What Are the Funding Gaps in Housing Microfinance?
Sandra Prieto serves as Global Director, Operations and Financial Inclusion at Habitat for Humanity International’s Terwilliger Center for Innovation in Shelter, where she works to promote inclusion of low-income populations in the housing finance sector. With more than 21 years of experience, Sandra has trained over 400 practitioners and authored numerous papers on the topic.
Laura Hemrika is Global Head of Corporate Citizenship & Foundations at Credit Suisse, which includes the bank’s Microfinance Capacity Building Initiative and Global Education Initiative focused on financial education for girls. Laura also serves on the board of the European Microfinance Platform and is a member of the Swiss Capacity Building Facility.
Gateway: At the European Microfinance Week later this month, you will be part of a panel on "Strategic Funding for Housing Microfinance." What are some of the funding gaps that this sector currently faces? How can different types of funding address these gaps?
Sandra: Housing microfinance, like many innovative sectors still proving themselves and embarking on the path to scale, requires a mix of funding from different kinds of donors, development-focused or patient capital providers, and investors interested in funding different parts of the work. We organized this session to showcase how different types of funding can support, in different ways or at varying stages, the growth and expansion of housing microfinance portfolios and reinforce each other. Blended capital is key to continue building and expanding housing microfinance portfolios; it helps spur innovation to support low-income households so that they can improve their housing conditions.
Laura: Different types of investors have an important role to play in specific contexts to help “graduate” the sector along the steps towards maturity. At an early stage, if housing finance is new to a financial institution, traditional grant capital can be very valuable for doing market research, initiating pilots or providing technical assistance for training or further product development to prepare for scale.
Later on, when trying to get to scale, investment capital that considers the larger loan sizes and longer tenors that characterize housing finance compared with traditional microfinance products, is needed. In specific geographies where housing finance for low-income people is still relatively small with little investment, such as in sub-Saharan Africa, more risk-tolerant investment capital would help scale or serve as a demonstration effect and a strong signal to crowd in more mainstream investors.
Grant or innovation capital could also be used to test and develop new housing-related business models and innovations such as more environmentally friendly or durable materials, less costly inputs or improved building techniques, or sanitation and solar solutions that might revolutionize housing and shelter at the base of the pyramid.
Donor funding is critical to unlock new markets.
Gateway: Donor funding seems to play a critical role in housing microfinance. Can you tell us why?
Sandra: Donor funding is critical to unlock new markets. From our experience at Habitat’s Terwilliger Center, we have found that financial institutions that are either market leaders or strong competitors are the likeliest to take the risk of adding housing microfinance portfolios. But in many cases, they lack the knowledge needed to tailor microfinance products to the needs of low-income clients.
That is why donor funding for technical assistance is very important to support them in developing or refining existing housing microfinance products. Thanks to donor funding, we have been able to provide technical assistance to many financial institutions, helping them to grow and expand their housing microfinance portfolios, as well as increasing the appetite for such products by other strong competitors, and even new entrants into the market.
Gateway: Can you provide some examples of the type of technical assistance that is needed to support housing microfinance?
Sandra: Technical assistance can help financial institutions to develop housing microfinance products by supporting activities related to market research, product design, processes and procedures review, piloting implementation, and marketing and promotional strategies. In addition, technical assistance can also support financial institutions on how to design non-financial construction support services.
Laura: These support services are key as they provide the end clients with the information they need on how to build safe resilient housing, using the correct amount and type of supplies and information on where to procure them. This benefits both the lending institution and the client, as well as the suppliers, local construction specialists and the overall local building ecosystem. Exciting new developments are also taking place in integrating technology solutions for this knowledge building and sharing.
In addition to developing expertise and products at the financial institution level, donor funding can also play an important catalytic role in enabling investment capital. Technical assistance given to financial institutions can be an important risk mitigator, improving their investment-readiness and risk profile. In addition, donor funding or other risk-tolerant capital could also be used at the investment level, along-side investment vehicles to provide guarantees or first loss capital.
Gateway: Can you share some examples of successful cases of investments which have helped with the scaling up of housing microfinance portfolios?
Sandra: The closest example is the Habitat for Humanity’s MicroBuild Fund, which is the first housing-focused microfinance investment vehicle dedicated to helping low-income families. The fund lends to microfinance institutions, which in turn, provide small loans to families to build safe, decent and durable homes as their finances allow. The fund has grown rapidly and has provided access to better housing for more than 415,000 people. As of June 30, 2017, the MicroBuild Fund has approved $90 million across 49 institutions in 28 countries, of which $74.3 million has already been disbursed to 42 institutions in 25 countries.
In addition to lending, we have been able to unlock funding from donors such as Swiss Capacity Building Facility and Hilti Foundation, to provide technical assistance to the investee institutions, resulting in products that are reaching scale.
Another example is the “Building Assets, Unlocking Access” project implemented in partnership by Habitat for Humanity’s Terwilliger Center for Innovation in Shelter and the Mastercard Foundation. The Sub-Saharan Africa housing deficit and the failure by the financial sector to respond to it were at the core of the partnership. This project has supported five financial institutions in Kenya and Uganda to develop housing microfinance products that can have the potential to reach scale. To date the project has reached over 42,000 households with housing microfinance loans, more than $33 million in capital has been mobilized, which has impacted around 210,000 individuals. These examples show the potential that diverse sources of funding have in expanding housing microfinance markets
There is a tangible opportunity for donors and investors to support the expansion of housing microfinance, a still nascent, but promising subsector within the microfinance industry.
Gateway: What advice would you give to donors and investors interested in supporting housing microfinance projects?
Sandra: There is a tangible opportunity for donors and investors to support the expansion of housing microfinance, a still nascent, but promising subsector within the microfinance industry. The growth trajectory and performance of housing microfinance portfolios is a positive sign, with housing portfolios often performing even better than the general loan portfolios of financial institutions. Donors and investors can learn from existing cases and explore ways to initiate or to expand their involvement in funding housing microfinance portfolios directly or some components that can further support the expansion of such portfolios.
Laura: I would also add, that it is key to be clear on your impact goals. One housing or home improvement loan may in fact have many social, health, and empowerment benefits for entire families or communities which may not be reflected in the number of loans, which may appear small in comparison. Growth, therefore, may also appear slower than hoped – patience and perspective are needed! Effective impact measurement is important here.
Finally, it is important to remember that housing portfolios, despite their slightly different nature and potentially stronger performance compared to the general portfolio of a financial institution is still, from an investment perspective, linked to the credit risk of the financial institution as a whole and its national context. Balancing the analysis of the housing portfolio strength and performance, with that of the financial institution and its systems and processes (IT, management buy-in, etc) need to be considered alongside each other.