CIVIS 32978 CitiesAlliance C i t i e s W i t h o u t S l u m s Issue 4v April, 2003 Shelter Finance for thePoor Series Shelter Finance that built their success on providing working capital loans to the urban poor, for the Poor Series and are now looking to expand and Synthesis diversify their products.To date, few of these experiences had been viewed Series Introduction through the prism of scale and sustainability.This is the framework From shacks in the applied to five case studies examined shantytowns of Lima, Peru, to under this initiative: Mibanco in Peru, tin-roofed mud huts in the SEWA in India, FUNHAVI in Mexico; a slums of Gujarat, India, wholesale fund facility in Ecuador, and the enabling environment for shelter insecurity of tenure and finance in Kenya.This synthesis paper uneven income streams force identifies emerging policy " the poor to build their homes recommendations on taking housing The objective of the Series is tentatively, one wall at a time. finance for the poor to scale. Yet the poor lack access to to look at shelter financing in financial institutions and The objective of the Series is to look at shelter financing in practice through the practice through the prism of financial products tailored to prism of scale, sustainability, and the way they build.This, outreach to the poor, and learn about scale, sustainability, and out- despite the fact that in so best ways to encourage and promote this many developing cities emerging practice. reach to the poor, and learn around the world a majority of the population lives in Introduction about best ways to encourage slums--60 percent of Nairobi's population, 82 percent of This paper makes three central points: and promote this emerging Lima's population--and that I) There is strong demand from poor " practice. most housing is built people for housing finance services tailored to the way they build. informally and progressively. II) Lessons are emerging in large part The Cities Alliance launched the Shelter from microfinance institutions Finance for the Poor Initiative to focus building on earlier successes with on the still nascent practice of financial working capital loans, and institutions providing housing finance to innovating with new housing loan poor clients on commercially viable products. terms.These loans are distinct from mortgages in that they are typically not III) The large potential for achieving for the purchase or construction of new scale and sustainability can be units, but rather for home improvement realized if financial institutions, and progressive building.They are being governments, and donor agencies offered as a new product line largely by a work in concert. generation of microfinance institutions CIVIS Shelter Finance for the Poor Series Box 1. The Five Cases in the Shelter Finance for the Poor Series1 Mibanco, Peru.A commercial regulated bank, Mibanco is Latin America's second largest microfinance institution with over 70,000 active clients, profitable and in operation since 1972. Half of its clients are women. Mibanco launched Micasa (my home), its home improvement loan program in the middle of 2000, initially as a pilot through four branches.Within 12 months, Micasa had 3,000 active clients, an outstanding portfolio of US$2.6 million, and was profitable, generating almost $16,000 a month in incremental net " income.2 It anticipates that these loans will grow to 50 percent of its overall There is strong demand portfolio within the next five years. Mibanco is part of the ACCION network of 27 financial institutions in Latin America and Africa. from poor people for housing FUNHAVI, Mexico. FUNHAVI is a non-governmental organization focused on finance services tailored to a single loan product: housing microfinance loans.Affiliated with Cooperative Housing Foundation, an international network of housing finance institutions, " the way they build. FUNHAVI has been in operation since 1996.As of October 2001, it had 1,300 active clients of whom approximately 40 percent are women, an outstanding portfolio of $1 million, and was operationally sustainable and moving towards financial sustainability. SEWA Bank, India. SEWA Bank was established as a cooperative bank in 1974, with initial share capital contributions from 4,000 members, all very poor women belonging to the Self-EmployedWomen's Association, a registered trade union.The bulk of SEWA Bank's capital comes from member savings.As of January 2002, the Bank had 3,700 loans with a portfolio of almost $1 million outstanding in home improvement and infrastructure loan products. This amounts to 40 percent of SEWA Bank's total portfolio. Ecuador.This case looks at the early experience of a demand-led subsidy program funded by the Government of Ecuador and the Inter-American Development Bank to involve non-bank financial institutions and private commercial banks in providing financial services to poor, low- and middle- income households. The Policy Framework, Kenya.This case analyzes the legal, regulatory and policy framework for housing finance loans in Kenya, to understand the barriers faced by financial institutions that have been trying to provide this service for some time with limited success, and to extrapolate policy issues and recommendations that are applicable to many developing countries. 1It is important to note that the cases were not selected a priori as "best practices", but were selected by their networks as those with experience worth documenting, and those willing to subject themselves to public scrutiny, irrespective of the final analysis results. Full case studies as well as summary notes are accessible on www.citiesalliance.org. PAGE 2Henceforth, all dollars, unless otherwise indicated, are US dollars. 2 CIVIS Shelter Finance for the Poor Series I. Demand for Morocco Two surveys found that 88 percent of households have or Housing Finance are planning a productive activity in is Strong the home, and more than 83 percent of households are willing to In 2030, there will be an additional 2 take a loan to finance their home billion poor people living in urban areas, improvement projects. Ninety-two as the world is urbanizing at a rate percent of urban and 94 percent of " unprecedented in history. It is estimated rural households constructed their Lack of access to formal that there are currently some 840 own homes without access to million slum dwellers--without a formal finance.6 sources of finance and house- significant shift in policy approaches, this figure will double within the next 20 Poor urban residents identify their most hold credit is emerging as one years, with the bulk of this urbanization important needs in order of priority as of poverty occurring in Africa and Asia.3 (i) lack of jobs, (ii) inadequate housing, of the most significant obsta- Demand for housing and housing finance and (iii) water supply.7 Lack of access to will increase, as illustrated by the formal sources of finance and household cles to the reduction of urban following examples: credit is emerging as one of the most significant obstacles to the reduction of Peru Eighty-two percent of the 8 poverty, hampering not only million people living in greater Lima urban poverty, hampering not only the are classified as poor.At least half of improvement of shelter conditions, but the improvement of shelter poor households and 60 percent of also local economic development. the poorest households express a conditions,but also local eco- strong desire to expand or improve II. Emerging their home within the next 12 " nomic development. months. Only 10 to 15 percent are Financial Sector borrowing from formal or informal Responses sources.4 Innovations in providing shelter loans on Indonesia In 2000, the country's commercial terms to poor people are urban population of 85 million emerging largely from private financial already represented 40 percent of institutions, many of which originated as the total. By 2010 it will represent microfinance institutions.These 50 percent, with 120 million institutions are a heterogeneous set of people.Annual projections for players comprising private commercial housing needs for the next 10 years banks, credit unions, non-bank financial are approximately 735,000 new intermediaries, housing finance units and an additional 420,000 in companies, and non-governmental need of improvement.An estimated organizations.Their basic lending 70 to 80 percent of all housing in methodology has been to offer small Indonesia is constructed informally working capital loans, and reward good and incrementally, with minimal repayment behavior with access to access to formal financial markets.5 increasingly larger and longer-term loans.The clients of the early 3 Gelbard, Haub and Kent, 1999. 4 Brown and Garcia, 2002. 5 Indonesia: Housing Microfinance Project Concept Note, 2002,World Bank. 6 Davis and Mahoney, 2001. 7 African Population and Health Research Center, 2002. PAGE 3 CIVIS Shelter Finance for the Poor Series Box 2. The Clientele Maria, a market vendor living in a poor barrio south of Lima built on "invaded" land, borrowed 2,000 soles ($571) from Mibanco over 12 months for her home. For more than five years, Maria had been saving what she could out of her monthly income of $150 to buy the bricks needed to convert the walls of her two-room home from particle board and to add rooms on the back of the house for her children. She applied for the Micasa loan so that she could finish buying the materials and pay for the construction labor. In applying for the loan, Maria " consulted with friends and neighbors to find a contractor with a good reputation. The few impact evalua- However, when the contractor started building, he realized that the soil on Maria's lot was unstable and needed significant reinforcement to support the weight of the tions conducted of shelter new walls.To cover the additional construction costs, Maria borrowed from family members and a local moneylender. Seven months after taking her Micasa loan, finance point to positive Maria now has encased her original two rooms and kitchen in brick and has installed a cement floor.The walls of the new rooms are complete, but they still " results for the poor. lack a roof and solid flooring. Maria has repaid her family members and the moneylender and has five payments left on her Micasa loan.When she finishes repaying her existing loan, she plans to take another to continue work on the additional rooms and begin replacing the tattered zinc and wood panel roof. Brown and Garcia,2002. generations of such institutions are wage of $125. Less than 1 percent investing significant portions of their had accessed formal finance prior to longer-term and larger loans into home borrowing from FUNHAVI.9 improvement. SEWA Bank's clients are all poor These financial institutions describe their self-employed women-- clients as the economically active poor in predominantly street vendors, laborers, or home-based workers. In the informal sector.They are largely 1998, an estimated 76 percent of serving their existing poor clients with SEWA borrowers had annual this new loan product, and most provide household incomes below $415 and housing loans as a reward for good past half of these had annual incomes performance on microenterprise loans. below $276.10 As illustrated by the following examples, institutions devise their own indicator Ninety-five percent of the clients of for client poverty levels: CARD, a commercial bank in the Mibanco's clients' incomes hover Philippines were earning below the around and below the poverty line. poverty line, with a weekly income The poverty line indicator of gross not exceeding $13.11 national income per capita was $175 per month in 2000.8 The few impact evaluations conducted of shelter finance point to positive FUNHAVI in Mexico serves clients results for the poor.An evaluation of who earn between two and eight Plan International's Credit for Habitat times the local monthly minimal 8 Brown and Garcia, 2002. 9 Daphnis,Tilock,Anderson and Fulhauber, 2002. 10The Center for Urban Development Studies, Harvard University Graduate School of Design, March 2000. 11 PAGE Ibid. 4 CIVIS Shelter Finance for the Poor Series programs in Bolivia and Guatemala sturdier roof, walls, floors, or a to their borrowers' loans. showed that clients invested their water, sewage or electrical SEWA Bank's housing products $200 to $800 loans in roofing, walls, connection, latrine installment, or an do not diverge significantly from floors, tiling, water, sewage and additional room--rather than to its microenterprise loans, and in electrical connections, and additional purchase or build a new home. It is a fact most of the latter can be used rooms. Seventy-eight percent of variant of the working capital loan for housing as well.The housing clients said that home improvements technology with the following loans are longer-term (60 improved family health.12 Clients with distinctions: longer terms, larger months compared with 35 Grameen-financed homes, equipped amounts, lower interest rates, months) and cheaper (14.5 with Grameen's construction adapted loan appraisal techniques, percent per year compared with standards of cement pillars and and no differentiated collateral or 18 percent) than microfinance sanitary latrines had 50 percent fewer service delivery channel, as illustrated working capital loans. Just as for incidences of illnesses than those by the examples below: microenterprise loans, clients are without Grameen houses.Their Mibanco's housing loan product required to save for at least 4 to 6 houses suffered far less structural differs from its microenterprise months if the loan is non- damage during the devastating floods loan in the following four ways: a collateralized, or provide of 1987 and thereafter, compared lower annual interest rate, longer informal collateral such as with non-Grameen homes.13 An terms (up to 36 months household assets, jewelry, or co- impact assessment of SEWA Bank's compared with 24 months), guarantors. SEWA prefers that slum-upgrading program that slightly larger ($916 on average the assets backing the loan be included progressive housing loans, compared with $500), and also registered in the woman's name. reported increases in literacy (school available to a new client group of The product is provided by the children enrollment), productivity low-income salaried workers same staff who handle all of (increase in number of working such as bus drivers and school SEWA Bank's other loan and hours), income, health (lower teachers. In terms of similarities, savings products. incidences of illness and thus lower it relies on the same informal FUNHAVI's only product is health expenditures), and increased collateral of household assets and home improvement loans. Loan marriage opportunities, higher status, co-signers used for terms range from 6 to 36 months and respect in the community for microenterprise loans, despite but average 20 months, loan women borrowers.14 In sum, housing the mass land-titling program amounts range from $500 to finance loans serve poor households, that has taken place in Peru. $2,500 and average $1,600. Co- and help them improve their Mibanco found that land titles are signers serve as the guarantors. livelihoods. expensive to use as guarantees, Part of the loan is issued as and that poor clients do not want vouchers to purchase Housing LoanTerms, to use title as collateral for a less construction materials from Conditions, and Service than a $1,000 loan. Mibanco uses specified wholesalers. FUNHAVI the same staff to provide housing Delivery Innovations earns 11 percent of its revenue loans and, similarly, does not from purchasing construction The most significant finding in terms couple loan services with materials at wholesale prices and of achieving scale is that housing technical assistance or selling them to clients at retail finance loans are in essence a variant construction advice to clients. prices. In contrast to the service of well-honed working capital loan Engineers found no qualitative delivery model of Mibanco and products innovated by microfinance differences between the homes of SEWA Bank, FUNHAVI requires institutions.The product is distinct Mibanco loan clients and those of that all borrowers purchase from mortgages in that it is typically other institutions that tie materials from suppliers it used for housing improvement--a construction advice and assistance specifies and receive construction 12Plan International, 2001. 13The Center for Urban Development Studies, Harvard University Graduate School of Design, March 2000. 14Daphnis,Tilock, Chandy and Fulhauber, 2002. PAGE 5 CIVIS Shelter Finance for the Poor Series assistance that it provides. Also, the basic lending methodology loans account for approximately 7 rewards clients' good repayment percent of BancoSol's portfolio in CARD Bank's (Philippines) performance by providing access to Bolivia.They represent 6 percent of average housing loan amount is longer-term and larger loans. Mibanco's current portfolio, but are $349 compared with its average Adjustments to the lending expected to grow to as much as half microenterprise loan of $103. methodology are essentially variations in a few years.The percentage of Microenterprise loan terms range of microfinance institutions' tested Grameen Bank's portfolio in housing from 25 to 50 weeks, compared financial product. One of the loans is 6.7 percent, with a total with 50-week housing loan variations is that many of the dollar portfolio of more than $620 terms. Housing loans are available to clients with a solid institutions offering this product million. Grameen disbursed 317 repayment record with CARD, undertake a quick assessment of the housing loans in its first year (1984) and with a minimum year-and-a- intended construction proposal to and by November 2002 had half savings record. minimize the risk of unfinished disbursed 556,600 housing loans.17 As construction, and several are training of February 1999, CARD's total Grameen Bank's (Bangladesh) their loan officers in construction amount of loans outstanding was loans are available to its clients pricing and techniques to better $2.2 million, of which 18.4 percent with a good repayment track assess and monitor housing were housing loans.18 For these record, and loans are available for improvement loans. In Mibanco's institutions, and for the majority a range of activities from home experience, adding a home entering this market, housing loans repair to home construction or improvement loan product was easier are a growing segment of the land purchase. Loan amounts and than originally anticipated. This portfolio. terms are larger than for the finding is perhaps the most important microenterprise loans, interest one in terms of inspiring more retail Financial Sustainability rates are lower, and a member microfinance institutions to start must provide legal At this point, it is difficult to make a adding this product to their existing documentation of land ownership firm assessment of the profitability of mix of services for poor clients. when a house is to be built. housing finance to the providers, While borrowers are responsible especially given the novelty of these Growing Portfolios for the design of the house, it loans as a specific product line.While must meet minimum Grameen Although most microfinance many financial institutions recognize health and safety standards, such institutions have only recently begun that an increasing proportion of their as having a pit latrine.15 to offer housing loan products, the loan portfolios are being invested in number is increasing.A study funded housing, very few maintain To summarize, the key finding is that by the International Finance disaggregated portfolio data.The there are more similarities than Corporation (IFC) identifies 141 Cities Alliance case studies of differences in terms of the basic institutions providing shelter finance Mibanco in Peru, FUNHAVI in principles underlying original loan products to the poor.16 And Mexico, and SEWA Bank in India are microfinance working capital loans: while the scale of operations is still the first to use an analytical loans remain uncollateralized, savings small given its newness, it represents framework of scale and sustainability remain important, women have a a growing portion of the portfolios. to assess housing finance loan significant presence in the loan Among the 27 financial institutions in products.Although the sample is portfolios, and formal land title the ACCION network, 7 have small, these three case studies (distinct from tenure security) is not housing portfolios totaling almost indicate that financial institutions can important for institutions to offer this 10,000 active clients and $20 million provide this service on commercially variant of a housing loan product. in outstanding balances. Housing viable terms. 15The Center for Urban Development Studies, Harvard University Graduate School of Design, March 2000. Escobar, 2002. 16 17The Center for Urban Development Studies, Harvard University Graduate School of Design, March 2000; Grameen Bank Monthly Update, November 2002. PAGE 18The Center for Urban Development Studies, Harvard University Graduate School of Design, March 2000. 6 CIVIS Shelter Finance for the Poor Series Mibanco The institutional impact and financially stronger now than 15 of Micasa after 12 months has been years ago.When Mibanco decided positive, with almost 3,000 clients, a to offer its Micasa housing finance high-quality albeit young portfolio, loans in August 2000, it had already with the portion at-risk greater than established itself as one of the largest 30 days of only 0.6 percent. Micasa microfinance institutions in Latin broke even on a cash-flow basis, America with nearly 70,000 active including the initial investment in clients, an outstanding portfolio of " adjusting the management $45 million, and net income of $1.2 Although most microfi- information system within nine million. It could thus demonstrate months, and, if performance positive results on the Micasa nance institutions have only continues at present levels, is housing portfolio within the first 12 expected to generate a return on months. recently begun to offer hous- loan portfolio of between 7 and 9 Product innovation in percent, compared with its overall community-led low-cost ing loan products,the number return on loan portfolio of 3.4 housing construction, percent. " engineered by community-based is increasing. FUNHAVI After six years in organizations such as SPARC in operation, FUNHAVI is India, and the South African operationally self-sufficient and Homeless People's Federation, moving towards full financial where poor communities are sustainability. building homes at a significantly lower cost than comparable houses SEWA Bank SEWA Bank is in the local market. profitable and has been in every year since 1998, with small operating Joint ventures between losses reported in 2001. It has had a housing institutions and correspondingly positive return on financial institutions, as assets except for 2001. It should be illustrated by Intermediate noted that these figures include Technology Development Group SEWA Bank's total portfolio, since (ITDG), an international NGO and the portfolio was not disaggregated NAHECO, a group of community- for housing loans, which account for based organizations, working an estimated 40 percent of the total together in Nakuru's informal portfolio. settlements in Kenya, where ITDG has developed a low-cost house and Moving to Scale NAHECO provides business and housing loans towards acquisition of The potential for scaling up housing these homes.19 finance for the poor is reinforced by the following converging developments: Entry of traditional commercial banks and credit Product innovation in housing unions who find that the longer finance by a generation of terms, larger amounts and, at times, microfinance institutions that some form of collateral backing the has understood delivery of other loan are closer to their comfort financial services to the same zone than traditional clientele, and that is institutionally 19Brown,Tilock, Mule and Anyango, 2002. PAGE 7 CIVIS Shelter Finance for the Poor Series microenterprise loans. Examples private sector institutions, often without include Banco del Desarrollo in national and local government or Chile, Capital Bank in Haiti, and external donor support.This section Banco Caja Social in Colombia. outlines some policy recommendations to governments and funding partners Governments seeking about how best to leverage their solutions to chronic housing comparative advantages to support problems, and a dearth of public sound financial institutions in order to " finance to perpetuate the social Governments play a housing model of subsidy provision reach scale and sustainability in for each fully constructed unit.This delivering housing finance services to unique role in creating an is in addition to disenchantment the poor. with the limited scale and mis- enabling policy and regula- targeting of such efforts. Recommendations to Governments on Setting tory environment for finance Entry of private developers, the Policy and Regulatory such as Argoz in El Salvador, which is subdividing privately owned urban Framework institutions that would like to plots of land located on the outskirts Governments play a unique role in of San Salvador and other urban creating an enabling policy and provide housing finance serv- centers, leasing with an option to regulatory environment for finance " buy individual lots to low income institutions that would like to provide ices for the poor. families, providing long-term housing finance services for the poor. financing, and providing limited Demand for such services will be advice to families and the new severely constrained if the poor are not settlements on obtaining access to allowed to build, or live in fear of their basic services.20 homes being razed to the ground; and Most importantly, client demand the same holds true for supply of for services and demonstration services if financial institutions are that they are creditworthy and restricted by legal constraints or fail to a potentially profitable large innovate because there is no competition segment of the population. in the market. Policy debates regarding the enabling environment for microenterprise finance focus on the III.What Role for financial services legislation and Governments and regulation adopted by the national government. Issues such as minimum Funding Partners to 21 capital requirements, depositor Assist this Emerging protection, usury laws, degrees of Industry? intermediation allowed, ownership structures, and institutional soundness A key point to note is that microfinance and sustainability are seen as the key methodologies and the financial policy levers available to governments to innovations discussed in this note were, influence and control the development and continue to be developed largely by of the sector.All of these issues are relevant for housing finance. But in 20Ferguson and Haidar, 2000. 21The term "funding partner" is applied to a broad category of organizations such as bilateral and multilateral aid agencies, private philanthropic foundations, social venture funds, and private investors, among others, that provide PAGE funds to microfinance institutions. 8 CIVIS Shelter Finance for the Poor Series addition, the enabling environment despite it being the most common their lending to higher risk also encompasses issues that affect form of home construction for the populations, and investing in safer poor people's ability to buy land, poor.These codes limit the poor's treasury bills instead. The case of obtain legal rights to that land, and demand for financial services--they Ecuador, where the government is build a home upon it.22 Specifically, fear that their out-of-code structures providing a one-time subsidy to poor governments should focus on the will be destroyed and so prudently families for home improvement, following steps to set the proper limit investment in them.The Kenyan raises the question of whether these policies: Banking and Building Societies Act subsidies are not in fact stifling the explicitly forbids financial institutions emergence of private sector 1. Set a conducive from lending for plots of land with no responses to demand as illustrated by macroeconomic financial and or partially constructed housing on it. Mibanco, Sewa Bank and FUNHAVI. regulatory framework for The Governments of Indonesia and housing finance. Macroeconomic South Africa, on the other hand, have The poor are able to service their stability and sound financial sector developed comprehensive housing loan payments since housing is a policy remain important policy strategies that support productive asset for them--30 to 60 preconditions for the development of commercially based housing percent of housing finance clients are sound and sustainable financial microfinance programs as one of the engaged in a home-based income- institutions, and this is as true for tools for housing finance expansion. generating activity.A survey of clients those focused on the poor. Bolivia set participating in SEWA Bank's slum a precedent that enabled the rapid 3. Recognize that the poor upgrading program reported a 35 growth of sustainable microfinance-- value access to credit more percent average increase in weekly closing down competing state-run than its cost.As the growing earnings due, in large measure, to banks operating on an unequal portfolios of microfinance institutions loans for home improvements and playing field, removing interest rate are attesting, the poor are voting with water and electrical connections.25 ceilings, and regulating providers their feet and their message is loud after their formative stage when and clear--access to quality and 4. Provide land, basic regulations are appropriate.23 Kenya efficient financial services is more infrastructure, and social illustrates how over-regulation has important than cost. In turn, services to the poor and the stunted the development of housing microfinance institutions have poorest.To the extent that finance despite there being a demonstrated that competent governments have funds to expend, it relatively mature set of interested financial institutions can provide is better to invest these scarce funds microfinance institutions.24 financial services to the poor at scale into areas that do and perhaps always and on commercial terms. Interest will require subsidies--making land 2. Recognize that poor people rate ceilings or subsidies, or "debt available to the poor, servicing it with build their houses forgiveness" policies, by national basic infrastructure such as water, incrementally, and set policies governments distort overall financial electricity, and roads, and building and regulations in accordance. sector policy and constrain the and servicing social infrastructure Building codes and financial laws are development of viable institutions such as schools and health clinics. often based on the assumption that that can operate at scale.The Donde Also, there may be necessary people acquire homes through Act in Kenya, which regulates loan exceptions to the rule of unsubsidized purchase of a fully constructed unit. terms and conditions with the intent credit when reaching out to the very For example, in Kenya, building to make loans more affordable to poorest who are perhaps better codes were designed for the poor households, is having the served with welfare programs. construction of complete homes, thus opposite effect with banks reducing making progressive building illegal, 22Brown,Tilock, Mule and Anyango, 2002.While this section draws heavily on the Kenya case study in this Series to illustrate points, the examples and points can be generalized to many countries around the world. 23See Rhyne, 2001, for more information on the Bolivian Government's role in mainstreaming microfinance. 24Brown,Tilock, Mule and Anyango, 2002. 25The Center for Urban Development Studies, Harvard University Graduate School of Design, March 2000. PAGE 9 CIVIS Shelter Finance for the Poor Series 5. Provide secure tenure for the 1. Policies initiative addressing this issue is the poor. Improving tenure rights is key Community-Led Infrastructure Work with and support those to increasing security and stimulating Finance Facility (CLIFF). CLIFF is a governments that seek to promote an improvements in housing and living new finance facility of the Cities enabling macroeconomic, standards. Households are willing to Alliance designed to increase the financial policy, and regulatory invest over 30 percent of their access of poor communities to framework for housing finance, as income to acquire land, build, or medium-term sources of capital. discussed above. improve their homes.26 Conversely, they will not spend more than 15 Provide funds for building percent of their income on shelter 2. Institutional Partners institutional capacity, not just without some assurance regarding for on-lending. Grants or cheap Select a few financial security of occupancy as owners or funds should be applied towards institutions with a proven track renters. Governments should provide initial start-up costs, operating record to partner with, placing tenure security, if as an intermediate expenditures for a limited time, and emphasis on financial step towards ultimately providing full knowledge dissemination.ACCION sustainability and portfolio legal titles.There are many examples International is planning to pilot a quality as key criteria for of intermediate tenure systems that housing microfinance loan product selection. It could be argued that led to increased investments in through several affiliated institutions, the most important factor for the housing,27 such as the Ahmedebad and then disseminate the results creation of microfinance industries in Municipal Corporation granting slum throughout its network of 27 Bangladesh, Indonesia, and Bolivia dwellers 10 years security of tenure. institutions in 21 countries to scale was the power of demonstration by As has been mentioned earlier, up the experience, with some Grameen Bank, Bank Rakyat financial institutions providing funding from the Cities Alliance. Indonesia, and Bancosol housing finance loans do not rely on respectively--they spawned Avoid conditions on funds that formal collateral such as land title to industries in their nations and can (inadvertently) reduce back their loans. Despite the inspired action abroad.As a strategic ability to experiment with significant land-titling program in choice, there is more to be gained by housing finance. Funding Peru, which issued 4 million deeds in investing limited funds in a select few agreements with microfinance four years, Mibanco only uses potential winners and demonstrating institutions often restrict support to mortgages for loans higher than impact than spreading resources microenterprise loans, and restrict $5,000, because of the high cost and indiscriminately across many. Nothing institutions from providing a wider poor clients' reluctance to use title as spreads like success. array of services to their poor clients collateral for loans that average less in response to client demand. than $1,000. 3. Instruments Practitioners are urging their funding partners to assist in building their Recommendations to Provide medium-term capital institutions and their capacity to Funding Partners to financial institutions. Financial deliver a wide array of financial These recommendations are aimed at institutions offering shelter finance services to the poor, and to not pre- funding partners on how best to use loans need access to longer-term determine or restrict the service mix their resources to support forward- sources of capital than currently they offer.28 thinking governments and financial available in most developing country institutions in providing sustainable capital markets to improve the match housing finance to the poor at scale. between their asset and liability term structures. One example of an 26Ibid. 27Durand-Lasserve, Fernandes, Payne and Smolka, September 2002. 28Brown,Tilock, Mule and Anyango, 2002; Franck Daphnis, CHF International, presentation on FUNHAVI at PAGE World Bank, March 2002. 10 CIVIS Shelter Finance for the Poor Series 4. Knowledge And perhaps most importantly, incentives to promote Support applied research and construction of affordable housing its dissemination. Many for the poor by private builders, international funding partners work to reap the benefits of in multiple countries and are well specialization and economies of placed to transfer knowledge. scale, that will in turn stimulate Practitioners have identified these financial service provision. topics as knowledge gaps: More analysis of the profitability " of this product line to make the Conclusion ...the poor are reliable clients case for its commercial viability--this is essential to Preliminary analysis of the emerging who are willing to pay the full cost stimulate the entry of more housing finance industry for the poor institutions; is demonstrating the same lesson that microfinance has taught us: the poor for cost-effective services tailored to The range and forms of security are reliable clients who are willing to " of tenure that microfinance pay the full cost for cost-effective their needs. institutions can use in lieu of services tailored to their needs. mortgage guarantees for the Pioneer financial institutions are provision of housing loans; continuing to build on their strengths The points of intersection and innovate with new product between mortgage finance offerings such as shelter finance to technology and microfinance retain and expand their clients.The lending technologies to improve initial round of innovations in this product offerings and to reach a area is likely to come from the wider segment of poor existing generation of microfinance populations; institutions. But with proven success, as is happening with the The necessity and cost- commercialization of microfinance, effectiveness of providing they will be paving the path for a technical/construction assistance whole new set of players-- to poor clients; commercial banks, mortgage finance The links between housing companies, private builders and finance institutions and local and others who typically shy away from national government initiatives-- poor people. It is our hope that they what public sector/municipal- will soon be vying side by side for level service provision can help poor people's attention and support and facilitate the purchasing power. development of housing for the poor, and of housing finance Author and Series Editor: institutions that enable them to Mohini Malhotra, Cities do so; Alliance Acknowledgments. CitiesAlliance is grateful to the technical peer group that shaped the conceptual framework and oversaw the work of the Shelter Finance for the Poor Initiative. Its members include Mahlon Barash (Plan International), Robert Buckley (TheWorld Bank),Yves Cabannes (Urban Management Programme, Latin America), Gil Crawford (International Finance Corporation), Franck Daphnis (CHF--Cooperative Housing Foundation), Bruce Ferguson (Inter-American Development Bank),Alison Paijit (United States Agency for International Development), Douglas Pearce (CGAP--Consultative Group to Assist the Poorest), Elisabeth Rhyne (ACCION International), andWarren Brown (ACCION International). Many thanks to Billy Cobbett, Peter Palesch, Mark Hildebrand, and Andrea Merrick for technical review and substantive guidancePAGEof the on all products in this Series. Dorst MediaWorks provided editing services.The Shelter Finance for the Poor Initiative is funded by Cities Alliance, CGAP, 11 IFC and USAID. CIVIS Shelter Finance for the Poor Series Bibliography Daphnis, Franck,Tilock, Kimberly, Noudehou,Alain. 2002. Evaluation: Chandy, Matthew, and Ingrid Fulhauber. LAFTO Low Income Housing Area African Population and Health Research 2002. SEWA Bank's Housing Microfinance Improvement Program. Cooperative Center (APHRC). 2002. Population and Program in India. Cities Alliance Shelter Housing Foundation International, Health Dynamics in Nairobi's Informal Finance for the Poor Series, Cities Maryland, USA. Settlements. Nairobi:African Population Alliance,Washington, DC. and Health Research Center. Noudehou,Alain. 2002. A Housing Davis, Geoff and Eliza Mahoney.April Microfinance Program for Indonesia, Brown,Warren, and Angel Garcia. 2002. 2001. Housing Microfinance:Building the prepared for theWorld Bank by MiCasa:Financing the Progressive Assets of the Poor One Room at aTime, Cooperative Housing Foundation, Construction of Low-Income Families' Submitted to USAID.Washington, DC. Maryland. Homes in Peru. Cities Alliance Shelter Finance for the Poor Series, Cities Durand-Lasserve Alain, Fernandes, Plan International. February 2001. Credit Alliance,Washington DC. Edesio, Payne, Geoffrey, and Martim for Habitat Program Evaluation, Smolka. September 2002. SecureTenure Summary Report, February 2001. Brown,Warren,Tilock, Kimberly, Mule, for the Urban Poor. CIVIS, Issue 3, Cities Nthenya, and Ezra Anyango. 2002. The Alliance,Washington, DC. Population Division of the Department of Enabling Environment for Housing Economic and Social Affairs of the United Finance for the Poor in Kenya. Cities Escobar,Alejandro. 2002. Shelter Nations Secretariat (1998). World Alliance Shelter Finance for the Poor Finance:Literature Review and State of Urbanization Prospects:the 1999 Series, Cities Alliance,Washington, DC. Practice. MEDA Consulting Group, Revision. (DRAFT), International Finance Buchenau, Juan, and Alberto de Guzman. Corporation. Rhyne, Elisabeth. 2001. How Lending to 2003. Demand-Side Subsidies and the the Poor Began,Grew,and Came of Age in Private Supply of Financial Services for Ferguson, Bruce and Elinor Haider. June Bolivia.Kumarian Press, Connecticut. Housing Finance in Ecuador:Emerging 2000. Mainstreaming Microfinance of Issues. Cities Alliance Shelter Finance for Housing. Inter-American Development SEWA. 2002. Parivartan and its Impact: the Poor Series, Cities Alliance, Bank. A Partnership Programme of Infrastructure Washington, DC. Development in Slums of Ahmedebad City. Ferguson, Bruce. Micro-finance of SEWA,Ahmedebad, India. The Center for Urban Development Housing:A Key to Housing the Low- or Studies, Harvard University Graduate Moderate-income Majority? April 1999. World Bank. 2002. Mexico Low Income School of Design. March 2000. Housing Environment and Urbanization,Vol. 11, Housing: Issues and Options.Washington Micro-Finance Initiatives.Synthesis and No. 1. DC. Regional Summaries. Development Alternatives Inc., Bethesda, MD. Frank, Daphne. 2003. A Subsidized Savings Program to Improve the Housing Consultative Group to Assist the Poorest. of Low-Income Families - the Example of April 2002. Microfinance inWorld Bank the Housing Incentive System in Ecuador. Projects:Twelve Questions About Sound GTZ, Germany. Practice, Donor Brief No. 1.Washington, CitiesAlliance DC. Gelbard,Alene, Haub, Carl, and Mary C i t i e s W i t h o u t S l u m s Kent. 1999. World Population Beyond Six Daphnis, Franck,Tilock, Kimberly, Billion. Population BulletinVol. 54, no.1. 1818 H Street, NW Anderson,Thea, and Ingrid Fulhauber. Washington DC. Washington, DC 20433 USA 2002. FUNHAVI's Housing Microfinance Tel: (202) 473-9233 Program in Mexico. Cities Alliance Shelter Grameen Bank. Monthly Report, Fax: (202) 522-3224 Finance for the Poor Series, Cities November 2002. info@citiesalliance.org Alliance,Washington, DC. www.citiesalliance.org PAGE 12