Close to one billion people are slum dwellers (approximately one-sixth the world population), a number, according to the UN Human Settlements Program (UN-HABITAT) that will increase almost 200% by 2030. This provides an enormous market for housing microloans—a huge source of untapped profits—that could alleviate a future crisis by helping with “slum upgrades and slum prevention.” While state-subsidized housing may also be a solution, immediate massive investment in urban shelter and services should be of primary concern and will require the leadership of the private microfinance sector.
Serving the vast pool of housing microloan borrowers are numerous industry players including “urban developers, regulated financial institutions, government agencies, credit cooperatives, NGOs with an urban poverty focus, and MFIs” who provide the housing loan services.
Though conventional mortgages often remain unattainable for the poor, the merging of such traditional housing finance and microenterprise has enabled poor families to improve their homes by building in stages. About 70% of investment in microfinance housing has in fact been utilized in such “incremental building.” An UN-HABITAT report concludes that smaller short-term loans (microloans less than $5000 for one to eight years) prove more feasible to city dwellers who cannot afford long-term loans “favored by mortgage markets.” Housing Improvement Loan Products designed by Peruvian MFI Mibanco, for instance, allows households to finance home improvement projects instead of completely new construction. Besides small shorter-term loans, housing microloan products also typically have flexible repayment systems and require an established trust between borrower and lender instead of houses for collateral. Interest rates, just lower than microenterprise rates, are also sometimes used. These features have contributed to high repayment rates, enabling MFIs and other housing organizations, to achieve a profit and possibly avert the looming crisis of global slums.
Additional Resources
1) “World Faces Prospect of Teeming Mega-Slums.”
2) Accion InSight #4: “Building the Homes of the Poor—One Brick at a Time, Housing Improvement Lending at Mibanco.”
3) “Helping to Improve Donor Effectiveness in Microfinance—The Impact of Interest Rate Ceilings on Microfinance.”
4) “A New Approach to Low-Income Housing Finance.”
5) “Helping to Improve Donor Effectiveness in Microfinance—Housing Microfinance.”
6) “Developing Housing Microfinance Products in Latin America.”
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