MicroCapital: How does housing finance differ from traditional microfinance?
Rajnish Dhall: In India, traditional microloans usually are: (1) sized less than USD 1,000; (2) targeted for productive assets; (3) priced at around 22 percent per year; (4) repaid within less than a year or two; and (5) carry a group guarantee in lieu of collateral. In contrast, the micromortgages that Micro Housing Finance Corporation (MHFC) offers first-time homebuyers: (1) average about USD 8,000 in size; (2) carry interest rates of about 12.5 percent per year; (3) usually have a term of 15 years; (4) are individual rather than group-based; and (5) most importantly, are secured with the home as collateral. While the audience is quite similar, the products are almost at opposite ends of the spectrum.
Mark van Doesburgh: The MicroBuild Fund (MBF) we manage for Habitat for Humanity provides tenors of up to five years. While most traditional microfinance loans are for working capital for businesses, housing is technically “consumption.” The principle upgrades we see are: (1) changing dirt floors to ceramic tile; (2) upgrading from adobe to plaster walls; (3) replacing reed or bamboo roofing with iron sheeting or ceramic tiles; (4) constructing bathrooms; and (5) adding additional rooms or levels.
MC: Are there many poor people that need housing loans…and can pay them back?
RD: Absolutely, there is a massive need! The Indian government estimates there is a shortfall here of 25 million homes, 99 percent of which are required by lower-income families. It’s not just the poor; it’s the informal sector workers. In India this is estimated at 80 percent of the workforce. These people lack documentation of their income and are thus financially excluded even though they might be able to comfortably afford the payments.
As of last year, MHFC had about 10,000 clients, and only 35 customers were behind on their payments by 90 or more days. We have had no write-offs since our inception eight years ago.
MvD: In our MBF portfolio, we compare the housing portfolio with the non-housing and find that – across the board – repayment rates are higher for housing loans. This shows how much borrowers value the product and that they are indeed capable of repaying.
MC: How do we maximize client protection?
MvD: With housing microfinance, the issue of financial education is not any greater than in traditional microfinance, but proper building practices are critical. If housing is managed well, the improved living conditions can improve safety and security for the client and his or her family. But if not, the client and family can actually be put in greater danger. A loan officer needs to have the skills to evaluate a home improvement project to determine – to a reasonable extent – that the microfinance institution (MFI) is not financing a home improvement project that could be detrimental.
MC: How does insurance play in?
RD: MHFC, like most housing finance companies, offers third-party property insurance and mortgage redemption policies in case of death of the main earner. The prohibitive expense of medical insurance is an issue, however, as lower-income families often do not have a savings buffer for medical or any other emergencies.
MC: Why do housing loans often remain just a niche offering for MFIs?
MvD: MFIs rarely have the technical knowhow needed to develop housing loan products. Part of the reason we see MFIs so active in incremental home improvement loans is because they more closely resemble a traditional individual microfinance loan than a micromortgage, which involves land titles, much longer tenors and larger loan amounts. MFIs are often ill-positioned to secure loan funding at the necessary tenor for micromortgages. And the vast majority of their clients do not possess a formal land title. Many MFIs are reluctant to accept alternatives such as land-purchase agreements, inheritance documents and municipal-use documents.
RD: The traditional business of MFIs is growing quite well in India as well – possibly 30 percent to 40 percent per year – and hence there is no real requirement for most MFIs to add this product at this stage.
MvD: Many MFIs create a housing microfinance product simply as a way to reward their best clients. In these cases, the product is not designed to attract new clients and will always be limited to a select few.
MC: Where do you see micromortgages heading in the next five years?
MvD: Although we are seeing growth, what we have seen and heard is that the limitations mentioned above continue to hold MFIs back from diving into micromortgages on a large scale. The major exception is companies in India that specialize in housing finance.
RD: In India, a massive housing supply is coming over the next few years as the central government is pushing for “housing for all.” Along with major regulatory support, this has set up the ecosystem for intense growth. From hardly any loans a few years ago, there are now about 10 companies in this space that now have made about 10,000 loans each and are growing at about 100 percent per year.
MC: How will housing finance be addressed at European Microfinance Week?
Daniel Rozas: We see the lack of housing finance as a major component of financial exclusion – and one that has been left off the microfinance agenda. To that end, we’re looking to bring in a diverse group of institutions that are active in this area to share their work.
This interview is part of a sponsored series on European Microfinance Week,
which will be held from November 16 through November 18 by the European Microfinance Platform (e-MFP), a 124-member network located in Luxembourg. MicroCapital has been engaged to cover the event on-site.
Rajnish Dhall is the Managing Director of the Mumbai-based Micro Housing Finance Corporation. Mark van Doesburgh serves as a Managing Director at Triple Jump, a fund manager based in Amsterdam that focuses on “inclusive finance.” Daniel Rozas is the Senior Microfinance Expert at the European Microfinance Platform. All three will participate in a plenary session titled “Microfinance and Housing, One Brick at a Time” during European Microfinance Week.
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