managing risk.pdf

Managing Risk and Creating Value with Microfinance67Housing is a basic need. It provides security; protection from the elements; and, in the case ofmicroentrepreneurs, a place to conduct business. Housing microfinance provides the financial resourcesfor new or additional construction in small, manageable amounts using an incremental lending approach thatmirrors the building process of poor households. In so doing, it can help the poor guarantee themselves aplace to live and work. This chapter describes housing microfinance and its progressive housing approach anddiscusses issues in the design of a housing microfinance product. 1The Housing Microfinance ApproachCompared to traditional housing finance, housing microfinance has more flexible requirements. For example,its proof-of-title requirements are less stringent, and it does not require the borrower to finish building thehouse within a given period. Given this flexibility, microfinance institutions (MFIs) can address the needfor decent housing and enhance their portfolios with a housing microfinance program. They can financeland acquisition, new home construction, purchase of a complete house, home improvement, construction ofadditional rooms or other structures (new bedrooms, a garage, or a workshop), home repair and maintenance,and new or upgraded infrastructure. Moreover, these gradual improvements can contribute to the broader goalof community development and slum improvement (Painter, Campa Sole, and Moser 2006).In Latin America, the demand for housing finance for the poor remains largely unmet because traditional banksand mortgage institutions will not change their lending practices to meet the needs of the poor. Traditionalmortgages and home improvement loans finance the cost of home building in a single loan, usually distributedover the building period. Those loans have strict underwriting requirements that include full legal title to theproperty and the ability to make monthly payments for a long time. They also require the borrower to completethe building process in a specified time.The poor usually cannot comply with those requirements. They may be unable to prove title to their property.Or they may be unable or unwilling to commit to a large loan amount or a long repayment period. With ahousing microfinance program, MFIs can use the methodologies of microfinance to fill this gap and addressthe housing needs of the poor based on their own building practices.Housing microfinance shares a number of similarities with traditional business microfinance, including (1)small loan amounts (compared to traditional housing finance), (2) no collateral requirement, (3) commercialinterest rates, and (4) creditworthiness determined by cashflow and character. Its differences from microfinanceare in its effect, loan size, nature of the client, and repayment plan. Table 5.1 describes some of the differencesbetween housing microfinance and traditional business microfinance.1. This chapter is based on the January 2008 dialogue with Richard Shumann (Cooperative Housing Foundation, CHFInternational) and Jesús Ferreyra (MiBanco, Peru).