European Microfinance Platform, August 2012 Newsletter
Allow me an impertinent question, dear reader: what was the largest loan you ever borrowed? Now, let me venture a guess – was it your home mortgage? If you answered no, then you probably fit either of three profiles: 1) you never had to buy a home, 2) you live in a country with limited financial access, or 3) you are very lucky.
Let’s set luck aside for the moment. Why the first two assumptions? Because in developed countries, mortgage finance takes by far the largest share of consumer credit. In the US, mortgages on residential property account for 84% of average household debt. In the UK, the number is 89%. There is no question that the primary goal of retail lending in rich countries is to fund housing. Now consider the numbers for housing loans in the microfinance sector.
They are depressingly small. As an example, MiBanco in Peru – one of the largest and oldest MFIs and an early adopter of housing microfinance in the late 90s – has less than 5% of its loan portfolio in housing loans. And MiBanco is an exception. Most MFIs have no housing loans at all. Why this huge discrepancy between the rich world’s use of credit and the credit we provide to the world’s striving poor?
Part of the reason goes back to the origins of microcredit itself, when it focused exclusively on microenterprise lending – give an enterprising woman working capital to invest in her business and thus increase her income. That focus has eroded over time, especially after countless studies started showing that large portions of such loans are actually used for household needs, not business investment. The need for different tools, including both credit and savings, to help poor households manage money is now well recognized. However, this hasn’t translated into significantly greater interest in housing loans.
If that seems surprising, consider that for many MFIs, traditional credit products have for years been a source of growth and profit. If something is working, why change? Hence the widespread presence of MFIs offering 2-3 basic credit products, all modeled one way or another on the short-term working capital loan.
Moreover, housing loans are by nature more complex. Whether it’s micro-mortgages or housing microcredit, they both need to meet one essential element –provide larger chunks of capital than traditional microcredit. And at the same income level, that means longer amortization periods – usually counted in years, rather than months. That’s where the problem comes in – microcredit is marked by high-yields (remember, in this sector, 20% interest is considered low). For small, short-term loans, this works, mainly because interest cost is but a small portion of scheduled payments. However, the impact of interest rates on the scheduled payment amount increases as loans get larger and longer. Meeting the affordability needs of poor families thus becomes more challenging, and requires a lot more effort in lowering operating costs – especially in the collections process. Not all MFIs are well-positioned for this.
There are, of course, other issues to be considered – stability of property tenure, legal and actual ability to foreclose (in case of mortgages), and a host of housing infrastructure issues, such as accessibility of utilities, degree of corruption (to receive property deeds, etc.), and many others. Yes, making housing loans in developing environments is a challenge.
That doesn’t mean we should give up. Housing microfinance has been around for years, and has been shown to be profitable. Recent experience with micro-mortgages in India is likewise showing promise. It can be done, and the demand is unquestionably there – the dream for better housing is universal.
The reasons for ignoring housing financing needs are increasingly becoming an insufficient excuse. If we’re serious about financial access, housing should be high on the agenda. After all, what would your house look like if you didn’t have access to a mortgage?
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