How Housing Microfinance Can Address the Affordable Housing Crisis
Housing problem is a social problem that is affecting million across the globe, more so in the developing world where the increasing trend of urbanization has forced many people to live in crowded cities, in substandard structures referred to as informal sector.
In low income earning families, conventional formal sources of financing like mortgages cannot be considered as they are costly, as they have no regular income, no credit trail or high cost of borrowing.
Housing microfinance, an innovation that has mainly being used to extend credit to business persons and entrepreneurs, is therefore appearing on the horizon as the viable solution to the affordable housing.
In the following, this blog provides the good, the better and the ugly of microfinance for housing.
Understanding Housing Microfinance
Housing microfinance is defined as the delivery of a small amounts of credit and other financial services to those clients who have limited access to the banking systems.
In the context of housing, microfinance aims to provide loans for purposes such as:
1. Incremental Home Construction: Letting the families start building the houses from a step by step basis, when they have raised sufficient funds.
2. Home Improvement or Renovation: The process of helping home owners’ correct defects in existing dwellings or improving the existing housing stock.
3. Land Purchase: Assisting those persons / families to obtain an acre of land in which they can put up a structure.
4. Access to Basic Infrastructure: Credits meant for buying essentials including water, electricity or even sanitation facilities.
Housing microfinance which is also referred to as Hi-Re means house financing as distinct from conventional mortgage funding, where the amounts of loans are normally comparatively lesser, the terms of their repayments are shorter and the conditions are more liberal.
These loans are suitable for low income families since they take into account the ability of the borrower to repay the loan, they enable low income families to progressively upgrade without sinking in a pool of debts they cannot comfortably repay.
Housing microfinance identified these areas lack progressive housing finance and left a gap that can be filled by micro finance for housing with recognition of the special financial needs of low-income families.
Benefits of Housing Microfinance in Tackling the Affordable Housing Crisis
Housing microfinance has numerous benefits in the fight against substandard housing especially the vulnerable and low income earners.
Here are some key benefits:
1. Empowering Low-Income Families:
Conventional instruments of housing finance fail to capture low income housing credit markets since eligibility standards are too rigid.
A more liberal form of credit delivery is on offer within the microfinance structures as targeted the credit patronage of the cyclical income or the no-credit reference income.
It allows families to improve their living circumstances progressively so that their living standards are consequently boosted.
2. Supporting Incremental Housing Solutions:
Another strength, which characterize micro financial services, is its applicability to incremental building.
Families in many developing nations build houses gradually over years due to financial factors any time of the year.
Housing microfinance fits this practice since the people are able to borrow small amounts that will enable the construction in phases including putting up the walls and roof or extended rooms such as adding walls and roof.
Step by step way of home-building also helps to decentralize homes and makes it possible for low income households to acquire homes.
3. Reducing Urban Slums and Informal Settlements:
In this way, microfinances enables hopeful homeowners to avoid dilapidated and dangerous homes in the slum or informal sector.
There is a possibility that poor people will live in makeshift shelters if families can afford to construct or buy decent homes.
This does not only better the living standards of individuals but also tend to the objectives of sustainable urban development, conversely minimizing slum areas and delivering secure cities.
Challenges and Solutions in Using Housing Microfinance for Affordable Housing
Here are some of the challenges in using microfinancing for affordable housing
Challenges
1. Extraordinary Costs and Possibilities for Financiers:
Contributing insignificant housing loans is costly, and also be very uncertain for microfinance institutions (MFIs).
The overhead costs of making numerous small business loans are relatively high, and by the very nature of the borrowers’ unstable and low income generating source, there is a likelihood that they may default.
2. Limited Loan Amounts and Short Repayment Terms:
Microfinance loans are typically lesser in amount and have more limited repayment tenure than substantial house loans.
Although this works well if it would require incremental housing improvements and innovations, it might not offer enough coverage should there be major projects such as full house construction and the like, which would somewhat reduce the role of microfinance in addressing the housing problems in the long run.
3. Awareness and Trust Issues:
Some of them simply might not know about the possibility of using micro finance for housing or might be reluctant to approach financial institutions because of past bad experiences.
This can deter clients and hence slow down the absorption of housing microfinance products in the market.
Solutions
1. Innovative Loan Products and Partnerships:
This they can offer to the sector specific products including long lasting loans for larger construction or development projects or loans that comprise of sustainable building materials financing.
Therefore, working with NGOs, governments and international development organizations can also reduce risk and offer better loan products to borrowers for MFIs.
2. Technical Assistance Programs:
Enhancing capacity of low income families that includes construction techniques, financial literacy, and loan management enhances the impact of housing micro finance.
This can assist borrowers meet these goals efficiently and reduce likelihood of default on the loans.
Government Support and Regulation:
For instance, one of the major responsibilities that may be assumed by governments is formulating correct legal requirements that can facilitate the functioning of abovementioned program and offering specific benefits for identified lenders, including tax preferences and guarantees concerning the provided amount of credit.
The governments can also give subsidies or grants to the MFIs in the construction of houses for the intended targeting population.
Conclusion
Microfinance is likely to act as a revolutionizing solution for providing affordable housing as it empowers financially insecure families who would not qualify for housing finance from formal sources.
Microfinance for home and real estate includes incremental construction financing, home improvement loans, and land acquisition financing all of which enable people to upgrade their living standards progressively.
Despite the continued difficulties observed, such as high costs for lenders, constraints in the legal framework, and small rates of lending, housing microfinance can be significantly improved with new break-through solutions, in cooperation with the government, and partnerships.
Finally, the use of micro finance for housing can help lead to some improvements in the quality of urban environment, less concentration of slum areas and general improvement on the social and economic welfare of the community.