+ 12/31/2009 
DIG will continue to further housing finance for the poor despite -  
+ 5/8/2009 
CapStone makes 1,000th Loan -  
+ 4/1/2009 
DIG presents Market Assessment and Strategic Plan to Angola Partner -  

Assessing the Environment

There are a variety of factors that a financial institution or housing-related organization needs to consider at the very earliest steps of planning a housing financial product for the poor—especially a housing microfinance one.  These issues could ultimately limit or even prohibit some the core design and implementation activities.  Therefore, they should be carefully considered before any other steps are taken.  Most microfinance institutions will have some idea about these issues, but even a slightly more thorough investigation can yield some surprises that might shape your product design.

If, after this review, your organization feels that there are few or acceptable challenges for pursuing housing microfinance or related products for the poor in your country or region, then you should get a grasp of the potential demand with a thorough market assessment.  If, on the other hand, you have identified key challenges towards developing products, there are two options: one is to team up with other institutions to argue for changes in the regulations and policy.  You might seek the help of international donors or multilateral agencies in pursing this effort.  The second—and more feasible—option involves designing a product around the current challenges.  While you still should do a market assessment, you might want to think about the design of a product that incorporates these regulatory challenges while you begin a market assessment.

What is the “environment” for housing finance for the poor?
Ideally, there should be a variety of options for the poor to be able to access housing funds that account for their repayment capacity, their housing needs, and the legal structures for their homes. This means that financial institutions should also be able to offer profitable products that target as wide a population as possible easily and flexibly while insuring the financial safety of clients and investors.  This also means that housing subsidies and property policies should support both of improvements in the living conditions of its poorer citizens, and of private sector interventions to accomplish these improvements.  From these three areas (financial regulations, housing subsidies, and property laws), the items in the following checklist constitute a rule-of-thumb for reviewing the environment for developing private housing finance products for the poor. 

Financial Regulations
Financial institutions should be able to offer a wide variety of products at interest rates and terms that are appropriate to each client, and to do so flexibly and easily.  The financial environment should be such that it removes the barriers to this occurring, and possibly even promotes it.  Some items to consider are listed here.

  • General Banking Regulations
    General and necessary regulations for insuring overall, prudential soundness of the banking sector need to be in place but should not inhibit competition and growth, such as:
    • simplified licensing of non-bank lending institutions
    • adequate consumer protections against abuse, including truth-in-lending requirements
    • the existence of credit agencies or bureaus
    • equitable and appropriate taxation policies for different financial institutions
    • adequate prudential regulations applied to appropriate financial institutions like banks but not necessarily microfinance lenders

  • Microfinance Regulations
    Check to see if current laws either directly permit microfinance lending in some form or do not explicitly prohibit it.  This may be either through regulating the institutions (through new financial institution licenses or existing ones) or the institution’s activities or a combination therein.  If the opposite is true, there is almost no point in pursuing a private housing finance solution.  Also, check to see that there are no restrictions that indirectly limit microfinance institutions or their products, including:
    • interest rate caps
    • minimum capital holdings or reserves requirements for financial institutions
    • blanket depositor protections on all financial institutions, even for non-deposit taking lenders like most microfinance institutionsany limits on unsecured lending which is what most microfinance institutions practice
    • restrictions on bank branch or office operations, like working hours or locations, that prohibit traditional microfinance lending practices
    • required registration of collateral where most microfinance institutions do not or only partially register collateral
    • extensive loan documentation and reporting requirements that are cost prohibitive for most microfinance institutions
    • restrictions on ownership, management or investor structure that prohibit foreign or non-traditional involvement, if and when the MFI might have such involvement

  • Housing Microfinance Regulations
    Microfinance allowances in commercial and banking laws sometimes do not permit loans being used for non-enterprise purposes.  Likewise, some housing policies restrict which institutions can offer financial products in the field.  An institution exploring this area should check:
    • that microfinance laws allow for housing-related microfinance products, or are not restricted to enterprise loans alone
    • how financial, banking, or housing laws specify which institutions provide housing-related financial products (including mortgages, if applicable)
For additional insight on policy and regulation, see Housing Finance for the Poor: Policy and Regulation by DIG's Dr. Carlos Martin.  For further detail on assessing the financial sector environment as well as specific countries’ regulations, see the following resources from CGAP:
Microfinance Regulation and Supervision Resource Center
Guiding Principles on Regulation and Supervision of Microfinance

Housing Subsidies
Public subsidies often compete directly with private financial services among the segments of the population that might feasibly be covered by the private sector.  Even more often, they do so in a way that does not promote good financial behavior and subsequent access to the private financial sector. So, before you start off, you should also gauge the quality, target, and structure of current subsidies since these will likely affect the choices from which your target clients will be selecting.

  • Public Subsidy Design
    Subsidies come in different forms, and certain ones are more likely to shape a potential client’s decision to take out a loan than others.  A financial institution should be aware of subsidies that:
    • involve extensive direct construction of housing for the poor (or extensive construction loans to developers who build housing for the poor) since these are likely to be given to just a small population
    • involve subsidized interest rates for housing loans since these often result in default and make it worse for private financial institutions later
    • are targeted towards their primary segment (lower-income salaried and self-employed), especially those that subsidize full house purchases or construction in ways that prevent later progressive or incremental housing that would be funded by private housing microfinance

  • Public Subsidy Effectiveness and Efficiency
    Of course, even if the subsidy appears more attractive in the short-term to a potential borrower, there might not be (and likely are not) sufficient public funds to cover everyone in the target population.  It is also possible that the funds are not being efficiently deployed.  In all cases, the financial institution should check to see:
    • what the target population for a subsidy is and whether that crowds out potential private finance products
    • how much of the target population has received the subsidy, if any
    • of those who received it, what they did with it (including whether they stopped rent payment or payment on government loans)
    • whether there is long history of ineffective or inefficient subsidies that have either ignored or left untouched the real housing demands of the poor or have created false expectations of free housing or bad financial behavior among the poor
Ironically, the less effective and efficient a subsidy is, the more likely that private housing finance is needed.  So, institutions looking to offer housing financial products (especially housing microfinance) should be especially aware of these.  For more insight into assessing the environment of housing subsidies, see Subsidizing Housing Finance for the Poor by Marja Hoek-Smit of the University of Pennsylvania’s Wharton School. A further resource is The Design and Implementation of Subsidies for Housing Finance from the Samuel Zell & Robert Lurie Real Estate Center’s International Housing Finance Program at the University of Pennsylvania’s Wharton School.

Property Laws
A third and final area to consider when developing housing finance products for the poor are the corollary property policies, laws, and local norms that might shape whether a financial institution can offer a loan to a poor borrower, and what the borrower can do with it.  In particular:

  • Ownership Laws
    Foreclosure, eviction, lien laws and all other regulations over financial obligations must be strong in order for a private financial institution to be able to make loans.  If there is no threat of losing possession for non-payment, it will be difficult to justify any product let alone maintain it.

  • Title and Registration Laws
    There are often financial regulations and housing subsidies that require clear title and registration of land and property.  This might limit the kinds of uses for loans that a financial institution could provide.  A financial institution might decide whether their products are contingent on this kind of security, or whether their products can lead to the later granting of it.

  • Construction and Land Use Regulations
    There are also occasionally restrictions on construction and home improvements that may affect what a household can do.  These are usually not enforced or are arbitrarily enforced in poor areas, but can become a problem if they are.  Building codes and zoning laws have not been a barrier to most current housing microfinance programs, though.

If you or an assisting organization have gotten a good grasp of these issues, then you’re on your way!