A home is generally the most important asset people will ever own. For poor families around the world, it is likely to be the only significant asset they will possess. Yet, until recently, access to housing-related finance has remained extremely limited in the developing world. Economically active poor people living in developing countries have few options when it comes to financing their housing needs. Commercial banks, unable to access secondary mortgage markets like the ones flourishing in Western countries, only extend mortgages or other types of housing loans to their wealthiest clients. In many places, non-governmental and community-based organizations (NGOs and CBOs) have stepped up and financed small housing loans for economically disadvantaged households.
In fact, many microfinance institutions (MFIs) have long observed that clients use loan proceeds to improve their living conditions. This suggests that a fundamental expectation of microfinance—that economically active poor people can finance their needs in a manner that is incremental and affordable and under conditions that allow the financing provider to cover all associated costs—has potential beyond income generating (enterprise) uses and can apply to personal asset building (housing). The emergence of housing microfinance and its rapid rise and acceptance among MFIs has shown that new and innovative solutions can stretch traditional paradigms and offer effective alternatives to the poor.
Still, housing microfinance is only now coming into its own, and much remains to be done to document its successes and shortfalls, standardize its methods, and ensure that tools and best practices are developed and disseminated. Many organizations still rely on financing that is limited, and their delivery capacity is uneven, at best. Indeed, for many poor and very poor people around the world, the only source for housing finance is the neighborhood moneylender. As we deepen our understanding and knowledge of the practice, many questions arise and needs persist.
The Housing Finance for the Poor Program strongly advises that it is critical to develop a thorough understanding of an appropriate range of housing finance products, and of the markets where these products can flourish and reach scale. We start with the premise that a useful foundation for our work lies in an “action research” approach that looks at the two basic frameworks for approaching housing loans for poor people: (1) a microfinance-based framework where housing loans are primarily based on cash flow and not backed by traditional mortgages and (2) an asset-based framework where poor families make use of the home as effective collateral, and where mortgage-type financing becomes viable.
With significant support from a major US philanthropic organization, DIG
has created the Housing Finance for the Poor Program, a program combining practical action and research. Through this learning grant, the Housing Finance for the Poor Program will engage in a concerted and comprehensive effort over four years to advance practical knowledge on sustainable housing finance for the poor. Specifically, the Housing Finance for the Poor Program will initiate a series of carefully selected activities designed to answer the following three core questions in a systematic and comprehensive manner:
What are the key products and what is the potential market for housing finance for the poor (with special emphasis on differentiating between housing finance as a consumption loan or an asset-building loan)?
Can housing finance for the poor be taken to scale and sustained?
What is the ideal policy and regulatory framework to facilitate housing finance for the poor?
Our vision for success is that, at the end of the fourth year of program implementation we will have provided the Community of Practice in housing finance for the poor—donors, policy makers and development finance practitioners—with a tangible and comprehensive blueprint for prioritizing their investments and efforts towards the promotion of housing finance for the poor. In the process, we will have assisted up to a dozen MFIs, special microfinance banks, and commercial banks in developing and testing ground breaking products servicing poor individuals in key markets worldwide. Millions of poor households worldwide will benefit from our learning initiative and gain access to new and improved housing finance services in a way that would not have been possible without this grant.
The Housing Finance for the Poor Program follows an “action research” approach in order to fulfill the initiative’s objectives. This involves two interrelated tracks:
One is hands-on “action” work in different countries to explore the various private financial products that can be made available to the world’s poor. This represents an ambitious effort to work with leading institutions involved in housing finance for the poor in order to support the development and expansion of innovative services and to affect the living circumstances of hundreds of thousands of poor people over the next four years. Partner institutions include a carefully selected mix of MFIs, banks, NGOs and public-sector organizations in the six core countries and beyond.
The other is an extensive “research” component that documents lessons learned through a far-reaching supplemental research agenda. The Housing Finance for the Poor Program and its sponsors have leveraged their extensive understanding of the housing finance field to identify partners offering the optimal blend of research innovation, knowledge, and publication for a variety of different themes.