Recognition for demand-side finance paves the way for change

Monica Rashkin, Habitat’s Terwilliger Center & Amanda West, Habitat’s Terwilliger Center

We know that housing has a larger-than-expected contribution to developing country GDP when both housing investment (construction of new housing) and housing services (rents, maintenance and utilities) are accounted for. Including the informal housing sector increases housing’s contribution to GDP even more, particularly in developing countries. However, these large economic gains will not be realized without financial products and services that are accessible to those seeking to improve their homes. Mortgage finance has made some gains in reaching more people, but the reality is that half the world’s population lives on less than US$6.85 per day and, given the current rate of change, they are unlikely to qualify for mortgage finance anytime soon. Instead, they continue to rely on traditional sources of finance: their families (including remittances), personal savings and microfinance.

But microfinance institutions (MFIs) have not responded to this demand with tailored loan products. In 2018, housing loans accounted for only an estimated two percent of all MFI lending. But it has been estimated that 10-20 percent of microenterprise loans are diverted by households to improve their shelter. There are three barriers that MFIs face which explain this slow response: limited availability of the longer-term capital necessary for a housing loan product; lack of technical capacity in housing at most MFIs; and lack of mortgageable security from borrowers (often due to lack of tenure security or documentation).

Habitat for Humanity sought to address these barriers when it launched the MicroBuild Fund in 2012, as a demonstration fund to prove the viability and sustainability of housing microfinance. In January, housing microfinance got a big boost when the MicroBuild Fund was recognized by UN-Habitat and World Habitat with a Silver 2023 World Habitat Award. The World Habitat Awards (not affiliated with Habitat for Humanity) recognize global revolutionary housing ideas, projects or programs. Since 2012, the MicroBuild Fund has made longer-term capital available to MFIs. To date the fund has directly lent US$160.2 million to 59 MFIs in 33 countries, collectively making housing microfinance loans possible for more than 200,000 borrowers.

But perhaps most importantly, the fund has triggered growth in housing lending by investee institutions without distorting the market. Recognizing the demand for, and viability of, housing-specific microfinance products, investee MFIs have added more than US$825.1 million in additional capital to their housing portfolios, positively impacting an additional 3.63 million people through leveraged funds. To cite just one example, Microinvest in Moldova is a leading MFI and the largest player in the country’s nonbank financial sector. Moldova is among the poorest countries in Europe, with 60 percent of the housing stock in the two largest cities rapidly deteriorating.

To meet its growing demand for home improvement loans, Microinvest received a EUR €2 million investment in 2018 from MicroBuild. The investment was renewed in 2021, then topped up by EUR €1 million in 2021. This MicroBuild investment has helped Microinvest increase its housing portfolio by more than five times, growing in size from EUR 3.27 million in Oct. 2017 to more than EUR 16.27 million in Dec. 2022, serving more than 16,200 low-income households. This was possible because MicroBuild’s investment includes a technical assistance (TA) sidecar and Microinvest was focused on housing portfolio development. For Microinvest, the TA included an institutional assessment, market research, development of a new housing product, improvement of loan purpose transparency, staff training on how to conduct telemarketing for the institution’s housing loan product, and monitoring / evaluation of the pilot product. At the same time Microinvest was always a committed partner and dedicated significant own resources and focus to development of housing portfolio. As a result, Microinvest was able to overcome capacity constraints that may have limited the success of its housing microfinance product through investment alone. MicroBuild’s knowledge generation, meanwhile, helps the wider microfinance sector gains a better understanding of housing microfinance.

Recognition like the World Habitat Awards help illustrate that the low end of the income pyramid need not be left behind or wait until mortgage finance reaches them. Still, more capital that is accessible to low-income borrowers must be crowded into demand-side finance. Only through scale will the direct benefit to households and the indirect benefit to economies continue. The MicroBuild Fund serves as a roadmap for others to follow. How can your country build this important piece of demand-side finance?