‘A Mouse That Roared’? Housing Microfinance in South Africa: Status, Problems and Prospects

1. ‘A Mouse That Roared’?Housing Microfinance in South Africa:Status, Problems and Prospects FinMark Forum Sandton David Gardner 18 September, 2008

2. Study Background • Finmark Trust & HIVOS-funded • Based on literature review, interviews, workshop inputs & peer inputs • Builds on other work by FinMark Trust • Township Residential Property Markets study • Housing Entrepreneurs Study (comprising Small Scale Landlords and Home Based Enterprises) • FinScope, access frontier for housing finance in South Africa • Causes of Default of Housing Micro Loan clients • Literature review: housing finance development in Sub-Saharan Africa • Access to housing finance in Africa –Zambia, Botswana, Kenya, Namibia • Focus on access to housing finance for the poor

3. PRESENTATION OVERVIEW • Key Findings • Definition & Scope of HMF • Institutional Arrangements • Demand for Housing Microfinance • South Africa’s Develompental Paradigm • Status Quo & Lessons Learned • Way Forward

4. 1. Key Findings The mouse has not yet roared…but why? • She still believes she is a mouse and not a lion • HMF still not secure in its developmental role • All the rats are roaring…so why should the mouse? • Microfinance is working. Burgeoning household credit sector • Increasing microfinance finding its way into housing by default, not design • She is caught in a mousetrap • Structural constraints limiting HMF to specific market sub-segments, and precluding HMF from playing a major role in primary housing production processes • She doesn’t get enough cheese…and probably needs steroids • Actively and passively maligned • HMF sector requires a voice, a presence, and proactive lobbying Squeeak!

5. Housing Microfinance: ‘unsecured loans used for housing purposes’ Used for housing and related elements (land, services, construction) Default and design Size: larger than normal microloans: R1000 to R25 000 Term: generally longer than standard MF Interest Rate: competitive even though allowance given for ‘Developmental Credit’ Collateral: range of options being experimented with internationally – not the norm Importance of Housing Microfinance Commercial Imperative: untapped MF market Limit and problems of conventional housing finance (mortgage and asset-backed): HMF is more affordable, better understood, more widely available and appropriate Housing Imperative: Importance of housing to low-income households: security, shelter, housing asset, economic asset Supporting Incremental housing processes (urban and rural) Developmental Imperative: Potential to bridge the divide between minimum standards and needs of urban poor and not-so-poor Potential for supporting urban transformation objectives & relieving housing burden on state 2. Definition & Scope

6. 2. Definition & Scope: Typology

7. 2. Definition & Scope: Forms

8. ZAMBIA UGANDA TANZANIA KENYA BOTSWANA NAMIBIA SOUTH AFRICA AVERAGE 0% 20% 40% 60% 80% 100% Banked Formal - Other Informal - Only 2. Definition & Scope 2. Scope • Scope of HMF: Up to R8-billion housing-related microloan portfolio in SA • 10% to 24% of total household microfinance portfolio ‘housing-related’ • FSC 2007: R1,22-bn (96 760) housing-specific unsecured loans @ R12 600 avg • FSC Growth between 2004 & 2007: 138%, value by 261%

9. MINISTRIES SUPPORT ORGANISATIONS DEVELOPMENT FINANCE INSTITUTIONS Credit Bureaux TCB SA Microfinance Apex Fund (SAMAF) STATUTORY BODIES Donors & NGOs National Consumer Tribunal National Housing Finance Corporation (NHFC) National Credit Regulator Home Loan Guarantee Company Rural Housing Loan Fund (RHLF) Land Bank FINANCIAL MARKETS Equity & Debt Technical Assistance Guarantees Co-operative Banks Bill Co-operative Banks Bill National Credit Act Dedic. Banks Bill Development Bank of Southern Africa (DBSA) Self-regulated Entities Stokvels Burial Societies Village Banks Credit Unions NURCHA Equity Debt Insurance Equity Debt Technical Assistance RETAIL FINANCE INSTITUTIONS 3. Institutional Arrangements x

10. Potential HMF Demand: every person with secure tenure (and some without) Four main areas of potential demand ‘Substitute Finance’: people who cannot afford or access other housing finance – cynical & prevailing view – NOT REALISTIC Space left by lack of penetration by mortgage and secured housing finance Finance-related and housing supply-related problems inhibit potential Incremental Home Improvement ‘After-Market Demand’– CURRENT FOCUS Improvement of existing properties: rural & urban, formal & informal title. Transferred public rental, RDP/BNG, rural housing Mobilising Primary Housing Development – NOT YET POSSIBLE Primary access to land and housing for low-mid income people not possible outside of BNG HSS Increasingly recognized as only viable approach to improving housing conditions of lower-income people en masse Requires a fundamental re-formulation of human settlement & housing paradigm & processes Housing Entrepreneurship & Private Rental – ADDED STRATEGY Home-based enterprises: 70% of SMMEs linked to the home Backyard Rental / Tenements: Operating housing sub-market housing 13% of urban households Perfect for realizing multiple urban development benefits 4. Demand for Housing Microfinance

11. 4. Demand for Housing Microfinance

12. 4. Demand for Housing Microfinance

13. Secondary Housing Mkt Rental & backyard rental Access to Land & Services Informal Settlement 5. SA’s Development Paradigm • Step up to minimum standard product • Linear progression up the pyramid thereafter: this is unusual ‘Chasm Housing’ Impractical FLISP Limited Subsidy Supply Minimum Standards

14. 6. Status Quo & Lessons Learned • Current HMF Realities • Solid financial sector in SA: microfinance still shape-shifting • Level playing fields for MFIs: standard operating conditions, barriers to entry, pressure to grow, consolidation of players • NCA: Sector stability via blanket regulation of MF providers & protection of consumers • Concerns: household indebtedness, macroeconomic changes, default • HMF is different from MF • Emerging literature & local body of evidence of what works and what does not: wholesale & retail • Much larger than RHLF and NHFC-supported HMFIs: works across the board • Organic flow of conventional microfinance into housing good, but not enough • Emerging sense of differences: points of contact, parameters for successful lending, alternative methodologies & products, origination, management, risk identification & mitigation, default management • Need to continue to facilitate growth of sector and help ‘turn money into houses’ • HMF works but is a prejudiced ‘sector’ • Differentiate organisational commercial failure from methodological failure • Benefits to lenders and borrowers of all sizes: voluntary, profitable, growing business area • HMF not only the ambit of NGOs and small HMFIs: interest from banks, non-bank lenders, community groups & alliances, even developers

15. Current Housing Realities Mismatch between housing demand and supply: quantum and nature of housing products Minimum standards and subsidy system create artificial divide between formal and informal housing conditions and sterilise the latter Large and growing demand and discontent about housing conditions down-market Implications of SA Housing Paradigm BNG does not alter development paradigm sufficiently for future success Housing programme out of touch with South Africa’s state of development, real housing needs and appropriate strategic responses. Housing policy actively antagonistic to role of HMF and potential of incrementalism Need to fundamentally shift human settlement development processes & current housing subsidy programmes First and Second ‘Pillars’ of housing policy developed from middle up low-income housing strategy viewed from minimum standards upwards low income people relegated to sub-optimal, maligned housing situations Need to couple only viable low-income housing strategy with only viable low-income financing Mechanism fundamental political, strategy and policy change needed – this is more a housing problem than a finance problem 6. Status Quo & Lessons Learned

16. Turning Microfinance into houses: Institutional Infrastructure: Mainstreaming HMF in affordable housing delivery: Unblock HMF path to primary urban shelter production Lobbying for new housing paradigm including incrementalism Tackle problems inherent in current housing approach: rigid minimum standards, fully-subsidised one-step accommodation programmes Key is new methodology combining individual, state (subsidy) and private sector (microfinance) Reformulate facilitative roles of DFIs to offer institutional support to HMFIs, government, developers Organisational Infrastructure: Competition & Co-operation: Collaborative partnerships between mainstream and niche players to seek new housing development methodologies & microfinance models New HMF approaches and products need to be tested: Longer-term housing microloans Assessment of risk and interest rate Sources of fixed, movable and social collateral ‘Formal rollover’ microloan products Technical Assistance options Savings-based, housing-linked, product-driven, TA-linked Support to nascent HMF / incremental housing programmes Support Infrastructure: Understand successful housing strategies that engage with HMF internationally Research true depth and breadth of HMF in South Africa Grow confidence in HMF amongst housing and finance decision-makers. Technical Assistance: Turning HMF into houses: plans, approvals, supports, technologies 6. Way Forward

17. THANK YOU!David GardnerCell: (083) 399-3388 Email: david@gardner.za.net RRROOOOAAAAARRRRR!