Aga Khan Agency for Microfinance

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Housing Microfinance

One of the key product development priorities for AKAM in 2007 was the development of a housing portfolio throughout the network. Significant progress has been made on this front; many AKAM institutions are offering loans for the refurbishment and renovation of homes. By providing credit to poor families to restore and upgrade their homes, AKAM institutions are contributing to genuine improvements in the quality of life of its constituents. A most pressing problem facing families in the developing world is overcrowding within their homes, which has negative impacts on the health of the family. Under these circumstances, people must sleep in the same rooms where they cook, eat, wash and, in rural areas, keep their animals at night. Added rooms allow for activities to be spread out and, when combined with other initiatives, such as roof vents and windows, help to increase air circulation and reduce the prevalence of cooking smoke in the house. Previous work by other AKDN institutions has shown that these kinds of home improvements reduce the levels of asthma and other respiratory infections, particularly in children.

Other improvements, such as new roofs, double-paned windows, improved insulation, and better water and sanitation facilities can have a tremendously positive impact on quality of life. In many cases, an added room can also become a place of business – a place where a family can generate much needed income by operating a small store or workshop. This is particularly beneficial to women as it allows them to remain in the home to look after their families, while still being able to work and generate income.

Housing microfinance is radically different from the mortgage-based housing microfinance common in Western countries, but it is also quite different form the traditional microfinance that is focused towards entrepreneurial and productive pursuits. Title to property is often difficult to establish in many countries, particularly in Afghanistan, as a result of the many years of conflict, and where changing governments and Soviet-style regulation often still remains with the State. As such, mortgage instruments are often unsuitable; in many countries, the framework for mortgage lending is still absent. Another challenge is the need for much longer maturities for housing microfinance. Even relatively simple housing refurbishments cost as much or more than a year’s income for a poor household. As a result, clients need to be able to repay their loans over three, four, and sometimes even five or more years.

Guidelines for Housing Microfinance
In order to address these challenges, AKAM has developed a set of guidelines for the development of housing microfinance products throughout its network. These principles are based on the best practices for the development of housing microfinance as espoused by CGAP, Habitat for Humanity (HfH), USAID, and other established actors in the housing field, and will guide loan terms and structure, collateral and guarantee requirements, delivery approaches, and the provision of non-financial services.

• Incremental build, expansion, renovation and repair of housing are more appropriate activities to finance than purchase of existing houses or land;
• Mortgages are generally not suitable instruments for housing microfinance. Mortgage laws are often non-existent or weak, the fees associated with taking on mortgages are prohibitive for the clients, and they do not offer significantly added security to the loan as foreclosure procedures are lengthy and difficult. Standard approaches to collateral and guarantees will suffice in most cases;
• Land title issues require a flexible approach. Land title is often unclear or non-existent, but this should not be a barrier to accessing housing microfinance, as long as the client has sufficient land security – when the client has been residing on the land for several years and is not living on high value land that may be arbitrarily seized by governments or developers;
• Housing microfinance requires significantly longer loan maturities than other types of lending. In most cases, AKAM institutions will be offering housing loans with periods ranging from 3-5 years and which seek to diffuse the repayment burden;
• AKAM institutions utilise progressive disbursement options when financing housing developments. In this case, loan agreements for the total amount would be signed, but the actual loan would be disbursed in tranches based on the completion of certain construction milestones and management within budget. This will allow the institutions to closely monitor the client’s progress;
• While housing microfinance is primarily delivered to individuals, it can also be extended to small neighbourhood groups or cooperative housing schemes for simple infrastructure projects such as collective water and sanitation systems or other shared resources;
• In most cases, AKAM institutions require a Credit Life insurance component for housing microfinance clients, in part because of the longer maturities and because of the importance of the loan for the well-being of the family;
• Borrowers must have an equity stake in the proposed renovation project and total borrowings should not exceed 70% of the total project cost. In addition, loan service costs should not exceed 15-25% of borrower’s annual income, which is significantly lower than the normal 40% accepted by secured mortgage lenders in developed countries.

Construction Advisory
AKAM believes that construction advisory services can be important in the success of housing microfinance schemes, as they provide an added level of support and comfort to borrowers. A number of factors that need to be considered, including:

• Site and construction material selection and construction design with regards to disaster mitigation, particularly in earthquake prone areas;
• Material selections and construction design with regards to sustainability, energy efficiency, sanitation and health aspects;
• Historical and cultural sensitivity;
• Cost controls and monitoring to ensure project completion within budgets.

Most AKAM institutions do not have significant capacity to implement construction advisory programmes at this time. As a result, AKAM is consulting closely with other AKDN agencies (AKTC, AKPBS, FOCUS) and other external parties in the development of construction advisory services. Most construction advisory schemes can be operated on a full or partial cost-recovery basis.

Established housing portfolios exist in a number of institutions, and AKAM is working to see that all of its products conform to these general principles. New partnerships are also being pursued with a international agencies that are equally committed to the development of high-quality, sustainable housing sectors.