The housing deficit in Kenya stood at 2 million in 2012 and continues to grow at a rate of over 200,000 units a year with only 50,000 new ones being constructed every year. There is a proliferation of informal settlements in urban areas with 60% of the population living in slums in overcrowded homes typically with only one room and no adequate ventilation. Families are at high health risk of diseases such as malaria, respiratory infections and jigger infestation.
The vulnerable, in particular women, children, persons living with disabilities, the elderly and orphans, are worst hit. Under the new devolved system of government, housing delivery is the responsibility of the county governments. There is a risk that lack of effective coordination and technical competence at local level can stifle the provision of housing. In addition to limited access to land (68% of Kenyans are without land documentation or tenure security) and insufficient income, lack of affordable housing finance is another limiting factor for low-income families to improve their housing conditions.
Housing is therefore, one of the most significant expenses for households, especially the ones in developing countries. People in poorer countries face high land prices, complicated or completely absent land titling processes, costly building materials, and low incomes or savings. To manage this situation, many turn to a process called incremental building whereby people build and expand their home over time as funding becomes available.
Some financial institutions offer housing finance loans to low-income people to help address this demand. Depending on the institution and product, loans may cover the renovation or expansion of an existing home, construction of a new home, or basic infrastructure improvements, such as electricity or sanitation. Mortgages to purchase land or a home are less common, but exist in some markets. As with other microloans, housing finance loans are typically not secured by collateral, and are largely based on either a group guarantee or other social capital.

What is housing microfinance?
Housing microfinance consists mainly of loans to low-income people for renovation or expansion of an existing home, construction of a new home, land acquisition, and basic infrastructure (e.g., hooking up to city sewage lines). To date, most of the successes in this new field have been with home improvement loans. Land acquisition and new housing construction are still dominated by subsidies, rather than financial services.

Why is housing microfinance important?
The demand for housing microfinance is high. Indeed, microfinance institutions (MFIs) say that clients already channel a good portion of microenterprise loans to home improvement. Shelter is a basic human need that helps ensure personal safety and health. Housing microfinance offers small, incremental loans that fit with the way poor people build: progressively and over time. The home is a personal asset that usually appreciates in value over time. Thus, home improvement not only enhances living conditions, it is an investment. Micro entrepreneurs often use their homes as productive assets in generating income. The home can be a place to produce goods, store inventory, and conduct business.

Who offers housing microfinance?
Housing microfinance comes in many forms and brings together a variety of actors, including urban developers, regulated financial institutions, government agencies, credit cooperatives, non governmental organizations (NGOs) with an urban poverty focus and MFIs. Traditionally, housing finance for low income people has been part of a slum upgrade or urban development strategy, with the financial service accompanied by construction assistance or land rights advocacy. Increasingly, housing microfinance is a loan product being offered by many MFIs. Some MFIs offer construction advice or supervision, but many more do not. Construction assistance in the context of housing microfinance does not appear to be a predictor of financial performance.

What are the key features of housing micro loans?
The size of the micro loans varies, but generally they are 2–4 times larger than average working capital loans. The term is usually 2–24 months for home improvements, and 2–5 years for land purchase or construction. The interest is the same as standard working capital loans or slightly lower and delivery method is almost always provided to individuals, rather than to groups. Formal ownership of dwelling or land may be required and savings sometimes used as a guarantee (may be compulsory) targeting a clientele of low-income salaried workers, micro entrepreneurs primarily in urban areas, and the poor.

What are the challenges for expanding housing microfinance?
The major challenge for expanding housing microfinance is limited access to medium- and long-term capital. Essentially, housing loans should be funded with capital that matches their long term structure. Yet most MFI funding tends to be short-term—a year or less. And while some housing microfinance providers capture savings, they rarely collect enough to cover the demand for housing loans. Adequate funding instruments would allow institutions to expand their portfolios and avoid a mismatch between the source and use of funds. Thirdly is insufficient understanding of the appropriate relationship between subsidies and financial services. There are good reasons for governments to subsidize low-income housing. Housing microfinance can complement subsidies, but financial services should be kept distinct from the subsidy element. For example, in a slum improvement programme, loans to individual slum-dwellers should be managed separately from state subsidies for infrastructure and sanitation. Most MFIs’ comparative advantage lies in providing financial services, not administering subsidies. MFIs usually weaken themselves when they try to do both. Lastly is insecure land tenure. In most developing countries, poor families do not possess formal proof of land ownership. While formal land titles are not necessary in housing microfinance, land security is essential. Households are more likely to invest in their homes when they know they will not be evicted. This security is also important for financial institutions’ risk management.
The road ahead
As a way forward, there are several emerging lessons that may help governments and donors to create environments that enable the widespread development of housing microfinance, thereby increasing poor households’ ability to access decent shelter. To start with, land security should not have to mean full, legal title. On the contrary, it should be the degree of confidence that a household will not be forcefully evicted. This can be more relevant and available for poor households than legal title deeds. That means potential housing lenders can service poor households with secure tenure not based solely on full, legal title. Secondly, mortgages are not necessarily the most secure guarantee, particularly when financing the housing needs of poor households. Given the instability of poor households’ incomes, high foreclosure costs, weak resale market for repossessed properties, and liquidity risk of longer term loans, mortgage guarantees in Kenya and many developing countries provide substantially less real security for lenders than in developed markets. In these environments, shorter-term loans for progressive construction with household asset guarantees are often less risky than long-term mortgages. Thirdly, progressive building increases affordability. Given poor households’ limited incomes and high costs of land, building and housing, smaller short-term loans that support progressive building practices already employed by the poor can make housing loans more affordable. An average household with about Kshs 1,000 available for housing every month would not qualify for a commercial loan to build a complete single-room home and would have to save steadily for 14 years to complete such a construction. With successive loans for land purchase, the same household could move into a completed single room construction within two years and finish repaying the loan within eight years. In the same breath, “progressive-build friendly” policy environment may produce better results than strict enforcement of high minimum standards. Strict housing and financing laws (and enforcement of these laws) establish high minimum standards that are unachievable for poor households which can reduce rather than increase the quality and volume of housing available to the poor. Instituting regulations that reflect how the poor build can encourage lenders to develop innovative products, improve the quality of the guarantees taken by these institutions and allow the poor to improve their living conditions. Also, long-term financing for housing providers is part, but not fully, the solution. While lack of access to medium- and long term funding does restrict providers’ ability to lend for housing, financial institutions should demonstrate promising pilot project results as a precondition to increased access to capital for housing finance.
Of importance, greater dissemination of existing experience is needed. Initiatives that allow practitioners to share experiences and emerging “good practices” are needed to help expand and grow housing microfinance services more quickly. Services are also a major challenge in housing finance for the poor. Acquiring possession of a plot of land is the first major hurdle in obtaining housing for poor families. Obtaining access to basic services, such as water, electricity and sewage, is an equally daunting obstacle. In the same breath, conditions on donor financing of microfinance institutions can reduce their ability to experiment with housing microfinance. Many donor-funding agreements require microfinance institutions to lend only to micro entrepreneurs or lend at below market rates. Donor contracts should allow microfinance institutions to create viable housing finance products that have the greatest reach, potentially including the working poor. Lastly, combining financing with other advocacy, legal, or construction issues may be overly complicated for early stage programmes. Housing microfinance providers should focus on developing their financial product and partner with organizations that are better suited to provide nonfinancial services.
The writer is the acting CEO of the Association of Microfinance Institutions (Kenya). Email: