Housing microfinance: Is the glass half empty or half full?
Donors, governments, microfinance networks, and foundations have promoted housing microfinance (“HMF”) for a decade. Considerable operational experience has accrued on this practice over this time. Meanwhile, many emerging economies have grown rapidly, which has changed housing markets and the context for HMF. The moment, then, is auspicious for a re-examination of housing microfinance and its record.
How have microfinance institutions performed at housing lending? Is HMF still relevant to the enormous challenge of low-income housing and urban development in emerging countries and, if so, how can it be expanded to massive scale?
This paper answers these questions by analyzing recent survey data on housing microfinance, examining the housing economies and HMF practice in three countries that display a wide range of experience (Peru, Mexico, and Brazil), and profiling cutting-edge cases of market-based low-income housing delivery that include HMF. This paper mainly deals with Latin America, where HMF has advanced the most, but also draws on evidence from other regions. A short description of the emergence of HMF prefaces this investigation:
HMF has become “hot” largely for two reasons:
First, HMF has the potential to serve most low and moderate-income households. These families neither want nor can afford a large long-term traditional mortgage to purchase a developer-built complete unit. Instead, these households build progressively, by acquiring and upgrading title to a lot, building a makeshift shelter, replacing this makeshift shelter with permanent materials and expanding it, and lobbying government for services (Ferguson, 2003; Greene and Rojas, 2007). A series of small short-term loans can fund the steps in this progressive housing process with payments affordable to households.
The prototypical HMF loan consists of a small, short-term unsecured credit (US$500-$2,500 with a term of two to five years, depending upon context) to a homeowner to expand or remodel their informally-built house. Sometimes, microfinance institutions (MFIs) offer somewhat larger loans (US$3000-$7000) at longer terms (five to 15 years) for a family to construct a new home (often on a lot that they already own), occasionally secured by a mortgage. Small home improvement credit, however, is the main market for which microfinance institutions have created a housing microfinance product.
However, small credits could also finance a wide range of other housing investments useful to low and moderate income households. These include lot purchase, title regularization, construction of a floor/joist/roof structure that the home owner builds out, adding r ental units onto the homeowner’s property through horizontal or vertical expansion. individual and communal infrastructure, the vertical or horizontal buildout of a developer-built core unit or humid core (a bathroom/kitchen area containing plumbing and electricity) in pre-programmed steps, or the completion (adding fixtures, cabinets, electrical equipment, additional plumbing, painting etc.) of an unfinished condominium shell in a high-rise building. This paper will mainly deal with the supply and demand for small home improvement loans, which has become virtually synonymous with “housing microfinance.” However, these other possible applications of housing microcredit will be considered when strategizing how to expand HMF to relevant scale.
Social support programs joined with GDP growth have stimulated a rapid increase in household income of families in the bottom half of the income pyramid in many emerging countries over the last decade -- including Peru, Mexico and Brazil. This paper will also examine how this rise in family income has diversified housing investment of low/moderate income households beyond small home-improvement and the implications for HMF.
Nonetheless, the potential market for sm all home-improvement loans remains huge and, often, relatively uncontested; 50% to 80% of the population in most emerging countries build their homes progressively. Market studies typically show that one-quarter of these families want and can afford a small home-improvement credit at any one time. Although each individual project is small, the huge numbers result in an impressive total market potentially financed by such credit -- $331.8 billion worldwide according to the World Resources Institute (see their paper in this issue of GUD magazine). Traditional mortgage finance institutions have typically lacked the low-cost community-based systems necessary to lend to this market. Hence, microfinance institutions have frequently faced little institutional competition in extending HMF to these families.
A second reason that HMF has become a developmental “hit” involves its fit with the microfinance industry. Small home improvement credit offers a useful product that microfinance institutions can add to their core business – micro-enterprise lending. MFIs can successfully apply their existing loan methods and installations for micro-enterprise loans to small home improvement loans with little or no modification. Roughly 20% of funds nominally borrowed for micro enterprise go to housing improvement in the absence of an explicit housing product.
HMF also fits well with the transformation of many MFIs from NGOs into financial institutions that are regulated because they take deposits from the public. The aspiration to own or build a house has historically proved the main motivation for families to save in developed countries (where “savings and loan” societies have traditionally linked these functions) as well as emerging nations (where savings clubs and housing cooperatives have emerged for the same purpose). Hence, adding a home-improvement credit as well as a savings products makes sense for MFIs seeking to take deposits – the least-expensive type of funding -- and become regulated financial institutions.
Small serial credits largely for building materials to improve a homeowner unit – which has come to be called “housing microfinance” – began expanding a decade ago mainly because of these synergies with the microfinance industry. By this time, roughly 200 microfinance institutions worldwide had become commercially viable (Robinson, 2001). Increasing competition had caused microenterprise loan markets to tighten in some countries (e.g. Bolivia, Bangladesh). Diversifying into home-improvement lending and savings products appeared useful next steps for leading MFIs and their networks. Major figures – such as Hillary Clinton – lauded the achievements of the “microfinance revolution”, and the concept of “housing microfinance” enjoyed legitimacy by association.
In addition, a series of events, papers, and a book (Daphnis and Ferguson, 2004 – republished in Spanish in 2006) on housing microfinance during this period disseminated awareness of HMF throughout the international housing community and microfinance networks, and brought these two audiences into communication for the first time.
This conjunction of factors pushed and pulled the microfinance industry into low-income home lending. The next two sections of this paper assess how MFIs have done at this task.
Summary data on the current state of housing microfinance within the microfinance industry
Two recent studies present comprehensive empirical data on the state of housing microfinance. Both focused on Latin America, the region where this practice has advanced the most. The first – by Accion (presented in Messarina, 2006; and Merrill and Messarina, 2006) – surveyed 10 of its regional affiliates in Latin America. The second – by Micro Service Consult Gmbh (GmbH, 2005) – was commissioned by Housing Microfinance Ltd. a financial group planning to issue securities to finance low/moderate income housing in order to assess market demand from MFIs for funding. The GmbH study surveyed 25 of the top MFIs in Latin America on their housing credit products and plans.
Although conducted independently for different purposes, these two studies arrive at highly-similar conclusions. Discussing each in turn:
From 2002 to 2005, the HMF portfolio of the ten Latin American Accion affiliates surveyed grew from US$38 million to US$117 million, and home improvement lending increased from US$20 million to US$74 million. Interestingly, almost as many of these Accion affiliates offered home purchase loans (70%) as home improvement loans (80%), indicating that microfinance institutions (“MFIs”) are seeking to serve moderate-income households that buy a new unit as well as low-income households that upgrade a lower-cost housing solution.
The HMF portfolio grew from 12% of the total portfolio of these 10 microfinance institutions to 19%, but still represented only 9% of the total network portfolio of Accion. Repayment rates on the HMF portfolio of the surveyed MFIs were superior to that on microenterprise lending. This datum bears out the impression of many microfinance lenders that households prioritize repayment of housing credit over microenterprise credit.
These 10 MFIs surveyed by Accion stated that HMF loan demand is immense. Most of these MFIs do not market this product, although some competition is beginning to emerge from building materials suppliers and finance companies. This finding jibes with the conclusion of a market study conducted in three Mexican cities (Capital Advisors, 1999) that bordered the US that the effective demand for HMF totaled four times that for micro-enterprise finance in this same geographic area. Fifteen percent of Mexican households surveyed by this study both wanted and could afford a small loan at market rates with short terms for home improvement. The general sense of lenders is that roughly half the households of Latin American countries are interested in improving or adding to their homes, although only about a third of this half of the population can afford market-rate finance in a given moment.
The Accion study concluded that HMF has proved useful to build customer loyalty, but is not a core product of these ten MFIs. The core mission of these MFIs continues to be fostering economic development through micro-business lending. In general, these MFIs do not view housing as an integral part of this core mission.
The GmbH study showed that 17 of the total 25 MFIs surveyed had products for low-income housing, while the remaining eight were seriously considering developing such a product in the short run. These institutions had extended a total $84.2 million for housing loans. Overall, housing loans represented 8.8% of the total micro loan portfolio of these MFIs. Housing credit accounted for over 15% of the portfolio in only three of these MFIs. Despite this small share, many of these MFIs valued housing credit because it fits with well within their overall business strategy. HMF helps to diversify their portfolio, and meets the housing credit need of their existing client base of micro entrepreneurs.
All 17 MFIs with a housing product surveyed by the GmbH study make loans for home improvement, but only nine offered finance for purchase or construction of new homes. Maximum maturities lie between 10 and 20 years for MFIs offering new home loans and between two and five years for MFIs offering home improvement loans. The average loan amount was $1,925. Almost all institutions funded their housing loans at least partly from their own equity. Eleven of these 17 institutions used credit lines mainly from national public banks and international development banks for refinancing their housing portfolio.
The institutions surveyed by the GmbH study were interested in roughly doubling their housing credit volume over the next three years, although their core mission continued to be micro-enterprise credit. This expansion would raise their housing loan volumes from 8% to 10% of their total loan portfolio to 15% to 20% – a significant increase but hardly a dramatic one relative to the immense demand for this product.
These MFIs surveyed by GmbH said the “lack of availability of appropriate funding” was the most important constraint for the expansion of their housing portfolio. However, donors, investment banks, and others have flooded the microfinance industry with liquidity. Hence, such “lack of funding” statements may sometimes indicate other problems (such as high costs and inefficient operation that make funding at competitive rates unprofitable for these MFIs) and, therefore, deserve analysis on a case-by-case basis. These MFIs cited lack of institutional capacity and technical know-how as the second most important problem in limiting the expansion of their home lending. Given the multiplicity of sins that “lack of appropriate funding” often indicates, technical assistance to remedy institutional and operational problems appears to be as important as simply more or better funding.
Other recent studies of HMF within MFIs by International Habitat for Humanity (Stickney, 2006) and the Cooperative Housing Foundation (Schumann, 2006) come to findings consistent with these conclusions.
From the perspective of promoting HMF in MFIs, the glass is half full
Hence, these studies show rapid growth of HMF loan volume within MFIs, although from a minuscule base. MFIs have discovered that HMF is profitable and has immense potential for expansion. Thus, HMF – particularly small home improvement loans – is now well established as a recognized niche product for MFIs. From the perspective of many MFIs, their housing product is on track to fulfill its institutional missions: to diversify risk, support development of savings products and the transition to a regulated deposit-taking financial institution, and offer an additional product popular with their core micro-entrepreneur clients.
The “lack of funding” constraint – which MFIs cite as the main bottleneck to expand housing microfinance – is also on its way to solution. For example, Mexico’s second-tier housing development bank, the Sociedad Hipotecaria Federal (“ SHF”), which previously offered liquidity only for mortgage loans mainly for middle-income home purchase, has had an HMF window since 2005 and now offers a subsidy that can be joined with the HMF loan (as discussed below). The government of Colombia has also tried to start a secondary market for housing microfinance. Investment groups and capital market institutions are establishing financial vehicles to fund home credit of MFIs. The paper by James Magowan in this issue of Global Urban Development Magazine describes the considerable progress in issuing securities on public markets for on-lending to MFIs to finance low/moderate income housing in emerging countries. These major achievements deserve recognition and further support in order to consolidate them.
However, three interrelated factors seriously limit expansion of HMF within MFIs:
First, an explicit housing product typically has a slightly lower interest-rate and longer tenor, and can cannabalize their existing microenterprise loan business. That is, the MFI’s microentrepreneur clients could nominally borrow for housing to fund their business and get better terms than they would under a microenterprise credit. Thus, the end result of developing an explicit housing product might mainly be lower profits, unless marketed to a new clientele or unless the MFI monitors the use of the funds for housing.
Second, the Accion and GmbH studies confirm that microfinance institutions consider housing an adjunct secondary product. From the perspective of most MFIs, housing credit deserves little attention and is unrelated to their core mission of “promoting economic development.” Many studies as well as common experience show that most households build wealth mainly through homeownership and housing investment plays a crucial role in national economies. Nevertheless, microfinance institutions continue to relegate housing to a trivial role in their business strategy aimed, supposedly, at “economic development.” With a few notable exceptions, MFIs lack the interest to make housing a major focus.
Most fundamental, however, the microfinance industry offers far too small an institutional base in most countries for the expansion of housing microfinance to a scale relevant to demand, even if MFIs were interested in this role. The next section explores this fundamental institutional bottleneck in Peru, Mexico, and Brazil.
From the perspective of satisfying household demand and addressing the low-income housing and urban development emergency of the next three decades, the glass is more than half empty
The supply of HMF is still only a minuscule fraction of demand. Even if HMF continues to grow at current rates within MFIs, the total loan volume will be trivial relative to demand in most contexts over the next 20 to 30 years – that is, the peak of the world’s low-income housing/urbanization emergency (see Cohen, 2005).
The following profiles the housing economies and HMF practice in Peru, Mexico, and Brazil in order to illustrate the range of experience in ramping up HMF and to explore alternatives for addressing low-income housing needs on a market basis at massive scale.
Peru is a country of 27.5 million people, with 54% living below the poverty line. The population of the capitol – Lima – has increased from 1.5 million in 1960 to around 6 million currently. Gross national product grew at 5.35% in the third quarter of 2005, with inflation of 3.65% on average in 2004. As regards housing demand, 57% of the residents of Lima want to improve their house. In the south of Lima, 42% of roofs are of zinc or fiber. In the south and east of Lima, 26% of floors are made of earth. The housing deficit has been calculated at 1.2 million units, and is increasing at 90,000 units annually (Gwinner, 2005a).
Government has a number of housing programs (Gwinner, 2005b). One of these – BanMat – makes “loans” for building materials. However, arrears rates are about 80% on these credits. A second program – MiVivienda - is funded by a 5% tax on salaries. MiVivienda channels these monies through a second-tier finance institution, COFIDE, to first-tier housing lenders that – in turn – extend below market-rate credit to around 14,000 middle-income households per year for the purchase of new developer-built homes costing US$25,000 to $50,000. A third program, Techo Propio, operates by joining a direct demand subsidy (i.e. a grant) with the household’s downpayment and – if necessary – a loan for purchase of a new home, construction of a home on a lot owned by the family, or rehabilitation of their existing home. The subsidy amount varies from US$1,200 for home improvement to US$3,600 for purchase of a new home. Techo Propio currently delivers around 3,000 subsidies per year to households earning around US$400-$500 per month.
Overall, Peru has housing conditions and a set of governmental housing programs that are fairly typical of Latin American countries. The great bulk of the housing subsidy and finance system – the MiVivienda program in the case of Peru – focuses on middle income families and fuels the commercial homebuilding and mortgage industries. These programs contain significant subsidies per unit that limit their scope and production to a small share of the population – mainly middle-income families. The implicit government policy for the low-income majority is for these households to invade land or purchase a lot in a clandestine subdivision or low-income community and to build their home over many years without formal-sector support.
In short, Peru is particularly fertile ground for small serial home credit. A conservative estimate is that pent-up market demand totals US$1.1 billion for housing microfinance loans from 550,000 existing low income households, and is increasing at $20 million annually from 9,000 new low-income families.
MiBanco – the largest microfinance institutions in Peru and in Latin America, – has responded by creating one of the largest and fastest-growing housing microfinance businesses in emerging countries. MiBanco was formally launched in 1998 as a licensed bank when it assumed the loan portfolio of Accion Communitaria del Peru, a nonprofit NGO operating in Lima. Today, MiBanco is the largest microfinance bank in Latin America and one of the largest banks in Peru. MiBanco has recently won an award as one of Latin America's most successful commercial banks.
The impetus for creating a housing product dates back to the experience of senior management in helping to finance and rebuild houses in northern Peru destroyed or damaged by an earthquake in the early 1970s (Brown, 2003). Funding limitations precluded extending credit for housing before the organization became a commercial bank. In 2000, however, management began designing a product for market-rate finance of home improvement, called MiCasa. Management decided that the MiCasa loans would be offered through the same branch network with the same staff as their other loan products. The core part of the credit process – the evaluation of the client’s capacity to repay -- would be essentially the same for housing as the bank’s micro enterprise loans. There were two targets for MiCasa loans: MiBanco’s traditional customer base of micro entrepreneurs, and low-income, salaried workers living in the same communities. By adding low income workers to its target market, however, MiCasa has ended up serving poorer households than the micro-enterprise portfolio of the institution.
Credits – averaging US$1,600 – are extended for up to five years at interest rates of around 45% in the Peruvian currency (Soles), a somewhat lower rate than that for micro e nterprise loans. Borrowers, however, typically pay off ahead of the
loan maturity; actual terms average 20 months. MiCasa was envisioned as a microcredit product without technical assistance for construction. Currently, however this program assists households with the construction process through an initial design and budget, one visit at the start of construction to help orient the work, and a technical report on the feasibility of construction. MiCasa serves households, extends credit, and collects repayment through its regular system of loan officers, each of whom manages a portfolio of around 250 loans and gets paid largely on commission based on loan origination and collection performance.
Loans are secured mainly by cos igners, personal collateral, and temporarily taking custody of households’ pro ofs of ownership until credits are paid off, rather than mortgages (only about 10% of MiCasa loans are secured by a mortgage), which are time-consuming and expensive to secure and impractical to execute in low-income areas where home resale markets are thin. Thus, assiduous methods of loan collection and maintaining good credit in order to get access to more finance constitute the main incentives for repayment.
MiCasa has grown rapidly. In 2001 – its first full year of operation – MiCasa made 5,000 loans. In 2006, MiCasa made 13,498 loans. As of April 2007, MiCasa had 20,903 loans outstanding in total, and was making new loans at the rate of US $2.5 million per month. Arrears exceeding 30 days were 1.81% -- low by Peruvian and international standards. Return on equity was 7% to 9% per annum – which, when leveraged by the institution’s capital-to-asset ratio, resulted in profits of over 20% per year. From April 2006 to April 2007, the MiCasa loan portfolio grew at virtually the same rate (42%) as that of the loan portfolio of MiBanco as a whole (40%). MiCasa constituted 12% of the total portfolio of MiBanco.
According to the manager [i] of MiCasa, effective demand for these micro housing loans is huge, and far exceeds the supply of loans under the MiCasa program. This manager notes that the first priority of MiBanco as a whole continues to be micro enterprise lending, although the institution also actively markets MiCasa.
Recently, MiCasa has attempted to establish alliances with building materials suppliers, which are still at a beginning stage. For example, MiCasa has opened an office of five people within a building materials supply store associated through overlapping ownership interests with one of the largest cement producers of Peru -- Cimento Lima. This office has extended credit of around US $300,000 for purchases of building materials. Large international companies - such as Ace Home Center (US based) and Sodimac (Chile based) increasingly dominate the building materials retail sales environment in Peru.
MiCasa also has a pilot urban upgrading loan project. Under this program, loans have been extended for a total of around US$300,000 for infrastructure provision, including installation of water and electric networks, to six groups of households in various low income communities, which collectively agree to repay the loan. These loans are being repaid on time, and two of the six groups of households have repaid their loans fully.
Although the partnership with the building materials supplier and the urban upgrading loan project are still embryonic, the manager of MiCasa believes that these initiatives hold the future to expansion of housing microcredit in Peru.
With the success of MiCasa, a number of other local financial institutions – particularly cooperative credit societies (Casas Municipales) and other MFIs – have now introduced housing products similar to MiCasa and are beginning to explore this market. This competition has contributed to forcing down interest rates on housing microfinance loans, from around 70% per annum three years ago to 45% currently.
Of the three countries profiled here, Peru represents the “best case” for the argument that housing microfinance can become relevant to the scale of the urbanization/low-income housing challenge. On a flow basis, Peruvian MFIs appear to be extending roughly the amount in HMF loans – US $20 to $30 million per annum -- necessary to cover demand from new families. However, little progress has been made in satisfying the huge pent-up demand from the past. The housing micro credit volume extended by all Peruvian MFIs over the last decade totals less than US $150 million compared to a pent-up market demand of US$1.1 billion.
With a population of 110 million, Mexico has 30 million households, growing at a rate of 750,000 families per year. Forty percent are low-income, earning up to three minimum salaries – about US$450 per month.
Mexico has made great progress in traditional mortgage finance over the 15 years since the Tequila Crisis of 1994 virtually destroyed the private housing finance system led, at that time, by commercial banks. An institution funded by pension contributions of private workers mandated by federal law, INFONAVIT, lends at below-market interest rates largely to low-income formally-employed workers and still dominates the Mexican mortgage market, accounting for roughly 60% of mortgage loans.
In 2002, the federal government created a second-tier housing development bank – SHF – to lead the development of private market-rate housing finance. Under its organic law, SHF enjoys the support of the federal treasury necessary to build a private housing finance system, which phases out over a period of 12 years in order for the private sector to assume full responsibility. SHF has been the main funder and de-facto regulator of 17 mortgage banks, called housing “SOFOLES” (SOFOLES can lend but not take public deposits for a single asset type – in this case, housing) that filled the gap in mortgage finance left by the exit of commercial banks after the Tequila Crisis.
These housing SOFOLES have innovated successfully in their origination and collection methods, and became the main home lenders to moderate and middle-income families. The success of housing SOFOLES has, since 2004, begun to re-attract commercial banks back into home lending. The largest housing SOFOLES are now turning into commercial banks so that they can take deposits from the public and better compete in a more contested mortgage market. Other housing SOFOLES are branching out into new products – including unsecured lending for home improvement – by converting into a new category of financial institution, called a “SOFOM”, which allows diversification of asset types without taking deposits from the public.
INFONAVIT, SHF/SOFOLES, a number of other government housing finance institutions, and – recently – commercial banks have joined to increase mortgage lending dramatically in Mexico over the last eight years, which has more than tripled to around 500,000 loans per annum. These mortgages mainly finance the purchase of new homes built by sophisticated commercial housing development companies, which have become some of the most efficient and largest-scale homebuilders in the world. This system is constructing many new residential subdivisions of 10,000 to 20,000 houses with complete infrastructure on the periphery of the major metropolitan areas of Mexico. These new commercially-developed homes mainly consist of core units that the family can expand horizontally and vertically in pre-programmed steps.
Despite these striking successes, roughly 40% of households – who are largely low- income and employed informally – lack access to institutional housing finance and fall outside Mexico's housing system. As a result, a large market exists for small home credits for home improvement. Based on a market study (Capital Advisors, 1998) that shows 15% of Mexican households want and can afford such loans, unsatisfied HMF pent-up demand in Mexico is roughly US$9 b illion, and growing at US$330 million per annum.
The Mexican MFIs sector is somewhat underdeveloped. The MIX – a microfinance database – lists only 27 institutions versus 40 in Peru, a country of only about one quarter of Mexico’s size (Elias, 2008). Seeking to diversify from its customary middle-income clientele, SHF has established a facility for offering credit for first-tier lenders to fund HMF loans and has recently added a subsidy program that can be joined with these home microcredits. One Mexican MFI – Financiera Independencia – is assertively expanding the HMF market, mainly through joining SHF’s HMF credit and subsidy facilities. Box 1 profiles this experience.
Box 1 -- Financiera Independencia in Mexico; leveraging housing micro finance with government subsidies without contaminating credit markets
Joining mortgage finance, government grants, and a household down payment has worked well for assisting middle-income households and stimulating mortgage lending and commercial homebuilding for this segment. Such “direct demand subsidy programs” have a long history in emerging countries, particularly Latin America (Ferguson, 1996).
However, combining housing microfinance with government subsidies has proved elusive for low-income households. MFIs frequently distrust governments and are concerned that the availability of subsidies will dilute borrowers’ willingness to pay on microcredit. In turn, government housing bureaucracies frequently emphasize increasing housing production numbers, pay much less attention to cost recovery (e.g. repayment rates on loans), and do not understand the perspective of MFIs. Largely for these reasons, attempts to join HMF with housing subsidies have failed in Columbia, Nicaragua, and elsewhere. A Mexican MFI, Financiera Independencia, and the federal government second-tier housing Bank, SHF, have succeeded in joining these two sources of funding on a large scale for the first time.
Financiera Independencia is an MFI incorporated in Mexico as a Sociedad Financiera de Objeto Multiple (“SOFOM”). Since its inception in 1993, FI has grown to include a network of 128 branches in 30 of the 32 Mexican states. The institution offers four products, including a credit line for home improvement called CrediConstruye.
FI i ntroduced Credi Construye in 2007 funded by a US $80 million line of credit from SHF that expires in 2011. FI is the first MFI to use this SHF housing microfinance facility. Borrowing households mu st have low incomes – below 4 minimum salaries (approximately US$600 per month). Loans must be used for home improvement and all are e xtended in the form of a vouche r that can be exchanged for construction materials. The average loan size is US$600. Loan terms are two years with an interest rate of 43% per annum.
Virtually all of these loans are joined with a subsidy, typically of US $400 per household, under the Esta Es Su Casa program of the Mexican federal government. CONAFOVI – the apex housing policy organization of the Mexican federal government – has delegated the administration of this subsidy to SHF.
As of December 2007 after one year of operation, Credi Construye had disbursed US $32.7 million in loans to 20,000 clients. Arrears rates for 90 days were 2.5% – low by both Mexican and international standards. FI anticipates quadrupling loan volume and number of borrowers served by the end of 2008.
The management of FI has found no problem with borrowers confusing subsidy and microcredit, and attributes the smooth operation of the program to the SHF grant process. While housing agencies unfamiliar with banking operate most housing subsidy programs, SHF is a second-tier housing Bank with long experience working with the private sector. SHF has largely succeeded in developing a private housing finance market for middle-income households in Mexico. The institution has now begun to focus on bottom-of-the pyramid housing finance markets.
Sources: interview with management of FI, June 24, 2008; and Elias, 2008.
The C reditConstruye program of FI shows that joining housing microfinance with housing subsidies can, indeed, dramatically increase loan volumes without contaminating credit quality.
Government subsidies, however, are a limited resource. Even if the FI/SHF partnership with accompanying subsidies were to quadruple to $120 million in loans per annum as planned for 2008. it would satisfy only a miniscule fraction of the US$9 billion of pent-up demand for small housing credits in Mexico. O ther commercially -viable Mexican MFIs have shown little interest in housing. In summary, the relatively underdeveloped Mexican MFI industry lacks the capacity and interest to satisfy a significant fraction of demand for HMF in that country. The efforts of the SHF and FI are highly promising, but have a long way to go to reach a scale relevant to this market.
While small housing credits are a n iche secondary product for most MFIs, they are vital to the business of Mexico's enormous building materials manufacturers and retailers, such as CEMEX (the third-largest cement manufacturer in the world) and Home Depot of Mexico. These modern corporations must provide consumer finance for their products to be competitive. The experience of the Patrimonio Hoy program of CEMEX of Mexico illustrates the likely evolution of housing microcredit in large markets, such as that of Mexico – see Box 2 for a description. This case has received wide attention within the building supply and manufacturing corporate sector in Latin America, in particular, but also throughout emerging countries.
In effect, Cemex’s Patrimonio Hoy program merges small credits with other components of the low-income housing value chain – including building materials, a savings program, and technical assistance in construction. The integration of these elements greatly expands the market for each one. Typically, no one organization can provide all these elements. Hence, as Patrimonio Hoy demonstrates, this integration comes from alliances among various entities – corporations, citizen-sector organizations, and government.
The expansion of housing microfinance to scale depends fundamentally on the creation of such business alliances. Irene Vance’s paper on HMF in Guatemala in this issue of Global Urban Development Magazine provides a good second example of creation of a low income housing value chain through business alliances organized by a commercial bank. A third intriguing example is that of a building materials manufacturer, Corona, of Colombia, which provides very small credits (US$400) to the poorest households for ceramic tile to replace dirt floors, also d ocumented by a paper in this issue of Global Urban Development Magazine by Gutierrez.
Home Depot of Mexico – the largest retailer in this country – also provides consumer credit for 12 to 18 months for purchase of its building materials, although without integrating other aspects of the progressive housing process. The consumer credit extended by the Patrimonio Hoy program of Cemex, alone, has exceeded US$400 million, compared to the US$120 million in loan volume to which FI aspires by the end of 2008 for its Creditconstruye program.
Thus, consumer credit for the purchase of home construction materials represents, by far, the main source of low-income housing finance in Mexico and has an enormous institutional platform for growth – the world-class Mexican building materials manufacturing/retail industry. In comparison, home improvement lending through microfinance institutions is miniscule and only one commercially-viable MFI is aggressively pursuing this market.
Box 2 - Patrimonio Hoy in Mexico
The Patrimono Hoy Program of CEMEX. the giant Mexican cement maker, serves do-it-yourself homebuilders, who account for 40 percent of the consumption of cement in Mexico. CEMEX research showed that low-income homebuilders in Mexico take four years to complete one room, and 13 years to complete a 4-room house. This slow rate largely reflects the lack of formal-sector support. So, many households join informal savings clubs (tanda ) in which each family pays US$10 to a pool and one member is selected each week by lottery until all have received money. However, this informal savings and self-help construction has strong drawbacks when unguided. Building materials dealers often sell these households poor quality materials left over from large customers at high prices. Homebuilders who lack construction skills often waste materials by buying too much or too little. They also hoard these materials, which leads to their deterioration by weather and loss from theft. Home design and construction is often poor quality. Finally, tanda savings often end up getting used for festivities rather than invested in construction materials.
The CEMEX Patrimonio Hoy program addresses these problems with self-help construction with the business goal of expanding CEMEX sales in this market. It first organizes small groups of families who commit to a 70- to 86-week saving program. As informal tanda, each group’s members take turns collecting payments and playing the role of enforcer. To ensure that savings get spent on construction materials, however, families receive raw materials rather than cash. Deliveries start after only two weeks, before families have saved much, and subsequent deliveries are made each 10 weeks. Thus, CEMEX is, in effect, advancing microcredit to these families in the form of building materials. CEMEX operates this program through establishing “cells” – four-member offices – located in low-income communities. CEMEX arranges with local building materials suppliers to deliver high-quality product and uses its cells to orient groups of households in the construction process. Rather than use advertising, CEMEX hires local “promoters” – 98 percent of them women – to inform local households about the program. These local women are the key to establishing the relationships and developing the trust necessary for the program to work in the challenging environment of informal communities. The program sponsors parties and other events to celebrate completion of a room or a house.
The average do-it-yourself homebuilder in Mexico spends US$1,527 and takes four years to build an average size room of 100-square-feet. But participants in Patrimonio Hoy can build the same size room, with better quality, in less time – 1.5 years – and at two-thirds the cost (US$1,038, which includes the cost of materials, technical assistance from an engineer or an architect, and Patrimonio Hoy club fees). Patrimonio Hoy reached 100,000 people in its first two years of operation, and planned to expand this number to 1,000,000 by 2008. Patrimonio Hoy operates without subsidy. SHF – the secondary housing-finance liquidity facility of Mexico charged with leading the development of market-rate home credit – has established a window for housing microfinance that works with Patrimonio Hoy and other first-tier lenders. CEMEX has operations in 23 countries, and management are interested in expanding Patrimonio Hoy outside Mexico.
Sources: interview with management of Patrimonio Hoy; and Prahalad, 2005.
In contrast to Peru and Mexico, Brazil has virtually no commercially-viable microfinance institutions. Nonetheless, small credit for housing is a huge indus try and finances roughly one-fifth of housing units in the Sao Paulo area. comparable to the number of units funded by Brazilian institutional mortgage finance in this metropolis.
These small housing loans mostly take the form of consumer credit channeled by building materials retailers for the purchase of their products. However, this building-materials consumer credit industry is fragmented, disorganized, and charges relatively high interest rates. An examination of Brazilian housing finance and its building materials consumer credit industry provides important insights into small serial credit for progressive housing in an environment without microfinance institutions.
One million Brazilian households form each year and enter the market for housing (Ferguson, Cherkezian, and Motta, 2007). Over half of this demand for new housing comes from low and moderate-income households earning below five minimum wages – about US $650 per month. Self-financed progressive housing accounts for 62% of new Brazilian housing investment. Much of this self-financed progressive housing development occurs in the informal sector.
As in Peru and Mexico, economic growth joined with social support programs have expanded the lower middle-class and decreased the number of households in abject poverty over the last three years, stimulating demand for housing investment. According to The Economist, “between 2000 and 2005 the number of Brazilian households with incomes of US$5,900 to $22,000 grew by half, from 14.5 million to 25.3 million, while those receiving less than US$3,000 a year fell sharply to just 1.3 million.”
Although growing at a rapid rate recently, mortgage finance is still small in Brazil, both relative to the share of housing funded and to GDP. Table 1 compares mortgage finance as a share of GDP in Brazil with that of other countries.
Partly because of the low penetration of institutional mortgage finance, many Brazilian households pay for a surprisingly large share of their housing in cash. Downpayments of 30% to 50% are common. A wide variety of “alternative” sources of housing finance have also developed.
The main sources of institutional mortgage finance are the SBPE (Sistema Brasileiro de Poupanca e Emprestimo) (averaging about 20% of mortgages for purchase of new homes) and the CEF using FGTS funds (averaging about 60% of mortgages for purchase of new homes).
Table 1 -- Mortgage Finance As a Share of GDP
Category: Payday loans