What We’ve Learned About Good Business and Good Housing Finance for the Poor

Two years ago, we learned the story of Grace Kamene Mutua, a woman living in Kenya’s Machakos County who had started a small bodaboda (motorbike) taxi company. Her goal was to earn enough money build her own house for a growing family.

Grace fulfilled this goal, thanks to the Building Assets, Unlocking Access (BAUA) program, a partnership between Habitat for Humanity’s Terwilliger Center for Innovation in Shelter and Mastercard Foundation. Today, there are many more people like Grace across Kenya and Uganda who have been able to see their own housing dreams come true. Their lives have been transformed for the better.

If the impact of the program on those people is tangible and visible, what about the impact on the financial service providers (FSPs) who, through their products, have supported stories such as Grace’s?

The driving force of BAUA was a stark gap in access to housing finance among low-income households. This gap, if addressed strategically and responsibly, has a potential of creating an estimated $200-$250 billion dollars in profits (Mckinsey, 2014) for financial institutions.

In 2016 we discussed the products, services and technical assistance that were being developed by FSPs to deliver innovative ways of getting small amounts of incremental finance into the hands of poor people to gradually build/rebuild their homes. At this point the project had reached 10,000 individuals. Only two years later, more than 50,000 individuals have gained access to incremental housing loans from FSPs in Uganda and Kenya. At last count nearly $44 million worth of loans had been issued to clients.

A business case for the banks, the necessary element

After five years of working together, what have we learned about the business case behind incremental housing microfinance (HMF) products?

Our big takeaway is that the business case is twofold: there are profitability drivers (and outcomes), and there are non-financial drivers (and outcomes). Taking this a step further, we have learned that there are 4 important levers: market levers, institutional levers, segment-specific levers and profitability levers.

The success of an HMF portfolio is founded on FSPs developing a product that is as much about portfolio diversification as it is about improving living standards among poor households. The incremental nature of the loans allows customers access to manageable levels of credit while providing banks’ exposure to a housing product that targets the majority of Africa’s consumer market: the 70% of the population living at the bottom of the pyramid that otherwise cannot access traditional mortgage financing.

Further, one of two impact studies now complete indicates that the HMF portfolio is making positive improvements to the quality of life at a household level, and in some cases the economic standing of the home-owner.

What has worked for the FSPs?

Market Levers: In both Kenya and Uganda the market was ripe for the HMF product. There were clear indications from participating financial institutions that other loan products were being diverted for housing related needs. KWFT, being the largest of 13 microfinance institutions in Kenya, was able to leverage its 42% market-share. As well, it was not impacted directly by interest rate caps because it  operates as a microfinance institution.

In Uganda, 70% of housing is ‘self-built’ through incremental means, typically financed through savings. Centenary Bank thus focused on offering smaller, unsecured loans and leveraged a local legal instrument ‘Kibanja mortgage’ to provide security to larger HMF loans.

Institutional Levers: KWFT and Centenary have each institutionalized social impact missions into their work. KWFT’s mission is, in part, to transform the lives of its customers, while Centenary views its role as cornerstone in building financial inclusion of the rural population. Each FSP showed strong market and capital positions, and extensive operational leverage across their respective markets, which has driven their business case.

Segment-Specific Levers: With the support of the Terwilliger Center for Innovation in Shelter, both FSPs identified niche segments and appropriately designed and targeted their products towards these groups. KWFT largely focused on women entrepreneurs that were part of savings groups. Centenary has expanded beyond its existing client based and is targeting the HMF loan at segments such as low-earning public servants with low, however stable incomes, and urban/peri-urban owners building more units to take advantage of the housing deficit emerging as Uganda urbanizes.

Profitability Levers: Both FSPs have experienced improved portfolio at risk (PAR) in comparison with other credit products. Even when recent PAR levels rose to worrisome levels in Kenya, the HMF products rose more slowly and to a lesser extent. KWFT manages this by lending primarily through savings groups to provide social accountability. Centenary has leveraged its ability to scale to over 60 branches to drive volume at a lower-interest rate than its other credit offerings. Similarly, KWFT leveraged existing channel reach to keep costs in launching their new product to a minimum.

When Conditions are Not Met

There may be no better case to understand the unsuitable conditions for launching the HMF product than the partnership’s early experience with BAUA in Ghana. The project was launched just as Ghana’s seemingly stable economy began to weaken, the cedi was devalued, and interest rates sky-rocketed. Nearly one year into implementation the borrowing rate for the FSPs was 38% and scaling the HMF product was simply not feasible.

There are institutional challenges ahead with scaling HMF more broadly. The BAUA project’s work with smaller FSPs has revealed that not all institutions experience ease in scaling the HMF products. Larger institutions such as KWFT and Centenary have established a greater channel reach, whereas, upscaling is proving more difficult for smaller partners with limited ability to market the product at the same scale.

In Conclusion

We have little doubt in the market gap and opportunity for incremental HMF products. These products meet the housing needs of their users, especially when they offer flexibility. The success of the product, however, largely hinges upon the conditions in which these institutions operate, and in their ability to balance financial and non-financial drivers through market, institutional, segment, and profitability levers.

To read the business case report from the Building Assets, Unlocking Access project, please go here.