Across Africa, 85 percent of the population simply don’t have access to the formal financing — credit, savings, or mortgages — that would allow them to build or improve their homes. When we started the Building Assets, Unlocking Access project, we were driven by this stark gap in access to housing finance in sub-Saharan Africa and a desire to do something about it. In fact, McKinsey has estimated that the gap in access to housing finance among low-income households, if addressed properly, could create an estimated $200-$250 billion dollars in profits for financial institutions.
The initiative, undertaken in Kenya and Uganda by Habitat for Humanity’s Terwilliger Center for Innovation in Shelter and the Mastercard Foundation, offered technical support to financial institutions to develop small, short-term, nonmortgage-backed loans and reflected the regional tradition of gradually building homes, as resources allow.
An estimated 1.6 billion people in the world live in substandard housing. This figure is climbing, but housing microfinance — small, nonmortgage-backed loans for short terms — could be a market solution to address growing housing needs, incremental building patterns, and the land tenure realities of low-income households.
We were somewhat encouraged by the success of similar projects in other parts of the world, reflecting the universal demand for safe and secure shelter. Even so, it has been heartening to see how BAUA was able to help people such as Jane Mueni Paul.
A mother of three living in Machakos, 40 miles from Nairobi, Kenya, Jane was kicked off her family land when her father remarried. She had a steady income from her small business operating a school canteen and selling seeds, but her new circumstances forced her to rent a single room near a market. She was determined to have her own land and provide a better environment for her children.
In 2015, she heard about the Nyumba Smart Loan, the Kenyan Women Financial Trust’s first housing microfinance loan, developed by BAUA. After being quickly approved for a loan of 200,000 Kenyan shillings ($1,973) to construct her own home, she received guidance on how to plan and budget the project, select materials, choose, and contract a tradesman. Within weeks of approval, work had begun.
She said that the key outcome of building her own home, following the rejection by members of her family, was that she now felt like a “strong woman.”
“I am very happy,” she said. “I would urge banks to give women more loans to allow them to build themselves, as well as to educate them on housing microfinance.”
Jane’s experience and her hopes for the future reflect the success of BAUA. More than 35,000 clients have taken up the Nyumba Smart loan in the last two years — a huge achievement compared with the mortgage market, that in the past decade has only disbursed 23,000 conventional mortgages in Kenya.
In just three years since the loans were launched in the two East African countries, the BAUA project has supported 57,932 low-income households — some 289,000 people. Nearly $44 million in loans has been issued, all provided by six local financial institutions. International donors did not lend a cent — the Mastercard Foundation contributed $6.6 million to research, product design, and implementing the pilots that led to bringing the loan products to market, with Habitat’s Terwilliger Center providing the technical knowledge and expertise in housing and microfinance.
“To make the most of the potential offered by housing microfinance, investors need to be more committed to a long-term horizon for returns and to social impact investing.”—
What’s more, the loans have shown to outperform other mainstream products the financial institutions are offering. The Nyumba Smart Loan has shown the lowest levels of portfolio arrears of any KWFT product.
The BAUA project has clearly demonstrated that there is demand for housing microfinance among families or individuals earning as little as $5 a day. However, more perseverance from financial institutions and commitment from donors and investors is needed before housing microfinance can reach the mainstream — a goal that Habitat’s Terwilliger Center and the Mastercard Foundation believe is perfectly attainable.
We think take-up of loans could double over the next five years, and that the financial sector is faced with a viable business opportunity.
Barriers to expansion
If financial institutions are to expand housing microfinance loans to meet demand, however, several barriers exist. Firstly, there is a lack of institutional knowledge assessing the demand to design adequate housing products, which differ from traditional microfinance products. There is also a lack of adequate capital, and a lack of diversity in the funding of these loans.
Equity is the most broadly used source, followed by international borrowing, but the use of grants is limited compared to traditional microfinance. Many traditional microfinance institutions in Africa find it challenging to think of expanding their product suite beyond short-term, working capital for enterprise needs.
The financial sector faces continual pressure to demonstrate results and returns in the short term. A nonmortgaged product such as housing microfinance may require a longer, break-even horizon than other products. There may be capital constraints faced by financial institutions on investing heavily in a housing microfinance portfolio, particularly because loan tenure may be longer. Funding a portfolio not only through a financial service provider’s own liquidity and deposit base, but also through external investors, will make the choice easier.
The conditions to introducing housing microfinance need a fair wind, as the BAUA project partnership discovered in Ghana. Launched in the middle of the current decade, as Ghana’s seemingly stable economy began to weaken, the Ghanaian cedi devalued and interest rates skyrocketed. Nearly one year into implementation, the borrowing rate for financial service providers was 38 percent and growing, and the housing microfinance product was simply not feasible, given soaring costs.
Breaking down the barriers
To make the most of the potential profit offered by housing microfinance — which according to the recent research by Habitat’s Terwilliger Center could be similar, or even higher than mainstream microfinance products, as highlighted in the McKinsey report — investors need to be more committed to a long-term horizon for returns, and to social impact investing. They also need to understand their risks and costs, and fully appreciate market evolution and trends. They might need to think more creatively about how to better leverage local currency and local liquidity in banking and in pension sectors.
Blended capital is also important if we want to encourage the adoption of housing microfinance as a relevant product in financial institutions’ overall portfolios. Within markets, there are institutions ready to take the risk and act as market leads, but adequate funding to support the introduction of such loans is required.
More donor support is likely to be needed for microfinance products’ design and piloting phases. The effectiveness of such support has been shown by an earlier project launched in 2009, in Peru, with support from the Inter-American Development Bank, or IDB. Mibanco, a Peruvian microfinance bank, developed the housing microfinance product Micasa, with grant funding from IDB and technical assistance from Habitat’s Terwilliger Center. The pilot project reached close to 1,500 clients in the first year and has grown significantly — it has now reached more than 201,000 clients, disbursing approximately 16,000 loans a month.
Proper knowledge of the demand, and training Mibanco’s staff on how to design and sell the new loan was as a key outlay before the launch. Doing the same elsewhere will help convince institutions that new products can be marketed successfully.
The groundwork that was a fundamental element of BAUA, and which built on Micasa, developed tools and approaches that can be replicated elsewhere. This includes: Properly understanding your customers and their needs and aspirations, appreciating the local market, finding a competitive position, and knowing the broader housing sector.
Donor agencies are aware that housing is a fundamental human need, and it is an expressed priority for the Sustainable Development Goals. They might consider investing more strategically in housing microfinance projects, leveraging the knowledge and resources that already exist, and being more judicious on what support is subsidized and for how long.
We believe that BAUA’s popularity with customers and the success of the loans for banks has demonstrated the business case for housing microfinance in sub-Saharan Africa. Recent research undertaken by Habitat’s Terwilliger Center has shown that at least 47 percent of financial institutions find it as profitable as other products offered by the institution, and 51 percent of institutions expect a return in one to three years.
Data — as provided by the International Finance Corporation, showing that more than 20 percent of microfinance loans are used for housing — and high levels of demand present a clear opportunity to expand into this sector.
With more commitment from donors and more flexibility and stamina from financial institutions, more housing microfinance loans could be offered to low-income households. This would help decrease the housing deficit and break the cycle of poverty for thousands of families across sub-Saharan Africa.
Habitat for Humanity’s Terwilliger Center and the Mastercard Foundation will be talking more about this topic at the upcoming Housing Finance Forum in Uganda, on July 11-12. Click here for more information.