MicroCapital: Why was housing selected as the theme of this year’s European Microfinance Award?
Christoph Pausch: It’s really a question of staying true to the underlying purpose of the Award: to highlight practices that are outside the microfinance mainstream, but are financially sustainable and deliver significant social value. The Award succeeds when it is able to gather best practices in the selected area and disseminate them widely, thus facilitating innovation that’s valuable to the sector at large.
Housing perfectly fits this criterion. For most families, housing is one of their major investments, and the demand for related, effective financial products is tremendous. Study after study shows housing to be among the top three uses of microcredit, even when loans are designated for business investment. Despite this, the vast majority of microfinance institutions (MFIs) treat housing as a niche product. Though lending methodologies are well-developed, the need to spread the message is great.
MC: What partnerships are MFIs leveraging to implement housing microfinance?
CP: You see plenty! For example, specialized NGOs like Habitat for Humanity work with MFIs to develop products and train staff. Other partnerships focus on improved building techniques, for example to make homes more resilient to earthquakes or high winds. There are also partnerships with governments, which may range from a project targeting a specific community to broad subsidies aimed at housing affordability. On the micro-mortgage side, MFIs frequently partner with real estate developers to build housing that’s affordable to the MFIs’ clientele.
MC: How are funders reacting to MFIs’ efforts to offer housing products?
CP: Thus far, few funders have tackled housing in a serious way. Out of some 100 active microfinance investment vehicles, only one – MicroBuild – is specifically devoted to housing. We at e-MFP believe this area is ripe for major innovation and expansion as housing requires a different type of funding – specifically long-term local-currency funding – to grow and sustain housing loan portfolios. Frankly, this is a big growth opportunity for investors that they have ignored thus far. With greater supply of the right type of funding, demand from MFIs will pick up as well.
MC: What are the implications for client protection?
CP: The typical issues highlighted by the Smart Campaign all apply, though the presence of real estate is a key additional concern. Relying on the property is an easy guaranty, but it can be a high-stakes gamble for the borrower – these are people’s homes, after all! MFIs need to be extra cautious that lending is based on income, not property values. Lenders must also develop a good understanding of property markets and recognize the signs of overheating. The social mission helps here – if you’re focused on improving living conditions and avoiding over-indebtedness, you’re much less likely to participate in real estate speculation that can hurt both lenders and borrowers.
MC: How do micro-mortgages differ from housing microcredit?
CP: Think of micro-mortgages as combining the front-end of a microfinance operation with the back-end of traditional banking. The client evaluation relies on assessing both formal and informal income, but there’s also the requirement for a formal title, and the need for the treasury unit to manage long-term assets, along with the associated interest-rate and maturity mismatch risks. These are not issues that MFIs typically deal with.
MC: What other trends do you see in housing finance for people with low incomes?
CP: In addition to housing microfinance, which involves loans that are slightly larger and slightly longer than traditional microcredit, the micro-mortgage market has also grown over the last decade. Lenders can provide fully secured, long-term loans to families with informal incomes both effectively and sustainably. This is a major tool, especially in dense urban areas, where the imperative of building upwards is incompatible with the rural practice of erecting a single-family home incrementally over time.
There is also room for sensible innovation through savings and remittance products – recognizing these as vehicles to help families plan home improvements. MFIs also have branched out into property insurance, which is critical in areas prone to natural disasters.
Christoph Pausch has served as Exectuive Secreatary of the European Microfinance Platform (e-MFP), a 130-member network located in Luxembourg, since 2007.
The award is being organized by the Inclusive Finance Network Luxembourg (InFiNe), e-MFP and the Luxembourg Ministry of Foreign and European Affairs – Directorate for Development Cooperation and Humanitarian Affairs.
This interview is part of a sponsored series on European Microfinance Week, which is held annually by e-MFP. MicroCapital has been engaged to promote and cover the event on-site.
Sources and Additional Resources
European Microfinance Award
European Microfinance Week 2017
MicroCapital Coverage of European Microfinance Week Since 2012
European Microfinance Platform (e-MFP) Coverage of European Microfinance Week 2016