European Microfinance Week 2017

INTRODUCTION

Laura HEMRIKA opened the session by stating that housing microfinance is seen as very promising and attractive to MFIs and other financial intermediaries with a social bottom-line. Housing microfinance also provides decent profitability, access to new markets and new clients, as well as opportunities for the diversification of products. Hemrika pointed out, however, that housing microfinance is still a market in its early stages, whose main limitations lie in access to capital (and cost of capital) and institutional capacity.

This session shed light on the question of capital. The four speakers represented different interventions at various stages with diverse kinds of capital: grant capital for innovation, technical assistance or capacity building, and investment capital.

To get to know the four experts better, the audience was split into small break-out groups where they had the opportunity to listen to each expert and ask them questions.

BREAK-OUT SESSIONS

Elizabeth MCKEON spoke about the role of IKEA Foundation as a grant-maker in improving housing conditions for the poor. McKeon emphasised that the foundation has a special focus on children, having in mind their basic needs: a safe place to call home, a healthy start in life, a quality education and a sustainable family income. Getting involved in housing as a foundation meant addressing a serious reality - children continue to die from lack of sanitation, ventilation and other poor housing conditions. At the same time, McKeon acknowledged the combination of barriers that make housing markets asymmetrical: lack of availability of suitable products, predatory financing and inadequate supplies of materials. In this context, IKEA Foundation and Habitat for Humanity partnered for the first time to target four areas of this ecosystem: 1) Market research; 2) Equitable finance; 3) Consumer rights, warranties and protection; and 4) Infrastructure innovation. With this partnership, IKEA Foundation targeted poor communities in India and Kenya to improve homes through access to small loans and affordable, eco-friendly building materials and services.

The first question to McKeon dealt with IKEA's influence on the availability of better local materials for housing. She explained that the involvement of IKEA as a housing material supplier would represent a conflict of interest, and it is up to the local market to respond to these opportunities. McKeon noted, however, that interventions must focus on market research to understand the ecosystem, such as availability and access to materials. She also disclosed some details on how this grant operates which is re-distributed to MFIs and aligned as a grant technical assistance meant to understand the supply chain better. McKeon also mentioned that in a larger portfolio of grants, IKEA Foundation is working with companies active in solar energy, cleaner energy materials, and other innovative approaches which are coordinated and shared in markets where they make most sense.

Hans RAMM provided a perspective on housing finance from the Swiss Agency for Development and Cooperation (SDC), and specifically the Swiss Capacity Building Facility (SCBF)¹ as its financial inclusion technical assistance facility run jointly with the Swiss financial sector. The SCBF facilitates systemic inclusive financial market changes through capacity building grants in partnership with impact investors (if investments are required). Ramm explained that the up-scaling of client-centric housing loans and related advice on construction materials and constructors can contribute significantly to several of the Sustainable Development Goals (SDGs), as jointly agreed overall goal of public funders and impact investors. Ramm mentioned four main factors which determine the success of inclusive housing finance joint interventions by public funders and impact investors:

• Based on a sound inclusive financial sector context analysis, the banking partner(s) need to be selected strategically, having both the capacity (with tailor-made technical assistance) and commitment to initiate an effective and responsible micro housing finance market. The banking partner(s) must be commercially viable to bear the market entrance risks.
• The stronger the capacity and the social mission of the banking partner(s) to design client-centric financial and non-financial housing finance services, the higher will the impact be at the end client level.
• The selection of well-qualified and responsible service providers to deliver advisory services on building materials and constructors as well as training in self-construction and financial literacy is very important for end clients to benefit effectively from housing loans.
• An effective public-private partnership between the public funder and the impact investor allows the former to offer technical assistance grants to capacitate the local market actors, and the latter to offer medium- to long-term refinancing facility to the local banking partner(s) - which is in turn able to offer medium- to long-term housing loans.

In response to a question from the audience, Ramm added that SCBF funds are technical assistance to capacitate financial institutions to up-scale client-centric financial and non-financial services to their low-income clients (e.g. grants for Habitat for Humanity to assist banking partners in design client-centric housing loan products) in partnership with impact investors (e.g. Credit Suisse or Triple Jump) who offer debt or equity capital to the banking partners. He pointed out the potentially strong employment and income impact on the local house construction industry as a result of the creation of viable micro housing finance markets. Another discussion point revolved around the business case for insurance in housing finance, which is a product with low demand on the client's side. Ramm advocated for the promotion of insurance among clients through financial literacy, as well as embedding insurance in housing finance interventions. He also emphasised that the SCBF would preferably be promoting housing loans combined with insurance covers to protect the asset building of the low-income clients with an upfront house savings plan.

Patrick KELLEY and Jarri JUNG were part of the same break-out group. Kelley highlighted the role of Habitat for Humanity in paving the way for investors to tap into housing microfinance through the MicroBuild Fund (MBF). The fund was created by Habitat to bridge an essential mortgage gap for low-income populations, and to seize an important opportunity to match microfinance with incremental building. MBF, managed by Triple Jump, helps MFIs in the first step of the ladder, so as to create momentum among other mainstream investors - who can subsequently attract more funding for incremental housing themselves. Kelley noted that in addition to the funding provided through the MicroBuild Fund, investees benefit from institutional technical assistance from Habitat for Humanity.

Following on Kelley's introduction, Jung emphasised the essential role for an investor like Triple Jump taking a risk with the MicroBuild Fund, but doing so with a proper understanding of the market and of the business case it provides. Within the last five years of partnership between Habitat for Humanity and Triple Jump in the MBF, the partners have: 1) Provided attractive long-term finance to MFIs; 2) Provided technical assistance for institutions to develop their institutional capacity to bring a good housing microfinance product to market; and 3) As such demonstrated the social impact and commercial viability of Housing Microfinance.

The first question from the audience addressed the issue of MFIs' over-specialisation in housing products. Jung reacted that it is important for MFIs to specialise in specific products, but to do so in a way that will still allow them to diversify their portfolio and discuss directly with clients. Kelley added that Habitat for Humanity works with three specialised institutions, and has experienced good outcomes. About the functional currency, Jung clarified that the majority of the fund's transactions are done in local currency funding. Kelley then commented on the typical route of housing finance, which starts with a home improvement fund and, as MFIs get increasingly comfortable, it scales to a two-stage home construction model.

DISCUSSION

Following a short recap by Hemrika, the four panellists answered a few final questions posed by the audience. One of the questions revolved around the issue of quality assurance, and on how to make sure MFIs are using the loan properly. Kelley noted that this is a complex issue, and anticipated a trend in the industry away from loan-led interventions and towards financial models for SME suppliers. McKeon questioned whether it is really the responsibility of the lender to determine what the beneficiaries have access to, and emphasised that the ecosystem needs to be stimulated in other ways. In turn, Ramm reminded the audience that impact investors are accountable for the responsible operations of their investees in compliance with consumer protection standards and that they have suitable tools at hand, such as the Alinus audit tool (to measure and monitor the responsible operational behaviour of their investees). As such, quality assurance is an intrinsic part of responsible finance practices and risk management. Jung commented that bad quality will eventually backfire, calling for technical assistance to help MFIs improve their products.

1 www.swisscapacitybuildingfacility.ch