In just two decades, housing microfinance programs have attained a prominent position among organizations addressing the shelter needs of the urban and rural poor in many regions around the world. At the request of the U.S. Agency for International Development Microfinance Office, the Center for Urban Development Studies at the Harvard Design School, working through Development Alternatives, Inc., undertook an assessment of current microfinance practices and the linkages between housing and microfinance. The tiered network that has developed among local lending institutions, governments, NGOs, and international organizations including multinational and bilateral development aid organizations was studied, and case studies were selected that illustrate recent trends including diversification of services, financing mechanisms, and methods of capitalization, as well as promising avenues for adjusting program structures and improving outreach. The report provides useful background information for those involved in or planning to expand into housing microfinance initiatives, and for international and bilateral agencies interested in developing effective poverty alleviation strategies. The objective of this report is to assess the nature of housing microcredit products that are currently being offered by microfinance organizations. The capacity of microfinance methodologies to deliver credit adapted to the living conditions and earning patterns of lower income families offers useful concepts and instruments for the housing finance industry to expand its own efforts to reach down.

The research for this background report uncovered two basic types of housing microfinance programs. The microcredit to housing finance (MCHF) programs initially began as microcredit initiatives for small and micro-enterprises. Their aim was the expansion of economic development opportunities for socio-economically and politically marginalized groups. However, microfinance institutions have frequently observed that their clients borrow for income generation purposes, yet channel the funds into housing improvements; therefore, over time, drawing on their experience in microcredit, these institutions broadened their lending portfolio to offer a range of housing finance products for new housing construction and home improvement projects. The strong connection between the home as both shelter and a place to house or support income-generating activities made this a logical evolution and eased the transition to new financial products, structures, and loan terms.