The Gaekwad family lives in a single-room house on the outskirts of a city. The family cooks their food, eats it and sleeps in the same room. This room is also used as a play area by their three-year-old child. Lack of credit has prevented the Gaekwads from obtaining a loan to improve their living conditions. There are millions of low-income families who live in overcrowded, inadequate and unsafe shacks made of wood and corrugated steel, crammed between dusty paths and open sewers.
A decent habitat and sheltered environment for low-income families can improve their well-being and catalyse overall economic growth. There is little more critical to a family’s quality of life than a healthy and safe living space. It is thus critical to recognise housing investment as a fundamental building block of economic activity.
House prices have been stretching further and further away from normal wages, making it difficult for low income families to get on the housing ladder. Lack of shelter is the locus that continues to breed innumerable problems for those without a roof on their head — problems in the areas of health, education, family stability, livelihood and self-esteem. It also makes them vulnerable to so many natural hazards like cyclones, floods and fire and causes annual setbacks to their economic condition and saving ability.
Faced with the enormity of the housing need and financial weakness of those in need, the government builds low-income housing units and distributes them — at very high levels of subsidy. With no clear definition and a lot of fudging, anything is possible. So we get a plethora of “low-cost” home schemes with ambiguous rules for entitlement. Due to the high proportion of subsidy, only a few such units are built. The housing units are usually attractive to members of the middle class, who often manoeuvre the eligibility rules and succeed in displacing the intended beneficiaries. We need a mass programme of social house building if we have to relieve the congestion of the homeless. This is a daunting task.
A better approach to tackle the issue is to finance the people to build according to their own preferences. However, both the poor and low-income households are excluded from the formal sector finance for many reasons.
In particular, the poor and low-income people are shunned by traditional banks because they lack the requisite documents to attest their income. They are seen by these institutions as both expensive to serve and risky as they have no capacity to make regular monthly payments over a long period of time. Further, they do not have the formal proof of land ownership needed by mainstream financial institutions. Finally, poor people find the procedures of traditional financial institutions onerous.
The low income households cannot afford resources for constructing a full unit. To manage this situation, the poor build their homes bit by bit over time as funding becomes available. Families might reinforce the walls or the roof to prevent seepage of water. They might replace a dirt floor with a tiled surface. Once the housing needs are suitably met they focus on sanitation and water supply. They construct a toilet, bathing place and construct a well. These can be financed as one individual module at a time. This method of improving housing one step at a time is called “incremental” or “progressive building”. The shorter term loans enable different parts of the house to be built over a suitable period of time. A modular loan with shorter pay-back period is a better fit for their income pattern than a long-term mortgage.
Traditional housing finance has not offered products tailored to low-income people, but a range of financial institutions are applying good microfinance practices to housing finance. This is allowing them to successfully deliver the much-needed services to the poor customers. A new stream of lending has emerged, called housing microfinance. It draws on proven best practices in microfinance but adapted to the classical housing finance paradigm. This has been highly successful wherever governments are offering long-term tenancies and shared-ownership housing in a supportive context. But the sector is still in need of a more sustainable business model to grow.
Housing microfinance is broadly defined as small loans dedicated to housing activities, including, but not limited to repairing, improving or upgrading housing; investment in infrastructure; the purchase of inhabitable land or permanent structures; and the construction of new housing.
Housing microfinance offers small, incremental loans that fit with the way poor people build: progressively and over time. These include loans for relatively small amounts and based on clients’ capacity to repay, wherein loan pricing is expected to cover the real, long-run costs — operational and financial — of providing the service. Moreover, repayment periods are relatively short and are on par with mid to high-end microfinance individual loans. Loans finance habitat needs in an incremental manner with short repayment periods and relatively low monthly payments. Further, they are not heavily collateralised, if at all, and collateral substitutes are often used.
The demand for housing microfinance is high. Clients already channel a good portion of microenterprise loans to home improvement. Microentrepreneurs often use their homes as productive assets in generating income. A home can be a place to store inventory, produce goods and run a business. A home is a personal asset that usually appreciates in value over time. Home improvement, thus, not only enhances living conditions but is also an investment.
The entire low-income housing ecosystem depends upon two things working together. There is a need for both the supply of housing — builders who have to build for this segment — and financiers, who help the demand side. Both of these considerations need to work in tandem. Without comprehensive paper trails to rely on, credit officers have to make their assessments through site visits to homes and workplaces, in-depth interviews and analysis of cash flows and household conditions. It is a know-your-customer process that goes far beyond mere formalities.
The challenges facing housing microfinance programmes include affordability constraints, specially for rural households; high land prices in the case of urban clients; commercial viability of the microfinance lenders; and need for new products, including savings-for-housing instruments, and for mechanisms limiting disaster and disability/death risk in housing lending. Careful blending of government policies, public-private partnerships, smart subsidies, planning and technical assistance for housing microlending would be required to further develop the low-income housing and housing finance markets.
Endowing slum-dwellers with mortgageable titles can open the gates to numerous opportunities for improving health, education, employment and providing entitlements to social programmes. While formal land titles are not necessary for housing microfinance, land security is essential. We need to introduce policy reforms to stimulate private sector participation through creative partnerships and fruitful linkages for fostering a sound ecosystem for affordable housing.
The stresses on account of homelessness are mounting and India must summon the will and act fast. Solutions will come from pairing passion with entrepreneurship and digging deep into the challenge at hand. We increasingly have the tools, but we need to summon the will and think out of the box. And don’t accept limits to how the world works.
The writer is a well-known banker, author and Islamic researcher. He can be reached at moinqazi123@gmail.com
