common belief that poor countries lack the resources
to provide fi nance for low-income housing. However,
research shows that poor countries are not as poor as they
are thought to be. ey have capital. e poor do save
portions of their earnings. e value of savings among
the poor is huge – 40 times all the foreign aid developing
countries have collectively received since 1945. In Egypt,
the wealth accumulated by the poor is 55 times foreign
direct investment (FDI). In Haiti, the total assets of the
poor are more than 150 times greater than all the FDI
received since independence in 1804; untitled real estate
assets are together worth some USD 5.2 billion. However,
to use the phrase coined by De Soto, these assets are “dead
capital” which cannot be transferred in the market. Many
poor people live in houses that do not carry any legal titles.
In Egypt, “dead capital” housing accounts for 92 per cent
of urban residents and 83 per cent of urban residents x.
However, this argument may lead to an illusion that poor
people are actually “rich”, having locked money in the
form of unmoveable assets like dwellings. is optimism
obviously overestimates the value of poor people’s
housing. Most poor people live in substandard housing
and slums which have little exchange value on the market.
erefore, the housing asset worth of the poor is much
more imaginary than real.
Lack of a Property Market to
Facilitate the Functioning of
a Housing Finance System
Assuming that poor people do have a wealth of capital
locked in the form of housing, it is diffi cult to make use of
it for lack of a property market. Many developing countries
have no clear, defi nite, private property rights, which are the
pre-conditions for any eff ective property market. Informal
settlements often exist outside the legal framework. ey
lack titles for formally legal transactions. Many informal
settlements are under constant threats of demolition from
government (see Box 1).
In some developing countries, people are required to go
through extremely tedious procedures to legalize their
land plots and housing units, or to obtain legal titles for
their properties. In Peru, it takes six years and 11 months
to obtain authorization to build a house on State-owned
land, and it takes 728 steps to obtain a legal title for that
piece of land. In the Philippines, it takes 13 to 25 years
to purchase land legally, involving 53 public and private
agencies. In Egypt, would-be buyers must go through at
least 77 procedures to acquire and legally register a piece
of State-owned land
y
. Although these might be extreme or
even exaggerated cases, they refl ect the challenging nature
of legal titles and attendant transactions in some developing
countries. e extreme diffi culties involved in the delivery
and transfer of legal titles make it more diffi cult to use
land and housing property as collateral for access to loans.
Compare what has occurred in Mumbai with evictions and homelessness in Kenya or Mexico City or New Delhi. In
terms of both the sheer numbers of poor people aff ected and the brutality of the demolitions, the evictions in Mumbai
qualify as amongst the worst cases anywhere in the world, with as many as 90,000 shanties torn down between 4
December 2004 and 5 March 2005. Evictions took place on Sundays or religious or festival days. Evictees’ belongings
were then set on fi re. Bulldozers demolished homes when people were still inside. is violates a range of human
rights, including the right to adequate housing. e demolitions are in eff ect creating apartheid in the city, with a clear
demarcation of where the rich and the poor live. e poor are standing in the way of enormous profi ts to be made
through land speculation — among the highest in the world — and if that helps build a so-called world-class city,
well, who cares for the poor? Nobody seems to be looking at the social and psychological impacts of such a clear case of
dispossession. Is anyone looking at the impact on specifi c groups—on women, on children, on Dalits? Mumbai needs
a judicious mix of public housing with lower rent costs, co-operative housing, microfi nance (an option where the poor
can contribute partly even where there is a subsidy) and a socially sensitive use of available legislation. e solution
has to be based on a human rights approach that meets the needs of the vulnerable fi rst, that respects the views of all
women, men and youth in the city and includes their participation in the planning process.
– Miloon Kothari, United Nations’ Special Rapporteur on Adequate Housing after visiting the scene of the evictions.
Source: Habitat Debate, Volume 11, No. 2, June 2005, Page 15
Box 1 Informal settlements under government threats of demolition
4Housing for All
However, some developing countries have made eff orts to
survey and regularize land parcels (Figure 2.1).
The Long Process Towards Ownership
Research shows that most low-income households aspire
to own houses. Housing is the most expensive asset for
most households. e substantial investment required, to
buy a fi nished unit is often way beyond the means of low-
income households. Rather, it becomes a socio-economic
process that involves self-build and incremental housing
construction. Families and relatives provide assistance
towards achieving home ownership such as (whenever
possible) in the form of “soft loans” requiring little if any
interest and repayments. In developing countries, the
vast majority of low-income households have built their
houses incrementally over long periods of time z. e
incremental process of construction refl ects their limited
fi nancial resources. It also creates emotional ties between
families and their houses; as a result, poor families may
be more reluctant to use their homes as mortgages for
loans. e high rate of home ownership among the poor
in Lima points to the fact that they value their “houses”
very highly.
Lack of Property Rights Restricts
Women’s Access to Credit
Access to credit is more diffi cult for women because they
lack property rights under their own names. In 1995
Kenya, less than one per cent of women owned land. In
2005, this percentage rose to four per cent – still leaving
96 per cent of land in male ownership. e land tenure
system and property rights are severely skewed towards
men aa.
Kenya is not an isolated case. Women around the world
face various constraints to access to land and property. In
some African countries, patrilineal kinship is the basis that
justifi es men’s superiority over women in practice. e
prejudice against women starts from the day of birth, as
they are always under the control of men – father, husband
or brother. Land is passed from men to men, for example
from father to son. Lack of access to property rights in
Figure 2.1 Survey of Land for Regularisation in Tanzania
Source: GOT
5
The Challenges of A ordability, Accessibility and Sustainability
rural areas often forces women to migrate to urban areas.
Custom is not the only factor that denies women’s access
to land and property: their economic inability to purchase
these is another factor. As women are not able to provide
collateral, they often fi nd themselves in no position to
secure loans from the formal banking system ab.
Poor Credit Cultures and
Information Systems
Credit culture has a major impact on the fi nancial sector.
Financial institutions have their own internal credit
culture to guide their lending operations. Credit is not
granted unless there is a demonstrated capacity and
willingness for repayment, which goes through a rigorous
analytical scrutiny for every loan. is scrutiny focuses on
the ability of the borrower to generate constant cash fl ows
to cover the periodic repayment ac. Such scrutiny is often
found humiliating by the poor and scares them away from
the formal fi nancial sector, since many have no regular
employment or stable income sources.
In centrally-planned countries, the fi nancial sector suff ers
from a lack of credit culture. Loans from State-owned banks
are often subject to government directives or plans, though
not to a thorough analysis of the borrower’s repayment
capacity. In the absence of a credit culture, State-owned
banks have been associated with lower growth in income and
productivity. ey often have high rates of bad loans
ad.
In countries where the credit culture is poor, banks
often do not assess the borrower’s repayment capacity,
and borrowers do not take loan repayment obligations
seriously. In some African societies, some people even
treat loans as grants or income. is culture is encouraged
by non-enforcement of loan contracts by State-owned
fi nancial institutions. is poor credit culture results in
signifi cant increases in banking risks. For example in the
year 2000, one Tanzanian State-owned bank had a 44 per
cent bad loan rate ae.
Another issue associated with poor credit culture is lack
of credit information systems. ese act as information
brokers that improve the transparency of credit markets.
However, in many developing countries credit information
systems are lacking or still in infancy. Financial liberalization
enhances competition between lenders, which increases
over-indebtedness, reduces loan repayment incentives and
causes an accumulation of repayment arrears. Asymmetric
information between borrowers and lenders can lead to
adverse selection and moral hazard. e high default rate
and non-sustainability of many microfi nance institutions,
which specialize in lending to the poor, point to the
problems caused by an absence of credit information
systems af.
Absence of Robust Credit Markets
in Developing Countries
e absence of robust credit markets in developing countries
is a signifi cant impediment to solve the housing problems.
To most families, housing is the largest investment in
their lifetime. ey need loans to fi nance investments
in homes. However, in developing countries, dreams of
decent homes run against most people’s inability to obtain
loans. In contrast, there is widespread access to credit in
most developed countries, including for home purchases.
Research shows that credit is one of the most important
factors that facilitate expansion in real estate markets and
housing in developed countries ag.
Figures 2.2 and 2.3 show a strong correlation between
economic development and credit markets. e more
developed a nation’s economy, the more developed its
credit markets. High-income countries feature far higher
rates of domestic credit to the private sector in terms of
per centage of GDP. e United States has the highest
rate. e least developing countries have the lowest rates
of domestic credit to the private sector, followed by heavily
indebted and low-income countries. Domestic credit from
the banking sector follows the same trends as domestic
credit to the private sector. In 2000, annual domestic
credit provided by the banking sector in high-income
countries averaged 210 per cent of GDP. For the USA,
the fi gure was 258 per cent of GDP. e average was 42
per cent of GDP for low-income countries,; 27 per cent
for heavily indebted poor countries; 24 per cent for least
developed countries; and only half of that – 12 per cent
– in Tanzania ah. e disparity in domestic credit markets
between low-income and high-income countries is even
greater than these fi gures indicate, because the range of
available fi nancial instruments is smaller in those with
low incomes For example, high-income countries have
sizeable bond markets and other signifi cant sources of
credit, while banks are the primary sources for credit in
low-income countries ai.
Asset-Liability Mismatch and
Lack of Long-Term Credit
Developing countries have low levels of domestic credit,
but, even when credit is available, loans are often to be
repaid in a very short time period. In many of the least
developed countries, three to fi ve years will often be the
longest available maturities for loans. For example, in
Tanzania, a women’s group had reached an agreement
with a commercial bank on provision of 10-15 year home
loans; but eventually the bank cancelled the agreement and
reduced the maturity to three years, which was the longest
term the bank could off er in 2005. is contrasts with the
10 to 40 years it will often take for a household on salaried
6Housing for All
income to repay in full. erefore, short repayment periods
make most families unable to generate enough income to
meet repayment requirements.
On the other hand, the lending policies of the mortgage
fi nance sector in many developing countries are also
aff ected by a number of factors – economic instability,
fl uctuations in infl ation, and foreign exchange rate risk
– which force the banking sector to raise real interest rates
and to reduce maturities in order to curb the high risks aj.
ese factors further contribute to the lack of long-term
credit.
Figure 2.2 Domestic Credit to the Private Sector (per
cent of GDP)
Source: Based on World Bank data 2005
Figure 2.3 Domestic Credit by the Banking Sector (per
cent of GDP)
Source: Based on World Bank data 2005
High Collateral Requirements
Many banks in low-income developing countries do not
off er home loans to individuals. When they do so, they
will often impose more requirements than lending to
corporations. High collateral requirements for home loans
is another hassle for borrowers. In a recent discussion with
a State-owned bank in Tanzania, it appeared that collateral
requirements for home loans exceeded 180 per cent of
loan amounts, while the maximum ratio of loans to value
was only 65 per cent. ese harsh conditions preclude
most potential borrowers, and the poor in particular, from
obtaining loans.
Poor Management of Financial Assets
Low credit amounts are not entirely due to a lack of
funds in the banking sector. For example, in Tanzania,
the banking sector has experienced signifi cant increases in
funds in recent years, which contributes to an expansion
in deposits. In 1999, deposits accounted for 53 per cent
of total funding sources, and other liabilities 43 per cent.
e deposits expanded very quickly and their proportion
in total funding sources rose to 84 per cent in 2003. Other
liabilities accounted for six per cent, share capital for
another six per cent, and other capital for four per cent
(Figure 2.4). Banks increasingly rely on deposits to fund
loans.
7
The Challenges of A ordability, Accessibility and Sustainability
Figure 2.4 Funding Sources of the Banking Sector in
Tanzania (billion Tshs)
Source: Based on BOT data
However, a large por tion of the deposits do not go into loans
but instead remain in the form of liquid assets such as cash
positions, inter-bank loans and government securities. e
three largest domestic banks in Tanzania (National Bank of
Commerce (NBC), Co-operative and Rural Development
Bank (CRDB) and National Microfi nance Bank (NMB))
together hold over 60 per cent of total deposits, but lend
only about 30 per cent of these, compared with some 60
per cent for those international banks operating in the
country. In the USA, by comparison, banks only keep
six per cent of total deposits in liquid assets and the bulk
of their capital is used for loans. Banking in Tanzania is
characterised by excessive liquidity and extremely low
credit. is represents a massive failure of the fi nancial
system to allocate capital to the most productive uses ak.
High Borrowing Costs
In Tanzania, one of the main challenges for borrowers is
the high cost of credit. In 1995, the average deposit interest
rate was 25 per cent and the lending rate was as high as
43 per cent. Since then, gradual economic stabilization
and improved competition have brought the rates down
(Figure 2.5). By May 2005, lending rates had dropped
to 14-17 per cent and deposit rates to 3-4 per cent. e
spread between lending and deposit rates decreased from
some 18 per cent in 1995 to about 11-13 per cent in
May 2005. One of the reasons for maintaining such high
spreads was to compensate for low utilisation of deposits
due to weak market demand and high transaction costs.
is practice brings additional challenges to individual
customers. It makes credit unaff ordable for the vast
majority of individuals, and next to impossible for those
on low income.
Ineffective Legal and Judicial Systems
Eff ective legal and judicial systems are essential for any
fi nancial system. Whether the legal and judicial system
will enforce contracts and the law eff ectively will aff ect
the willingness of lenders to make mortgage lending
or other loans. In addition, lenders want a system that
can settle disputes promptly. erefore, availability of
alternate dispute resolution mechanisms is important to
boost bankers’ confi dence in housing fi nance. In Tanzania,
the judicial system is far too slow when it comes to
commercial dispute settlement. An offi cer at the National
Bank of Commerce (NBC) told of diffi culties they faced
when trying to settle default issues in court. One client
used land as security against a loan. When he defaulted,
NBC attempted to repossess the land. But the case had
been pending in court for several years no settlement was
yet in sight.
Figure 2.5 Interest Rates in Tanzania (per cent)
Source: Based on IMF data
The High Costs of Lending to the Poor
To banks, the risk of credit default is higher with the poor
as their circumstances are much more likely to change
over time than for any other segment of the population.
e amounts they borrow tend to be relatively small,
maturities are short and transaction costs are higher.
erefore, the formal banking sector is reluctant to
enter this market. Many lenders in this market ‘manage’
customer repayments, rather than relying on customers to
pay on time: agents collect repayments from customers’
homes, which further contributes to high lending costs 97.
0
5
10
15
20
25
30
35
40
45
1994 1996 1998 2000 2002 2004
Deposit interest rate (%)
Lending interest rate (%)
8Housing for All
Low Participation of Individuals
in the Banking Sector
Currently, the banking sector in Tanzania focuses on
corporate banking services. e participation of individuals
in banking services is very low. e Government’s household
budget survey showed that only 6.4 per cent of households
had a bank account in 2000. Privatization of national banks
resulted in reduced outreach of individual customers due
to high transaction costs. e country’s poor credit culture
makes the banking sector reluctant to expand business and
serve the general public, particularly the poor. However,
in recent years, banks began to show their interest in
reaching the general public through microfi nance services.
Some banks have established microfi nance departments
or subsidiaries. Although microfi nance loans are typically
short term, the move refl ects the changing attitudes of
Tanzania’s banking sector towards low-income people. But
there is a long way to go to build a robust credit market
for individual clients.
9
The Challenges of A ordability, Accessibility and Sustainability
PART III
Experiences and Instruments for Low and
Moderate Housing
The Formal System Makes Affordable
Housing Finance Next to Impossible
Formal housing fi nance remains a Utopia to the poor.
e formal system has proved unable to meet the needs
of poor people around the world am. Any eff ective housing
fi nance system requires the balancing of three elements:
aff ordability for households, profi tability for fi nancial
institutions, and the capacity to scale up the transactions.
Daphnis states that in practice, lenders, governments
and donors understand these three principles as the need
to fi nance a complete housing unit under terms that
are aff ordable to the poor, profi table to the commercial
sector, and on a scale large enough to help solve the
housing problem. However, the same author claims that
this is simply impossible to achieve in poor and very
poor countries, where mortgage lending and secondary
mortgage markets have never materialized as fi nancially
viable options when addressing the housing needs of low-
income households. Poor households lack the capacity to
repay large amounts of money borrowed at real interest
rates to fi nance complete housing units. Housing fi nance
normally requires long repayment periods. However, in
developing countries, most sources of funding are short-
term, which creates a serious asset/liability mismatch
for fi nancial institutions, which signifi cantly raises the
risk of long-term lending. Poor households often have
diffi culties to sustain regular repayments for long periods
of time. Investors do not want to risk their savings in
securities backed by such loans. erefore, no reliable
secondary mortgage market for housing loans targeting
poor people exists in developing countries. e donor–
supported housing banks that had been aiming to serve
the poor either went bankrupt or evolved into full-fl edged
commercial banks and shifted loan portfolios away from
poor households an.
Can Microfinance Meet the Housing
Finance Needs of the Poor?
Poor people face two problems when looking to use
fi nancial services: access and cost. Many poor people have
to turn to informal moneylenders for access to credit. But
these fi nancial services come at high costs, with nominal
monthly interest rates typically ranging from about 10 to
more than 100 per cent – a multiple of the monthly interest
rates of formal fi nancial institutions
ao
. Such high interest
rates make it prohibitive for poor people to borrow large
amounts of money for long periods. e informal fi nance
mechanism is too costly for the poor to fi nance complete
housing units. erefore, slum clearance and rebuilding
through informal fi nance is often not a feasible option for
the poor.
As for microfi nance institutions (MFIs), they can only
provide small amounts of credit at a time to individual
poor households. Although MFI interest rates are typically
lower than those of informal moneylenders, they are much
higher than those charged by formal fi nancial institutions.
In Mexico, the average size of housing micro-credit
introduced by CHF International and FUNHAVI is USD
1,800 with annual interest rates of 54 per cent. Loans must
Chapter 3: The Hopes and Challenges of Housing
Micro nance for Low-Income Households
10 Housing for All
be repaid with 18 months for fi rst-time borrowers. Table
3.1 shows the typical housing microfi nance schemes in
operation ap. Loans are typically very small and repayment
periods are short with a maximum of three years. e
basic ideas behind housing microfi nance evolved from the
microfi nance revolution. erefore, the main principles
of housing microfi nance refl ect those of microfi nance in
general: (1) loan sizes are relatively small and are disbursed
based on borrowers’ capacity for repayment; (2) repayment
periods are relatively short; (3) loan pricing is expected
to cover the real, operational cost and risk premium; (4)
loans are not heavily collateralized; (5) loans do not aim
to fi nance complete housing units at a time, but rather
housing improvements and incremental expansion of
home space; (6) although savings are not a prior condition
for obtaining housing micro-credit, MFIs often link loans
to clients’ savings profi le and habits aq. To put it briefl y,
housing microfi nance enables the partial fi nancing of
housing needs which meet only some of poor people’s
aspirations to proper homes.
Various initiatives have been launched to address the
high cost of credit for the poor around the world. ese
programmes try to bring down the borrowing cost for
the poor. ey are often supported by government or
donor-fi nanced nonblank fi nancial institutions. But most
of these institutions are capital constrained and can not
meet the needs of the vast majority of the poor as. ey are
often not fi nancially self-sustainable. e survival of these
fi nancial institutions depends on constant capital injection
from governments or donors. In other words, they are
heavily subsidized by governments or donors. However,
subsidies can be on a large scale to cover all the needs of
the poor. When coming to housing, the scale of subsidies
is too high for the government to aff ord. erefore, the
wide replication of such initiatives is often economically
not viable for the poor countries.
Poverty and the Microfinance
Revolution
Growing Poverty Drives Poor People Away from
Access to Formal Sector Financial Services
About half of the world’s population (three billion) live
in poverty (less than two US dollars per day). Of these,
1.3 billion population live in severe poverty (less than one
US dollar per day), and 800 million lack access to basic
healthcare. Nearly 800 million population are hungry
or malnourished and 2.4 billion lack access to proper
sanitationat. As many as 1.2 billion have no access to safe
drinking water. Some 275 million children never attend or
complete primary school education, while 870 million of
the world’s adults are illiterate. As for health, three million
people die from HIV/AIDS every year (a cumulated 25
million in the last 20 years), and 70 million will die from
the condition by 2020; 40 million people are currently
infected with HIV/AIDS and will die within 10 years. 13
million children have been orphaned by HIV/AIDS since
the epidemic began, and the number is expected to double
to 26 million by 2010. With regard to housing, over 100
million people live in slums. An estimated 25 to 50 per
cent of urban residents in poor, developing countries live
in impoverished slums and squatter settlementsau.
Poor developing countries (host to 80 per cent of the world’s
population) pay the rich developed countries an estimated
nine times as much in debt repayments as they receive in
aid. Africa spends four times as much on repaying debt as
it spends on healthcare. In 1997, the foreign debt of poor
countries stood at over two trillion US dollars and was
still growing. is amounts to USD 400 of debt per head
in the developing world – where average annual income
in the very poorest countries is less than a dollar a day,
as mentioned aboveav. With its associated vicious cycle of
low productivity due to lack of capital and skills, poverty
makes people unable to meet the standard requirements for
credit. In those areas where poverty is concentrated, many
economic activities are also organized in informal ways.
ese entail specifi c characteristics that are often diff erent
Table 3.1 Selected Housing Micro nance Schemes
Institution Average
Loan Size
(US$)
Maximum
Repayment
Period
(months)
Security
Collateral
Required
Time with
Programme
Savings
Required
Solution
Type
TA to
Clients
ADEMI 1,800 36 collateralized None No Variable No
FUNHAVI 1,500 20 2 co-signers None No Variable Yes
CHF/Gaza 4,800 36 2 co-signers None No Variable Yes
Source: Daphnis & Ferguson (2004)ar
11
The Challenges of A ordability, Accessibility and Sustainability
from those of formal enterprises, including, for example,
scarcity of capital, family ownership, small-scale operations,
lack of legal status, lack of security of business operations,
labour-intensive production, informal education and
training, low skill levels, products transacted on informal
markets, etc.aw ese defi ning features restrict the scale
of production and high risks and instability of informal
economies, which in turn deters the formal fi nancial sector
from providing fi nancial services.
The Demand of Microfinance Unmet
in Formal Financial Sector
e microfi nance revolution is best understood against
the background of developing countries’ population and
income patterns as well as the formal fi nancial sector’s
inability to meet demandax. e Consultative Group to
Assist the Poorest (CGAP) estimates that over 500 million
poor people around the world need fi nancial servicesay.
Robinson argues that the number is much larger, with
some 360 million households badly needing savings or
credit services from formal fi nancial institutions. If we
assume that the average household size is fi ve persons, then
it is some 1.8 billion people who demand microfi nance
services.
Research shows that in a country like Morocco, most
microfi nance demand from the poor is met by the informal
sector, including friends (38 per cent), family and relatives
(38 per cent), colleagues (21 per cent) and money lenders
(3 per cent). e poor hardly have any opportunity to
turn to formal credit institutions since these often deny
them access. Among poor people, 20 per cent said that
when they have other alternatives, they will not consider
formal fi nancial institutions; 18 per cent said that they
did not approach formal credit institutions because they
had no collateral available;17 per cent worried about
repayment ability; 12 per cent thought that formal
fi nancial institutions were not pro-poor; and six per cent
were put away by the diffi cult and lengthy procedures of
the formal fi nancial institutions (Table 3.2).
The Rapid Expansion of Microfinance Services
Across the world at the end of 2003, as many as 2,931
microfi nance institutions were in operation serving
80,868,343 clients, 54,785,433 of whom were among the
poorest when they took their fi rst loan. Of these poorest
clients, 82.5 per cent, or 45.2 million, were women.
Assuming an average fi ve persons per household, the 54.8
million poorest clients served in late 2003 spread the
benefi ts of microfi nance loans to some 274 million people.
is represents a 38 per cent annual growth in the number
of microfi nance clients, compared with its starting point
of 7.6 million poorest families at the end of 1997. e
overall microfi nance growth of 621 per cent between
1997 and 2003 averaged about 39 per cent per year (Table
3.3).
The Emergence of Housing
Microfinance
Housing fi nance sources in developing countries generally
falls into three categories or tiers. e fi rst category is
Table 3.2 Reasons for Not Applying for Formal Loans
Reasons First Quartile
per cent
Second Quartile
per cent
ird Quartile
per cent
Four Quartile
per cent
Total per cent
Other Credit
Sources Available
17 20 21 23 20
Lack of Collateral 21 17 16 18 18
Fear of Inability
to Repay the
Loan
19 18 16 18 17
Lack of Bank
Relations
10 12 12 14 12
Diffi cult
and Lengthy
Procedures
73676
Lack of Financial
Documents
24523
Other 11121
Source: CHF International (2005)ba
12 Housing for All
comprised of private commercial institutions providing
credit for upper-income households at market interest rates
upon the certifi cation of income streams and provision
of collateral. is category of fi nancial institutions avoid
involvement in provision of housing fi nance for the
poor due to their lack of collateral and steady income,
perceived high default risk, and high transaction costs.
e second category is the public sector, which usually
provides subsidized funds for middle-income groups and
civil servants by way of specialized or non-specialized
housing fi nance intermediaries. In many developing
countries these public housing programmes have failed
to reach the poor. eir eligible benefi ciaries normally
operate within the formal economy, can demonstrate
basic home ownership capacities, and have some access
to capital. Public programmes attempting to target lower
income households have been impeded by weak political
will, a paucity of available funds, leakage of funds to
non-eligible groups through corruption, or a failure to
comprehend the socio-economic and political dynamics
of the situation within which the poor operate. Since
they often work in the informal economy, the poor have
(with only a few exceptions) been excluded from access to
capital from formal private or public fi nancial institutions.
ey have to rely on informal sources, including savings,
informal loans from friends and family, remittances from
family members working abroad, and the sale of whatever
assets they have. Housing microfi nance programmes, as
administered by microfi nance institutions and shelter
advocacy groups, have recently emerged to address the
shelter needs of these groups and to fi ll the fi nancing gaps
not covered by traditional, more formal institutions. e
target population with unmet demand for housing credit
from formal fi nancial institutions typically account for
the bottom 40 per cent to 70 per cent of national income
distribution bc.
Ferguson points out that in developing countries, the vast
majority of the population (80 to 90 per cent) do not qualify
for mortgage fi nance from formal fi nancial institutions to
purchase the least expensive, economically built housing
unit. ey are left to build their own housing units without
formal fi nancial sector support, and must rely on piecemeal
or incremental fi nancing support from non-formal fi nancial
institutions. Many developing countries even have nothing
like a viable mortgage fi nance sector
bd
.
Providers of Housing
Microfinance Services
On aggregate, housing loans are still very small in low-
income developing countries – only three per cent of
outstanding credit, compared with 27 per cent in high-
income countries. e experience of the microfi nance
industry in housing loans has been neither very lengthy
nor extensive. MFIs typically off er working capital loans
to business. Recently, MFIs have become more responsive
to the wide spectrum of poor people’s needs, including
housing fi nance. Some banks have also managed to reach
the bottom tier of the market, which includes those low-
income households who are willing to invest in home
improvement. In Tanzania household income ranges
between USD 50 and 500 per month. Loans for new
(often incremental) house construction are also off ered
by some MFIs, but general-purpose MFIs typically will
not allocate more than 10 per cent of their portfolios to
housing. Loans for new home purchases are normally not
available. ose for land acquisition and infrastructure
are mostly available from NGOs and CBOsbe. A variety
of institutions are involved in diff erent types of housing
microfi nance.
Indeed, an increasing number of institutions are becoming
involved in housing microfi nance services, including
MFIs, NGOs, community-based organisations (CBOs),
and formal fi nancial institutions (Table 3.4). MFIs use a
wide range of mechanisms and techniques for providing
housing services. ese are either “stand-alone” or “linked”
Table 3.3 Expansion of Micro nance Services
Year Number of Programmes
Reporting
Total Number of clients
served
Number of “poorest”
clients reported
12/31/97 618 institutions 13,478,797 7,600,000
12/31/98 925 institutions 20,938,899 12,221,918
12/31/99 1,065 institutions 23,555,689 13,779,872
12/31/00 1,567 institutions 30,681,107 19,327,451
12/31/01 2,186 institutions 54,932,235 26,878,332
12/31/02 2,572 institutions 67,606,080 41,594,778
12/31/03 2,931 institutions 80,868,343 54,785,433
Source: Daley-Harris S (2004)bb
13
The Challenges of A ordability, Accessibility and Sustainability
Table 3.4 Providers of Housing Micro nance Services
Types of Institutions Area of Focus Examples
MFIs Large-scale MFIs with over 100,000
clients;
Housing portfolio often borne
out of a disaster situation or as
diversifi cation;
May be a reward for successful
completion of a micro-enterprise
loan.
Medium-sized MFIs with 10,000-
100,000 clients;
Most have already achieved
best practice in microfi nance;
Similar principles are applied to
housing products (short term,
small amounts); Some have taken
government funds for expansion;
Commercial funding usually not
available for these loans, resulting in
funding mismatch
Grameen Bank
CALPIA (El Salvador, specialized
fi nance company), BancoSol (Bolivia,
bank), ADEMI (bank, Dominican
Republic), MiBanco (bank, Peru),
CARD Rural Bank (specialized bank,
Philippines)
NGOs and CBOs Capacity to transfer technologies
across affi liates in various countries;
Limited focus on technical assistance
for housing products; Currently
working on commercial funding
for conventional micro-enterprise
portfolios; Could leverage fi nancing
for housing; Some are direct lenders
and some are wholesale providers of
credit
Accion, CHF International, FINCA,
Homeless International
Co-operatives, Mutuals and
Municipals
Locally owned and often locally
started housing programmes; Good
experience and best practice; Usually
part of networks that enable cross-
experience sharing
Jesus Nazareno (S&L co-op,
Bolivia), Mutual La Primera (housing
co-op, Bolivia), Caja Arequipa
(municipal co-op, Peru)
Government Housing Programmes Some are professionally run; others
are very political and/or not market-
based; Major source of second tier
fi nancing for housing but with
limited outreach; Demonstrated
outreach to low income clients
Ex-FONVIS (Bolivia), FONAVIPO
(El Salvador)
Commercial Banks Some downscaling to housing faster
than to microcredit; Security is
a major issue; Have the capacity
to expand; Could mobilize large
amounts of commercial fi nancing
Banco de Desarrollo (Chile), African
Bank (South Africa)
Source: adapted from Escobar and Merrill (2004)bg
14 Housing for All
housing services. Stand-alone housing microfi nance does
not require clients to demonstrate a prior loan/repayment
history with the provider as a criterion for lending. Loans
are typically off ered to individuals rather than groups. Loan
sizes are small (USD 1,000 to 5,000) with short repayment
periods (1.5 to four years). No mortgage is involved since
loans are not collateralized by any property. Some MFIs
have introduced “linked” housing microfi nance services,
which set additional conditions for qualifying loans such
as participation in savings schemes. erefore, “linked”
loans are secured to a degree.
Microfi nance institutions have grown rapidly to try to meet
huge demand for credit. Some have developed into ‘giants’,
with over a million clients each, including : Grameen Bank,
the Bangladesh Rural Advancement Committee (BRAC)
and the Association for Social Advancement (ASA) (in
Bangladesh), Bank Rakyat Indonesia (BRI), the Bank
for Agriculture and Agricultural Co-operatives (BAAC)
in ailand, and the Sri Lanka National Savings Bank.
However, MFI outreach remains dwarfed by demand,
with only fewer than fi ve per cent of poor households
having access to microfi nance services.
Housing Microfinance by Commercial Banks
Accion has identifi ed several models for those commercial
banks intent on microfi nance business of a general nature:
(1) creating an internal unit within the bank; (2) creating a
fi nancial subsidiary; (3) creating a private service company;
(4) creation of new MFIs with bank co-investors . However,
formal fi nancial institutions are not keen on involvement
in housing microfi nance. In Asia, only four commercial
banks have a profi table microfi nance business: BRI in
Indonesia, together with three small private commercial
banks (Bank Dagang Bali in Indonesia, Hatton National
Bank in Sri Lanka, and Krishna Bhima Samruddhi Bank
in India). In addition to these, a 1997 USAID study found
eight commercial banks in Latin America and three banks
in Africa where microfi nance is a small but profi table
business. Altogether, in 1998 only 15 commercial banks
were engaged in profi table microfi nance business in the
world120. e practice of commercial banks in housing
microfi nance is more limited, with only very few
commercial banks involved such as Banco de Desarrollo
in Chile, CashBank/BoE and African Bank in South
Africa121. Overall, commercial banks account for 78 per
cent of the total number of outstanding microcreditbk.
Housing Microfinance by Co-operatives
Co-operatives play an important role in the provision
of housing microfi nance. ey enable low-income
households to save and borrow, where formal fi nancial
services are not available. ey can provide signifi cant
linkages between banks, housing agencies and individual
members of low-income communities. ey are more
responsive to the needs of low-income members. Terms
of credit are more attractive and lower than most market
rates. Although credit unions or savings and credit co-
operatives (SACCOs) do not aim to provide housing
microfi nance, the amount of loans used for housing has
increased rapidlybl.
One example is the National Co-operative Housing Union
(NACHU) in Kenya. It was established in 1978 to support
housing co-operatives through technical assistance and
training, and off ering housing microfi nance to co-operative
members. Its main eff orts are focused on low-income
housing co-operatives
bm
. On top of funding, NACHU
has also sought to address issues like land availability and
collateral through a combination of savings and lending
programmes with resettlement. While it is pursuing this
approach in several communities, the most advanced
project is to be found at Bellevue, a fi ve-acre community
west of Nairobi. Launched in 1994, the project involved the
resettlement of 184 households. NACHU lends USD 705
per quarter-acre plot, the interest rate is 15 per cent, and
the maximum loan term is four years. Unlike most housing
microfi nance schemes, NACHU retains land titles until all
members have repaid their share. e NACHU experience
at Bellevue provides valuable insights into the way creative
housing fi nance can overcome obstacles relating to land
availability, access to basic services, and aff ordability
bn
.
NACHU runs three distinct types of housing microfi nance:
(1) housing rehabilitation/improvement loans; (2) new
house loans; and (3) resettlement and infrastructure loans.
Housing rehabilitation/improvement loans are small loans
averaging Kshs 50,000 each targeting the poor who cannot
aff ord to build or buy new housing units, but look for
opportunities for housing improvement. e maturity is
four years with an annual interest rate of 19 per cent. e
new house loans are designed for the poor co-op members
who have bought land and started construction of their
housing units in an incremental sort of way. e loans
help them to expand the units. New house loans range
between Kshs 100,000 and 400,000. e resettlement
and infrastructure loans target co-operative members who
live in slum areas and want to use their own resources to
relocate to areas with more secure tenurebo.
NACHU grants loans to co-operatives which on-lend the
monies to eligible applicants. Conversely, the co-operatives
pass repayment monies on to NACHU. But variations
may be allowed. For example, borrowers can pay either
at the co-operative offi ce, at the society bank or at the
predetermined location that suits them best. e mode
of repayment is usually discussed and agreed with the
community in order to reduce the potential for defaultbp.
15
The Challenges of A ordability, Accessibility and Sustainability
Housing Microfinance by NGOs and CBOs
NGOs and CBOs are involved in many housing
microfi nance activities, including for instance Accion,
CHF International, Habitat for Humanity, FINCA and
Homeless International. Habitat for Humanity Tanzania
(HFHT) provides loans to families who live in inadequate
shelter with monthly incomes between Tshs 40,000
(or USD 39.00) and 120,000 (or USD 144.00). Loan
repayment periods range between seven and 10 yearsbq.
In Cambodia, most housing microfi nance schemes have
been launched by NGOs and CBOs, including for
example the Urban Sector Group (USG) and the Solidarity
for the Urban Poor Federation (SUPF). NGOs’ primary
services are savings schemes for land and housing, with
housing micro-credit as an aside. SUPF operates in half
of Phnom Penh’s 500 poor settlements through district-
based “Khan” units and women’s savings groups. On top
of using members’ savings to acquire land and housing,
SUPF has managed to raise awareness of land and housing
issues among one third of all squartter communities. e
housing microfi nance loans of CBOs and NGOs are
granted to small groups, and most NGOs and CBOs in
Cambodia have resorted to this group guarantee as an
eff ective tool for loan recoverybr.
In 1998 and in co-operation with several other NGOs
such as the Asian Coalition for Housing Rights (ACHR),
Cambodia’s SUPF created another NGO, known as the
Urban Poor Development Fund (UPDF). UPDF aims
to make housing micro-credit aff ordable for poor urban
communities in order to enable them to improve housing
and settlements. It was also intended to act as a tool to
strengthen the Federation of community savings groups
through support of, or ‘topping up’, the fi nancial resources
required to scale up community-driven development
schemesbs.
As for CHF International, it is also a very active provider
of housing microcredit through programmes in various
countries. For example, CHF Romania has been off ering
individual and group home improvement loans since
1998. It makes individual housing loans available to fi rst-
time and repeat borrowers with secure monthly incomes
and good credit histories. Typical lending periods range
between three and 18 months, with 12 per cent monthly
interest rates plus a three per cent up-front commission.
Loans range from USD 50 to 450 for fi rst-time borrowers
and can reach USD 800 for repeat borrowers. Loan
amounts refl ect borrowers’ individual repayment capacity,
which is estimated at 25 per cent of the household monthly
income. Security against loans is secured through recourse
to co-signers, whose mailing addresses must not be the
same as applicants’.bt
CHF Romania also off ers housing microfi nance loans to
groups. ese group loans allow securitization through co-
signers or through a mortgage instrument for the largest
principal amount available. Maximum loan size is USD
750 per person in a condominium homeowners group and
the maximum lending period is three years. e monthly
interest rate is 16 per cent and loan commissions range
between two and four per cent, depending on loan sizes.
However, housing microfi nance group loans face four
main operational diffi culties, including: (1) wide ranges of
incomes and repayment capacities within target groups; (2)
the challenge of reaching consensus among condominium
residents; (3) the limited number of collateral options
available to them; and (4) the high overhead costs of
putting together such group loans.bu
Housing Microfinance by MFIs
If housing loans are small with short maturities, MFIs
may be the ideal providers. e amounts and maturities of
housing microfi nance loans are usually signifi cantly lower
than those of mortgage loans. Interest rates on housing
microfi nance are closer to those on microbusiness loans
than on conventional mortgages. Clients are mostly poor
households, with whom MFIs are used to deal. MFIs
have developed specifi c lending methodologies to reduce
the risk of low repayment rates, and many have achieved
signifi cant results such as BancoSol, FIE, Caja de los Andes
and Crecer in Bolivia; Compartmos in Mexico; Genesis
Empresarial and SIFFE Credit Unions in Guatemala;
Banco Ademi in the Dominican Republic; Financiera
Calpia in El Salvador; and Caja Social in Colombiabv.
FINCOMUN is a Mexican MFI with 17,200 clients in low-
income Mexico City neighbourhoods and an outstanding
loan portfolio of more than three million US dollars.
FINCOMUN also provides housing microfi nance loans
as an extension of existing enterprise loans; loan sizes range
from USD 500 to 1,000, with weekly instalments and a
six per cent monthly interest rate calculated on a declining
balance basis. In addition, FINCOMUN estimates that
10 to 15 per cent of business loans is diverted to housing
improvements related to business operationsbw.
Housing Microfinance by Developers
With proper incentives, some developers off er housing
microfi nance services.
Funding Strategies of
Housing Microfinance
Savings
Traditionally, savings has been a primary source of funds
for fi nancial institutions. In the USA, 97 per cent of
16 Housing for All
total commercial bank liabilities are deposits of various
maturities which fund the banks’ lending operations. e
fi nancial success of many housing microfi nance providers,
including Bancosol, BRAC, BRI and EBS, depends largely
on their ability to raise savings (Table 3.5). However,
many MFIs are not allowed to take deposits until they can
meet certain minimum capital requirement mandated by
regulatory authorities. Many MFIs are small and unable to
meet these criteria, and those that can often fi nd themselves
falling far short of loan demandbx. Table 3.5 shows the
savings and loans portfolios of selected microfi nance
providers. Average deposits amount to USD 32,395,791
against an average loan portfolio of USD 57,339,910. e
number of borrowers are more than twice that of deposits.
Most microfi nance lenders cannot rely on client deposits
alone and must rely on additional, alternative sources to
meet the demand for loans.
Donors, Governments and
International Institutions
Donors play a very important role in promoting and
funding microfi nance programmes. For most MFIs, the
principal source of funding remains grants and highly
subsidized loans. Grants and loans are mainly provided
by international donors (e.g. Sweden’s SIDA, the UK’s
DFID, USAID), multilateral banks (e.g. World Bank,
Inter-American Development Bank) foundations (e.g.
Ford Foundation), and apex organizations (e.g. Women’s
World Banking, ACCION, FINCA) . For example, South
African NGO People’s Dialogue is 95 per cent funded by
international donors and the remaining fi ve per cent by
the South African governmentbz. International grants and
loans typically include conditions and requirements, and
they are limited in amounts.
While donors are valuable sources of funds, they are
not the most desirable ones for MFIs as they are neither
suffi cient nor sustainable. Donor pritorities and focuses
can be versatile and their support is often conditional and
temporary, not to mention lack of knowledgeable staff .
From a business perspective, this segment is not growing.
For example, the United States foundation giving is down
as much as 20 per cent since 2000ca.
Access to Commercial Banks through
Loan Guarantee Programmes
e format developed for the Rajiv Indira Suryodaya
project in Mumbai, India, demonstrates how NGOs
can access funds from commercial banks to leverage
Table 3.5 Selected Micro nance Providers (December 2003)
Member Country Number of
Active Borrowers
Gross Loan
Portfolio (USD)
Number of
Depositors
Deposits (USD)
ASA Bangladesh 2,130,000 166,500,000 2,330,000 16,200,000
Banco del
Desarrollo
Chile 33,500 31,500,000 18,100 8,500,000
BancoSol Bolivia 56,700 91,200,000 53,300 70,100,000
BRAC Bangladesh 3,400,000 190,900,000 4,100,000 104,400,000
BRI Indonesia 3,100,400 1,717,700,000 29,869,200 3,244,900,000
CERUDEB Uganda 44,800 34,900,000 397,800 59,400,000
Citi Savings Ghana 1,100 3,000,000 34,000 5,100,000
EBS Kenya 67,000 21,800,000 252,000 42,200,000
FINAMERICA Colombia 20,700 18,300,000 1,100 11,900,000
Kafo Jiginew Mali 52,700 11,000,000 120,300 12,200,000
K-REP Kenya 45,400 20,500,000 17,300 4,300,000
Los Andes Bolivia 49,700 80,200,000 39,000 48,500,000
Mibanco Peru 116,700 113,900,000 36,600 44,900,000
PRODEM Bolivia 25,300 60,500,000 65,900 48,600,000
UMU Uganda 28,600 6,300,000 35,600 700,000
XAC Bank Mongolia 18,535 9,598,647 25,666 8,936,865
Average 574,446 57,339,910 244,762 32,395,791
Source: based on Microfi nance Network
17
The Challenges of A ordability, Accessibility and Sustainability
the security provided. In 1997 and under the new
Slum Rehabilitation Authority (SRA), SPARC-Nirman
embarked on the fi rst-ever attempt by an NGO in India
to construct apartment buildings for 209 households
living in a slum in Mumbai. is slum development
scheme was established by the government of the State
of Maharashtra in 1995 to provide incentives for private
builders to construct free tenements for 800,000 poor
households. However, the SRA scheme did not take off ,
and only a fraction of the anticipated tenements have
been built to date. In light of the poor performance of
the SRA, the SPARC-Nirman alternative to commercial
builder-driven housing is an important step. Five
apartment blocks will be built and each tenement will
be a minimum of 225 square feet. ree buildings will
house community members and the other two will
be sold on the market to make up costs and generate
profi ts
cb
.
Apart from using its own revolving funds, SPARC-
Nirman took a loan for this project from Citibank and
the UK-based NGO Homeless International acted as
a guarantor for 20 per cent of the principal. Nirman
expects to recover its costs once all the buildings are
completed and the fl ats and commercial premises are
sold. e costs are expected to be met from the sale
of transferable land development rights (34 per cent),
apartments (51 per cent), and commercial spaces (15
per cent). Backed by collateral provided by the Homeless
International Guarantee Fund (established in 1994),
organised groups of poor urban residents can negotiate
more equitably with banks for the fi nancial services
they need. e fund has had some support from the UK
Department for International Development (DFID)
and from the European Union. However, the bulk of
funding came from non-governmental sources, such
as deposits by the Airways Charitable Trust (Figure
3.1)
cc
.
A variety of funding strategies are available. However,
MFIs fi nd that any single funding source is generally
insuffi cient. ey often use mixed funding sources
to meet demand for loans. Table 3.6 shows the most
common funding strategies adopted by microfi nance
providers.
The Characteristics of Housing
Microfinance Products
Criteria for Housing Microfinance
Lending criteria for housing microfi nance are mainly
based on repayment capacities. e home is the most
Figure 3.1 The Homeless International Guarantee Fund
The Guarantee for the Rajiv Indira Suryodaya Project
Source: CGAP (2004)cd
18 Housing for All
important asset for poor people and something to which
they are strongly attached. erefore, they are prepared
to spend a high per centage of their income toward
building, expanding and maintaining their homes. Most
lending institutions recommend that 20 to 35 per cent
of household income can be spent on housing loans.
For example, the percentage of household income used
for repayment is 25 per cent for CHF in Gaza, and 33
per cent for FUNDHAVI
cf
.
Loan Size
e size of housing microcredit loans is usually small,
between USD 300 and USD 5,000. Sizes are smaller
in Asia than in other regions, typically a few hundred
US dollars, compared with up to USD 5,000 in South
America. For middle-income countries, loan sizes are
accordingly higher. In South Africa, housing microcredit
loans can be as high as USD 8,000 (Table 3.7).
Loan Terms
Loan maturities vary according to purpose. Home
improvement loans are for two months to two years. Most
land purchase or construction loans range from two to fi ve
years. Some housing microfi nance maturities are almost as
long as those of mortgage fi nance. For example, Banco de
Desarrollo in Chile and People’s Dialogue in South Africa
both off er loan terms of 15 years. Table 3.8 illustrates the
range of terms currently off ered by housing microfi nance
providers.
Interest Rates
Interest rates on housing microfi nance loans are determined
by several factors such as cost of funds, transaction
costs, r
isks, and aff ordability for clients. Interest rates are
normally higher than those charged by commercial banks.
However, they may be lower or higher than for micro-
enterprise loans, or the same. For example, for housing
Table 3.7 Loan Size of Selected Housing Micro nance Providers
Institution Country Average/Maximum Loan Size USD
Diaconia Bolivia 800
FUNHAVI Mexico 1,400
ADEMI Dominican Republic 5,000
BancoSol Ecuador 1,095
Grameen Bangladesh 600
SEWA India 300
CARD Philippines 350
People’s Dialogue South Africa 1,200
CashBank South Africa 8,000
African Bank South Africa 2,500
Source: Escobar & Merrill (2004)cg
Table 3.6 Funding Strategies of Selected Micro nance Providers
Strategies SPARC CARD BRI Grameen Bank People’s
Dialogue
Mandatory Savings Yes Yes No Yes Yes
Bank Funding No Yes Yes Yes No
Donor Funds Yes Yes No Yes Yes
Foundation Funds Yes Yes No Yes No
Public Funds Yes No No No Yes
Credit Enhancement Yes No No No No
International Investors No No No Yes No
Source: Escobar and Merrill (2004)ce
19
The Challenges of A ordability, Accessibility and Sustainability
microfi nance programmes such as Calpia, Grameen and
SEWA, interest rates are lower than for micro-enterprises;
for FUNHAVI, the interest rate is higher than that for
microenterprises; CARD charges the same interest rates for
housing and micro-enterprises (Table 3.9). In most cases,
the interest rates for housing and micro-enterprises range
between 20 and 50 per cent. Grameen charges much lower
and subsidized interest rates (eight per cent) for housing,
which is not common in the microfi nance industry. High
risks and signifi cant transaction costs make low interest
rates commercially less
viable and sustainable from the
microfi nance institutions’ perspective.
e eff ective rate of credit is often higher than nominal
interest rates because of fees and other charges. e
eff ective rate captures all fi nancial costs related to the loan.
Borrowers pay not just the nominal rate on the principal
and additional fees, but also forego the interest they would
earn if they were not forced to keep the required balance
on their account. For example, Union Popular Credit
Union in Guatemala requires members to have credit
access-linked share accounts to qualify for loans, and these
accounts carry lower interest rates than passbook deposits.
A borrower will lose 10 per cent on interest earnings for
keeping money in share accounts in order to secure access
to credit .
MFIs widely adopt fi xed interest rates for their housing
microcredit. e short period of loans and higher
interest rates of housing microcredit will reduce the risk
Table 3.8 Loan Terms of Selected Housing Micro nance Providers
Institution Country Term
ADEMI Dominican Republic 12-36 months
Calpia El Salvador Up to 60 months
MiBanco Peru Up to 120 months
FUNHAVI Mexico 18 months
CHF/Gaza Gaza 36 months
Genesis Guatemala Average of 30 months
BancoSol Bolivia Average of 80 months
CARD Philippines 12 months
Grameen (basic) Bangladesh 120 months
SEWA India 60 months
Banco de Desarrollo Chile 180 months
People’s Dialogue South Africa 180 months
CashBank South Africa 180 months
Source: Daphnis (2004)ch and Escobar & Merrill (2004)ci
Table 3.9 Interest Rates of Housing Micro nance and Micro nance Business Loans
Institutions Housing Microfi nance Microfi nance for Micro-enterprises
ADEMI N.A. 18 per cent - 24 per cent
Calpia 23 per cent 32 per cent
MiBanco 45 per cent (MiCasa) 30 per cent + (Mi Capital)
FUNHAVI 58 per cent N.A.
Genesis 25 per cent 35 per cent
BancoSol 16 per cent - 22 per cent 32 per cent
CARD 20 per cent 20 per cent
Grameen 8 per cent (subsidized) 20 per cent
SEWA 14 per cent 17 per cent
Source: Daphnis (2004)ck
20 Housing for All
of macroeconomic fl uctuations to lenders. Low-income
borrowers are also liken on fi xed interest rates because of
its clarity of periodic payment amountcl.
Security and Collateral Requirements
Many housing micro-loans are unsecured
cm
. However,
housing microfi nance providers increasingly seek
to make security arrangements for housing loans in
order to reduce risk. Housing micro-loans are often
not collateralized. Since many developing countries
have no adequate legal system to support the use of
collateral to secure a loan, it is very diffi cult to liquidate
the collateralized asset to repay the loan balance in
case the borrower defaults. erefore, many housing
microfi nance providers do not choose to collateralize the
loans. Instead, they resort to co-signers as an alternative
type of security for housing microcredit
cn
.
Most MFIs use co-signers as security for lending. For
example, 71 per cent of loans by Union Popular use co-
signers guarantee. Only fi ve per cent of micro-loans use
a mortgage as security; two per cent use both co-signers
and a mortgage; 16 per cent use savings as securityco. In
Mexico, FUNHAVI off ers housing microcredit ranging
from USD 800 to 2,000 for incremental housing
construction/improvement, such as addition of an extra
room, roof replacement or basic sanitation, with repayment
periods of one to three years. FUNHAVI uses co-signers
as security for loans. Co-signers must feature the same
repayment capacity standards and eligibility requirements
as the borrower, and cannot be members of the borrower’s
immediate familycp. Some housing microfi nance providers
such as SEWA put more emphasis on savings as security;
other institutions, like SPARC, CARD and Genesis, use
group solidarity for housing and infrastructure micro-
loanscq.
Table 3.10 shows the common security measures adopted
by housing microfi nance providers. Most housing
microfi nance providers use co-signers as security. Some
use mortgages. Linked housing microfi nance providers use
both co-signers and savings as security. Since the amount
of loans is small, mortgage is not often used. e use of co-
signers should be adequate. Co-signers should be credit-
worthy and have resources which can be clearly accessed
by lenders in case clients defaultcr. Since housing micro-
loans are small, short-term and charged with high interest
rates to compensate the possible high risks, the security
for the loans are far less important, compared to long-
term housing fi nance. erefore, housing microfi nance is
more based on character and willingness to pay than on
collateral. e strategies housing microfi nance currently
uses to secure loans including: (1) personal guarantee (co-
signers); (2) land title and buildings; (3) mortgage/lien on
assets; (4) assignment of future income (wages); (5) joint
liability and group guarantees (character-based lending);
(6) other fi nancial assets (for example, life insurance
policies and pension funds)cs.
Underwriting