> Posted by Juan Blanco, Associate, Financial Inclusion 2020, CFI
In Latin America and the Caribbean, approximately 40 percent of families live in houses to which they have no title or that lack sewage systems, water, electricity, or proper building materials, according to the Inter-American Development Bank (IDB). However, current annual investments in living solutions by the base of the pyramid in LAC total $56.7 billion, confirming the increasing buying power of this segment and the growing opportunity in developing housing finance business models.
A few weeks ago I attended an event hosted by the IDB to launch the report Many Paths to a Home: Emerging Business Models for Latin America and the Caribbean’s Base of the Pyramid. The report was written by Christy Stickney for the Opportunities for the Majority Initiative (OMJ), a part of the Private Sector Group of the Inter-American Development Bank. OMJ provides finance to small, medium-sized, and large companies, as well as financial institutions and funds to support the development and expansion of business models that serve BoP markets.
The report analyses cases within OMJ’s housing portfolio in countries such as Colombia, Mexico, Nicaragua, Paraguay, and Peru. Stickney found two main housing solutions for the BoP, a “complete” housing solution and an “incremental” housing solution.
The complete housing category includes the micro-mortgage business model, and the rent-to-own model. Employing the micro-mortgage model, the Colombian government supports private sector developers in offering mortgages to families using a multi-faceted credit scoring and savings program to mitigate risk. Families that fall under an established income threshold can ask for government subsidies to make the initial down payment. Those unable to meet the initial payment can enter into a 6 to 12 month savings plan while their home is built.
The rent-to-own model gives customers the option of signing a formal rental agreement. Families that qualify can occupy homes and part of their monthly rent goes towards their future mortgage down payment. This option enables clients to build a payments history in the formal financial system through the rental payments while they save to pay for their home. This model is currently being pilot-tested in Comfama in Colombia and RAFCASA in Nicaragua.
The incremental housing category includes two business models, the core house model and the home improvement model. The core house model, developed by the housing finance company FOMEPADE in Mexico, targets low-income state workers. FOMEPADE first helps clients consolidate and refinance all of their outstanding debt, then extends a housing loan to buy a core house (a newly built basic house of modular design) or undertake a house improvement. The design of core houses facilitates rapid, low-cost improvements and additions. The financing for this model is provided by government subsidies, the family’s down payment, and FOMEPADE’s loan. This model is unique because it links social housing developers, public sector employees, and government subsidy programs.
The home improvement model has been used by different actors such as microfinance banks, municipal savings and loan funds, and wholesale financing institutions. The publication finds that these groups are increasingly using microfinance lending methodologies to help customers make small (roof, floor, water, etc.) or large (room, second story) improvements to their homes. Besides funding, in partnership with other entities like social housing developers, non-profits, and hardware stores, these institutions provide technical assistance, materials, and labor.
What is interesting about these four different business models is that they are not only making it easier for customers at the base of the pyramid to buy a home, or slowly build one, but also that in some way they are bringing this customer segment into the formal financial system. The complete housing solution options are particularly interesting to consider as on-ramps products. Micro-mortgages and rent-to-own offer people the option of having savings products, in addition to building credit scores and payments histories. It’s not difficult to imagine that BoP customers that now have these commodities could access different types of credit and insurance products in the future.
Another positive impact of these housing business models is that they enable financial behavior. Entering savings programs and making regular payments could influence these customers to continue these practices in the future, which could contribute to developing financial capability. Of course, there’s also an opportunity in incorporating capability-building guidance throughout the housing finance services.
We would love to hear your opinion – is housing finance a potential on-ramp to financial inclusion that might be worth a closer look and wider replication?
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