House in India. Photo credit: Sudipta Dutta Chowdhury, 2016 CGAP Photo Contest.
Housing microfinance consists of small, non-mortgage-backed loans offered in succession to support the existing incremental building practices of low-income populations. It can include a range of financial services that support informal shelter improvements such as home repair and expansions, addition of water and sanitation services, and energy efficiency upgrades. Housing microfinance can often work where lien-based mortgages do not, and where the improvements are undertaken in a series of small, incremental steps.
While the number of microfinance institutions (MFIs) offering housing microfinance has increased gradually over the years, a question has lingered around the possible impact of financing on the overall quality of construction applied by the client. To begin to address this question, Habitat’s Terwilliger Center for Innovation in Shelter took on the task of testing different points of comparison to determine possible connections between finance and quality of construction.
Evaluating construction quality involves looking at different aspects, with many direct and indirect influencers, such as the quality of skilled labor available in the area, access to quality material suppliers, geographic landscape, and the availability of utility connections. This being our first time conducting such an analysis, we put together a team with relevant microfinance, housing and construction engineering backgrounds to create a tool for evaluating construction quality. The tool needed to provide a balance between assessing construction essentials and maintaining the host MFI’s business model – which is primarily focused on ensuring repayment capacity and loan purpose, as opposed to getting extensively involved in the construction process.
After extensive deliberations, the team agreed to evaluate the quality of construction on the principles of quality, durability, and condition, using a scale of dangerous, poor, moderate, good and excellent. The house elements to be evaluated included foundation, walls, flooring, finishing, roofing, sanitation, water and electricity. It was mandatory that the enumerator for the study be an engineer or someone with relevant construction background. To produce information that is comparable, we decided to conduct the interviews in locations which have consistent socio-economic dynamics, assuming that the survey participants would have similar living style and conditions.
For this purpose, the Terwilliger Center reached out to one of Habitat for Humanity International’s MicroBuild partners in Sri Lanka, LOLC Micro Credit Ltd (LOMC), who offers a housing microfinance (HMF) product, to assist with arranging the interviews.
A total of 60 households were evaluated: 30 HMF clients and 30 non-HMF clients (the control group) randomly selected in the same community. were. Of these 30 in the control group, 20 had conducted home improvments in the past three years. The evaluation considered both the overall quality of the houses and the quality of improvements made in the last three years, with specific focus on the particular improvement that was financed through the MFI’s housing loan product for HMF clients.
We looked at four dynamics:
Difference in quality of overall home construction between HMF clients and non-HMF clients;
Difference in quality of recent improvements between HMF clients and non-HMF clients across three dimensions: materials, quality, and condition, as well as an average of these scores;
Difference in quality of HMF clients’ recent improvements (using the average total score) and the overall home construction quality of the non-HMF clients;
Difference in quality of HMF clients' recent improvements (using the average total score) versus the overall construction quality of their own homes.
From analysis, the following conclusions were made:
For the first three dynamics, no statistically significant difference was found in the construction quality between HMF clients and non-HMF clients. This implies that housing microfinance has a neutral impact on the quality of construction versus construction quality of other homes in the area.
For the last dynamic, a statistically significant difference was found when assessing the quality of HMF clients’ improvements in comparison to the rest of their home. Results suggested, at a 95% confidence level, that housing microfinance contributed to an increase in the construction quality of home.
This study provides some initial evidence suggesting housing microfinance is not leading to better built homes when comparing neighbor to neighbor, but is not conclusive. However, the finding that homes are not worse than their neighbors could be encouraging. The loans are not leading to a wave of low-quality building. Arguably, if borrowers are of a lower income than their neighbors, that their homes are of equal quality could be encouraging.
We know most low-income people build incrementally, so a home is often a series of interventions that lead to an eventual full and complete home. That there is a 95% confidence that financed stages are of a higher quality than previous (possibly paid for with savings alone, or by other financing) is encouraging.
We also learned about the process of conducting this type of this evaluation, the first such study conducted within the microfinance sector seeking to understand the link between finance and housing quality. A major limitation was that developing a comparison group was difficult and based on location, rather than randomization with accompanying variables like income. To ensure equality between treatment and control groups, and isolate the treatment effect, more rigorous studies are needed to validate these results.
In addition, the study provided significant insights into client behavior around construction practices, which can be useful for other MFIs offering housing products. At the Terwilliger Center we have continued to refine the Housing Quality Assessment tool and used it in the Philippines, India and Cambodia as part of our global housing product development and refinement evaluations for designing client-centric housing solutions. An improved version of the tool will be implemented in Peru with MiBanco in the coming month.
Editor's Note: In light of feedback that the conclusions were unclear, this blog post has been revised to clarify the evaluation points and the overall findings.
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