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Chapter 5

Low-Income Housing Finance

The formal financial system is limited to upper-income groups in South Asia.


However, market outreach can be stretched down the income scale through innova-
tion and enabling regulation. Mortgage services could be offered to the middle-class
population and even to lower-middle-income groups. But there will be some income
groups at the bottom of the scale for whom mortgages and new home purchases will
remain unaffordable, even in developed housing finance markets. In India, lower-
income rental markets can be trusted to service some of the very-low-income
demand, although in suboptimal living conditions. In all countries, microfinance
institutions (MFIs) target some of these clients for home improvement, incremental
construction, and repair loans as well.

The Power of Microfinance

Microfinance is most developed in Bangladesh, and is picking up with a fast pace in


India and elsewhere. Since 1987, when Grameen introduced its first housing loan fol-
lowing a devastating flood, MFIs have made progressive forays into servicing the
housing finance market.1 Currently, the Grameen housing portfolio is at $3.3 mil-
lion, with 89 percent repayment rates. So far, it has financed 674,435 homes. Loans
are usually for very small amounts,2 maturity is only a few years, interest rates are
relatively high, and repayment is guaranteed by a community-group approach.
Collateral is typically not required. Repayments are made weekly.
The challenges facing housing microfinance programs include affordability
constraints, especially for rural households; high land prices in the case of urban
clients; commercial viability of the microfinance lenders; and need for new

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products, including savings-for-housing instruments, and for mechanisms
limiting disaster and disability/death risk in housing lending. Careful blending of
government policies, smart subsidies, planning, public-private partnerships, and
technical assistance for housing microlending would be required to further
develop the low-income housing and housing finance markets. Success stories,
such as the new low-income housing lending mechanisms in India, would provide
useful models as well. Afghanistan’s MFIs are still gathering experience, detailed
knowledge of the housing microfinance market, capacity in loan appraisal tech-
niques, effective guarantee mechanisms to limit risks from mortgage lending,
lending methodologies and policies designed for high-risk areas, and cost-effective
ways to reach rural clients. In contrast, a small but well-developed network of
microfinance lenders in Sri Lanka (amounting to 0.1 percent of financial institu-
tion assets) is currently funding housing repair and upgrades. Pakistan’s MFI
market has a very limited outreach at barely 2 percent of the population, and
generally is not engaged in housing finance (Nenova, Niang, and Ahmad 2009).
The appendixes in this volume discuss in detail the microfinance industry for
each South Asian country.

Affordability of Housing

The lack of affordable housing is pervasive because of high interest rates, high real
estate prices, high costs of building materials, few world-standard and low-cost tech-
nologies, inflexible financing products, informality, and costly regulations. In
Afghanistan, estimates suggest that about 80 percent of the population cannot afford
new low-cost home purchase. As a consequence, housing solutions include home
additions, rent, and sharing with friends and relatives for free. These figures amount
to about a third of the population in Bangladesh. In India, affordability is a barrier
for some 30 million households. The lowest two income segments making up two
thirds of the population cannot be profitably provided with a dwelling or a mortgage
in Pakistan. Likewise, approximately 40 percent of the population in Sri Lanka can-
not afford low-cost housing. Subsidies for housing have been used to help house-
holds acquire formal sector housing, curb the expansion of informal settlements,
and upgrade existing informal housing.

Low-Cost Market Solutions

India’s Monitor Group, in an effort spearheaded and supported by the National


Housing Bank, has developed a viable model for providing housing to both formally
and informally employed low-income groups. Its studies show that even at prevail-
ing real estate prices, a significant portion of lower-income households may be
able to afford housing. Low-cost housing—units of 200–350 square feet priced at

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approximately Rs 200,000–320,000 ($4,300–$6,900)—would be affordable without
subsidies to 23–28 million Indian households. Those households already pay rents
comparable to the mortgage payments they would otherwise shoulder; and they live
in small, one-room units that are badly designed and maintained, with poor living
conditions and sometimes with shared service facilities. The obstacles to their
obtaining home financing are irregular incomes, the lack of credit histories, and
coordination failures preventing developers from funding low-cost construction for
low-income families. Several solutions have been pilot-tested and found effective,
sustainable, profitable, and feasible in market conditions. Annex C2 to appendix
C presents an approach that potentially could serve 5–6 million households just
above the affordability threshold (those with monthly incomes of Rs 5,000–8,000)
and a further 4–5 million households in the next-higher income bracket
(Rs 8,000–11,000). For informally employed groups earning more than Rs 5,000 a
month, viable solutions may be provided by certain business models (such as finan-
cial institutions using intermediaries like MFIs or nonbanking financial institutions
to target their clients) and products (like a savings-for-housing product, a group
liability product, a lease-to-purchase product, and others) (Monitor Group 2007).
The Indian case also provides useful lessons for market or near-market solutions
for other income groups. For Indian households just below the affordability
threshold (those earning between Rs 2,500 and Rs 5,000 a month), a comprehensive
housing program is suggested. The program would involve a combination of
market-based solutions to lower the cost of the units (such as low-cost construction
technologies and smaller housing units), policy initiatives to make the houses more
affordable (such as reduction in stamp duties), and some support from the govern-
ment (such as up-front cash contributions to buy down the monthly installments
and partially finance up-front costs for financial institutions). Suppliers may need
additional policy measures (such as measures to provide developers with access to
nonprime land, with a stipulated percentage to be used for housing this segment,
and tax incentives on constructing and financing such housing) to stimulate them to
serve this segment.
Market and near-market solutions still will leave a large number of urban lower-
income groups who would not be able to afford such housing. For very-low-income
levels, there is a role for government subsidies. Government programs, however,
are not as efficient as could be achieved under a commercially based approach; and
some programs have been poorly targeted to households with incomes higher than
the lower-income groups, or have been excessively directed at civil-force staff. A
more efficient approach to government housing provision for lower-income groups
would be to rely on public-private partnerships through which government-
provided land is competitively awarded to developers of low-cost housing, with
accompanying enabling regulation and basic infrastructure service provision. The
country appendixes in this volume provide a detailed review of existing government
and nongovernmental organization programs for housing, housing finance, and
social services related to housing.

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Notes
1. Unless otherwise noted, all data provided in this chapter are from background papers prepared
by Zaigham Rizvi in 2009.
2. For Grameen, the average loan size is about Tk 13,847, or $277.

References

Monitor Group. 2007. “Expanding the Housing Finance Market to Cover Lower Middle
Income Segments in India.” Unpublished manuscript prepared for the World Bank and the
Financial Sector Reform and Strengthening Initiative, Cambridge, MA.
Nenova, Tatiana, Cecile Niang, and Anjum Ahmad. 2009. Bringing Finance to Pakistan’s Poor:
Access to Finance for Small Enterprises and the Underserved. Washington, DC: World Bank.

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