Bankable Frontier Weblog

Discussing a different topic, a DFID colleague recently used the metaphor of shoes as either ‘Fashion or Footwear’. Today, I wish to apply that to the topic of housing microfinance. In recent years, it has emerged as a fashionable topic—launching papers, even a 2004 book (previously reviewed in this blog), and conference talks, such as my participation here today. Is it more than this, however? Could housing microfinance become ‘footwear’ in mainstream microfinance? To answer this, I wish to address three further questions:

1. What’s fuelling the interest in housing microfinance?
2. What do we know about it?
3. What might this mean for the future of microfinance?

Could this be footwear?

By way of background, let me first clarify terms. Housing microfinance is the provision of financial products which allow access to finance for the construction, extension and alteration of housing, usually for low income clients. While the credit aspects—such as loans for the purchase of building materials—are given the most attention, housing finance is not limited to credit. Indeed, some providers have launched savings products, and even remittance products, linked to housing construction.

What I will call ‘traditional’ housing microfinance has been a natural outgrowth of standard micro-enterprise finance. Microfinance institutions in various parts of the world discovered that, after several loan cycles for productive purposes which boosted their income, their clients wanted access to loans to improve their housing conditions. Even in salaried microfinance, or consumer finance as some would call it, a high proportion of general lending is used for housing purposes. In South Africa in the Nineties when I was running the wholesale lending program at the public housing bank, we consistently found in end clients surveys that around a third of personal loans to salaried borrowers were being used for housing purposes.

But why has the subject become much more visible in recent years? I believe that there are two powerful forces which have pushed it forward. First, the demand side continues to be fuelled by rapid urbanization in developing countries. In many of these countries, formal titling and enforcement means that conventional mortgage finance for building or improving a house does not work well, so clients are forced to rely on staged improvements to extend and improve their housing conditions. This force is not going to go away, hence the potential market for housing microfinance in many countries is growing. Second, from the supply side, housing microloans tend to be larger and longer term than enterprise microloans, and hence can support a rapid growth in MFI balance sheet. While the evidence is not conclusive on greater profitability of these loans, there are indications that MFIs may have good reason to develop and offer these products as part of retaining clients in more competitive environments at least.

These two forces suggest that housing microfinance will endure, therefore is more than ‘fashion’ alone, even if the topic has become more fashionable.

What do we know about the early programs? The answer here is not a lot yet, although evidence is accumulating from early programs. For example, in the context of today’s discussion on poverty alleviation, we do not yet know the real impact on households who take these loans. In theory, housing microcredit should be part of asset building for the poor, in the way that enterprise microcredit is about income building, by allowing poor people to channel surplus funds into a long run investment with at least provident value, and hopefully, financial value too if the house can be sold.

A recent research report by Richard Schumann of Accion on two programs developed in the past three years by MFIs in central America provides some further indicators about traditional housing microfinance:

• The default experience was better than in the enterprise funding programs;
• Loan officers could be trained to offer and service both enterprise and housing products;
• There appeared to be little difference in construction quality between clients who received construction advice with their loans versus those who did not.

Neither of these programs has achieved scale yet, although takeup was quite rapid. Accion affiliate MiBanco in Peru runs probably the largest housing microfinance program of this type today.

A key issue for housing microfinance is that the larger loan sizes and longer loan terms is likely to place much greater liquidity strain on traditional MFI balance sheets than enterprise credit. It may therefore accelerate the MFI transition to regulated status to be able to take deposits; and it may encourage wholesale funding relationships with larger entities.

While traditional housing microfinance is therefore a natural outgrowth of servicing existing customer needs which is likely to continue and grow, there are several non-traditional innovations in this area which I think deserve attention. They may better point to the future of microfinance in general. The one I wish to highlight is the Patrimonio Hoy program started by Cemex in Mexico. It has also been highlighted in CK Prahalad’s Bottom of the Pyramid book (also previously reviewed in this blog); and in a recent draft HBS case study.

In essence, Cemex, Mexico’s third largest cement company, decided to find a way to build its market position among small scale cement buyers who made up the bulk of its client base by number: in other words, it approached the issue commercially from the start. Patrimonio Hoy evolved as a group-based, savings to credit program. In return for a regular weekly instalment, delivered in instalments over a 70 week period, the client received the building materials (and advice) necessary to build a room onto a house. The program uses some of the best features of group-based credit and savings schemes, and combined them with Cemex’s hardware store distribution infrastructure to deliver a cost effective solution. The program reported 75 000 clients by 2004, some five years after starting. While the program has succeeded by most measures, these client numbers are small for a giant company like Cemex. Cemex is reportedly now looking for a way to let microfinance institutions manage the program going forward.

In this, Patrimonio Hoy points the way to the future of microfinance in general. First, the future includes large commercial giants with considerable scale—whether Cemex, or Citibank or Vodafone.  However, these giants have their strengths and weaknesses. Microfinance is about solving two traditional banking problems: how to manage risk; and how to distribute low value, high volume product. Through its chain of hardware stores, Cemex offers a great way to distribute not only building materials but also the finance at point of sale to buy them. However, as a cement manufacturer, its core skill is not the management of the risk of small loans to unbanked customers—MFIs may do better here, at least until better credit bureaus in developing countries allow better risk assessment by those who may not be as close to the client. The future of microfinance will be about how the specializations emerge to take care of each of these issues. Traditional microfinance which does both today, will not endure unless it does both well and cost-effectively in the face of competition from much bigger, more specialized players.

So, in conclusion, I believe that housing microfinance is much more than fashion; it is here to stay, whether in traditional or more innovative format such as Patrimonio Hoy. However, as footwear, it is still baby shoes—perhaps Bob the Builder boots!

What about my boots then?