managing risk.pdf

68 Chapter 5 - Progressive Housing Microfinance: One Room at a TimeTable 5.1 Differences between Microfinance Loan TypesTradional microfinance loanEffect on borrower’s incomeSmall loan amounts (US$100–US$400)Individual or group loansRepayment capacity based on generaonof future incomeLoan maturity of 3–9 monthsSource: Daphnis 2006.Housing microfinance loanEffect on borrower’s assets base and possibly incomeLarger loan amounts (US$250–US$5,000)Individual loansRepayment capacity based on borrower’s current incomeLoan maturity of 18 months to 4 yearsThe progressive housing approach meets the needs of the poor because they can avoid taking out large loansfor long periods, and they can avoid other traditional bank requirements. Compared to traditional housingloans, housing microfinance loans are small (US$250–US$5,000) and are amortized over relatively short terms(between 1 and 10 years). The small amount of the loan makes the debt affordable. Its flexible requirementsregarding proof of land title or income also makes qualification easier.This approach challenges the traditional belief that housing financing requires relatively large loan amountsover long terms with government subsidies to keep the payments affordable. Although progressive housingmicrofinance programs may face important challenges, they offer considerable benefits for the poor and theMFIs interested in diversifying their product portfolios.Key elements of the progressive housing loan include guarantees and collateral, technical assistance, costconsiderations, institutional arrangements, and subsidies. The role of government is also a critical considerationin designing a housing microfinance product. These issues are discussed in greater detail below.Guarantees and collateralTraditional microfinance does not require formal collateral or guarantees. It guarantees payment with devicessuch as group lending, forced saving, and alternative forms of collateral. Many of these devices, however, may notbe appropriate for the relatively higher amounts and longer terms of a housing loan. In housing microfinance,collateral represents an important constraint. The lack of a formal land title means that the client has no formalcollateral to offer. Given this lack of land titles and house deeds, MFIs need to be more flexible and to allowclients to use other documents that prove ownership or at least demonstrate a minimum period of residence.Those documents might include tax receipts or public utilities service receipts. Housing microfinance alsoaccepts more flexible forms of guarantee, such as a co-signer (usually with proof of formal sector employment),chattel mortgages, and obligatory savings. The principle is to hold something of value to the borrower to ensureon-time and complete repayment of the loan.Technical assistanceHousing microfinance products typically include technical assistance in the loan agreement. Some MFIs viewtechnical assistance as an integral part of their progressive housing methodology. Others view this as an additionalcost, with little effect on loan repayment. Technical assistance includes help in the design for improving thequality of the building, meeting pre-loan inspections, lowering the costs for appropriate construction materials,