Putting the “Housing” Back into
Housing Finance for the poor: The Case of Guatemala
Irene Vance
Introduction
In housing microfinance (HMF) circles it was envisaged that
the unmet demand for housing would be met by a merging of the
finance gap. Banks and mortgage lenders would go down market by
making smaller loans to a lower-income clientele. Microfinance
institutions (MFIs) would expand the size of loans and target
clientele for their housing credits somewhat upwards.
Over the last decade, however, HMF appears to have grown
mostly through microfinance institutions creating a home
improvement product and, to a lesser extent, making modestly
larger loans for new home construction and purchase. However,
the supply of HMF by MFIs will most likely satisfy only a
miniscule fraction of market demand in most countries even if it
continues to increase at current rates for decades (see
Ferguson’s paper on housing microfinance in this issue of
Global Urban Development Magazine). As the MFI industry has
found technical assistance an unnecessary expense for
microenterprise lending, MFIs have also tended to offer only
microcredit for affordable housing without other products and
services essential to expand this market.
HMF requires a much broader institutional platform than MFIs
offer in order to expand dramatically to a scale relevant to
demand in emerging countries. Regulated financial institutions
such as commercial banks, in particular, but also housing
cooperatives, and credit unions can help provide the broader
organizational base necessary for expanding HMF loan volumes to
massive size (see Magowan’s paper on capital market funding of
housing microfinance in this issue of Global Urban
Development Magazine).
Banks have a number of comparative advantages in serving the
poor and reaching economies of scale. These include extensive
branch office networks, back-office support and I.T. platforms
for internal controls, as well as access to their own financial
resources from deposits.
Yet, while banks may recognize significant opportunities for
expanding their market, they have been wary of housing
microfinance because of the complexity of housing, and the
perceived risk of offering loans to low-income families where
land title is often absent. The experience of private
commercial banks in microfinance – let alone housing
microfinance – is still relatively limited (Baydas, et al
1997). According to a USAID study commercial banks globally has
been reluctant to develop the capacity to deliver housing
microfinance loans (Martin 2008). Exact figures are
unavailable, but estimates indicate that at most a dozen of the
200 commercial banks currently offering microfinance globally
extends housing microcredit.
Fortunately, the reluctance of banks to lend for affordable
housing for the low/moderate income majority appears to be
changing for a number of reasons. First, significant
discussions about unbanked customers and the market opportunity
to build new business models at the bottom of the income pyramid
have intensified over the last five years (Prahalad 2004).
Second, the sheer size of housing demand as well as the
strategic importance of housing credit in selling other products
has caught the attention of banks and corporations. The World
Resources Institute and IFC Corporation (2006) have quantified
the global bottom of the pyramid (BOP) market at 4 billion
people with an aggregate purchasing power of US$ 5 trillion,
including around $400 billion of unmet demand for housing
investment. More than half these families have no relationship
with commercial financial institutions – not even a checking
account. Banks have extended mortgage loans mainly for purchase
of new developer-built units to the top 20% to 30% of the income
pyramid, and left out even most moderate-income households, let
alone the estimated 1 billion slum dwellers worldwide. The
challenge is to bring a package of financial services that
includes housing credit to scale to the BOP.
Yet finance is only one part of organizing an affordable
housing value chain necessary to expand markets vastly.
Typically, credit, alone, fails to stimulate a supply of
high-quality, low-cost housing solutions. Finance must be
joined with other housing-related products and services
including land, title or other forms of secure tenure, quality
building materials, construction technical assistance, basic
services, and other ingredients to house the low/moderate income
majority. No one organization contains the elements adequate for
this task. However, business alliances among various
institutions can create the packages of products and services
necessary to produce a wide range of low-cost shelter solutions
suited to the many housing submarkets used by the bottom of the
income pyramid.
This paper profiles the experience of Guatemala's second
largest commercial bank, G and T Continental, in housing
microfinance and in assembling value chains in affordable
housing production through business alliances.
The first part of the paper will examine the Guatemalan
affordable housing context, the housing microfinance program of
G and T Continental and how this bank joined micro lending with
technical assistance in construction. This multiple services
approach by a commercial bank provides some fresh insights on
how and why to put the “housing” back into “housing
microfinance.”
The second section of the paper will describe the alliances
that G and T Continental has established with the land
developers, construction companies, and Guatemala's largest
cement manufacturer to assemble value chains that offer a range
of low-cost, high-quality housing solutions for low-income
families.
Context and
the Housing Microfinance Program of G and T Continental Bank
According to 2008 figures Guatemala has a population of 13
million. 56% of all Guatemalans live below the poverty line and
16% live in extreme poverty (World Bank). Housing is the second
major expenditure after food, by the BOP at US $1.6 billion per
annum, or US $911 per household (World Resources Institute, and
International Finance Corporation 2006). From the perspective
of building materials suppliers, this represents an immense
market. However, from the standpoint of individual low and
moderate-income households, this purchasing power falls far
short of the amount necessary to pay for a mortgage to purchase
a developer-built complete housing unit.
Hence, as in much of the rest of Latin America, few
affordable housing options exist for the low income population.
The majority must build their own homes “incrementally” or
“progressively” largely funded with family savings over a period
of 10-15 years (see Ferguson’s policy introduction on the value
chain framework in this issue of Global Urban Development
Magazine for an analysis of progressive building).
In Guatemala the housing sector faces two critical
challenges, a high deficit and low quality of existing houses.
According to data from the Guatemalan Vice Ministry of Housing,
the total housing deficit is 1.2 million units, and of these
more that 700,000 make up the qualitative deficit.
Approximately 20% of households lack one or more basic services
and 25% of households suffer from overcrowding. Broken down by
income, 591,167 houses are required for the poor and the extreme
poor households and over 420,000 households for low-moderate
income families (Velasco and Solo, 2008).
A lack of access to financial services generally and housing
finance specifically exacerbates the shelter problems of the
poor. 74% of Guatemalans are unbanked (7.1 million homes) and
55% of these have never completed a bank transaction (WRI,
2006). Access to credit is highly concentrated geographically,
and by income segment. Areas near the capital city and main
economic centers to the southwest use the great bulk of
available home credit. According to UNDP report banks play a
fairly minor role in providing credit to Guatemalans, whatever
their income, most borrowers in all income groups obtain credit
through informal sources (UNDP, 2007). However, studies carried
out on behalf of DfID of the unbanked show that these households
have considerable interest in gaining access to financial
services (Velasco et al, 2005). This data illustrate the
opportunities to expand credit services to the under- serviced
regions and unbanked population.
Government funds are scarce, with an estimated 6% of national
government’s budget invested in housing by FOGUAVI. In the last
decade, the number of MFIs has increased. Saving and loan
cooperatives working in the affordable housing at market
interest rates have also multiplied, although the supply of
housing credit is still modest. According to World Bank
estimates these financial institutions cover about one fifth of
the demand for home improvements and basic services provision
(Velasco and Solo, 2007).
Meeting this enormous unsatisfied demand for affordable
housing will require the entry of new lenders and service
providers appropriate for the many segments of the affordable
housing market. Although lack of long-term capital is one of
the most commonly-cited reasons for limited growth of housing
finance, building retail capacity is equally important for
achieving scale in housing microfinance. More distribution
channels are clearly needed.
Given this context, the Swedish International Development
Cooperation Agency (SIDA) has capitalized a second tier
institution to provide both financial and non financial services
to MFIs. SIDA has a long track record of working with low
income housing initiatives in various regions from Central and
South America to South Africa. In five Central America
countries between 1998-2005, over US$52 million have been
provided as catalyst start up funding to foster the development
of innovative and sustainable models of micro-lending for
housing with technical assistance in construction for
progressive improvements, land titling, and new construction of
housing, especially for families living in poverty. To date
110,000 families have accessed housing micro loans, representing
6.5% of the total urban poor population of the Central American
region (Stein and Vance, 2007).
In Guatemala, The Trust Fund for Local Development in
Guatemala (FDLG) a second-tier institution supported by SIDA,
set up in 2000, has focused on the expansion of housing
microfinance among a wide range of financial service providers.
FDLG offers lines of credit as well as technical assistance to
enhance in-house capacity of financial institutions and has
brought together actors to create packages of products and
services including housing microfinance to reduce the costs of
progressive housing and add value for families – that is,
complete the affordable housing value chain.
Currently FDLG works with 12 financial institutions; three
rural development associations, four MFIs, four cooperatives,
and most recently with G and T Continental Bank.
G and T
Continental Banks’ Housing Microfinance Program
G&T Continental Bank (hereafter, called “the Bank”) is a
member of the Financial Group G and T Continental. It is the
second largest commercial bank in Guatemala and fifth in Central
America with 44 years experience in the market. Traditionally,
it has been one of the major mortgage finance providers.
Currently it has 1.6 million clients, a portfolio of over
US$1,660 million, more than 4,000 employees, 222 branch offices
and services points throughout the country, as well as 26
branches in the United States, El Salvador, Costa Rica, and
Panama. In 2006, the top management of the Bank took the
strategic business decision to go down market to make smaller
loans to lower-income households than it had customarily
targeted.
A microfinance unit has been established within the existing
institutional structure to take advantage of its extensive
resources and systems. It forms part of the new product
development division of the Bank, (as shown in the diagram
below).
![G:\GUD JOURNAL ARTICLE\GUD ARTICLE_IRENE VANCE\Diagrams and Illustrations\Organigrama[1].jpg](Vance_files/image002.jpg)
Creation of the microfinance unit within the Bank’s structure
has required a fundamental change in the culture of the Bank at
all levels. A major part of the start-up phase of the
microfinance unit has focused on the transformation of
highly-centralized management systems to decentralized
operations in order to ensure closeness to the client; one of
the golden rules of success in microfinance. The General
Manager of the Microfinance Unit, who previously managed a
well-known Guatemalan MFI, has played an instrumental role in
this change. The commitment of the Bank’s top management and
the resulting incorporation of microfinance into the
organization's core mission have proved fundamental to laying a
solid foundation that will lead to scale.
The general management for microfinance was in place by
February 2006, and by July of the same year a pilot began in
four branch offices. A specialized team to attend to the low
income segment has been trained, both by hiring new staff from
outside the Bank and re-training existing personnel. After the
initial pilot phase, a process of decentralization of
microfinance followed to 84 branches with 118 trained loan
officers. Housing microfinance is currently offered in eight
branch offices. Building an extensive new client base drawing
from the unbanked population is central to the Bank’s short and
medium term strategy for expanding housing microfinance.
The Bank uses various “sub agents” for expanding its
financial services to underserved clients and areas. Small and
medium-sized registered business – gas stations, hardware
stores, pharmacies or general stores -- serve as outlet points
for a number of banking services, including loan repayments,
payment of utilities, and changing checks, among others. This
approach enhances banking services, especially in the interior
and rural areas of the country, without the Bank incurring
expenses in the expansion of its own infrastructure.
The Bank also offers credit lines to 12 MFIs for on-lending
to low-income families. Although these credit lines with MFIs
currently represent a small fraction of the operations of the
microfinance unit (0.7%), they have strategic value for the
Bank, the MFIs, and the underserved population. Through the
MFIs, the Bank can provide services to customers in income
segments beyond the Bank’s normal reach; for example, through
communal banks in rural communities. The MFI acts as an outlet
for the Bank’s products that the MFI cannot provide alone, such
as deposits, which, banking laws prohibit unregulated financial
institutions such as these MFIs from taking. As a result,
customers enjoy a greater range of financial services. The MFI
receives a commission. Hence, it is a win-win approach for the
Bank, the MFIs and the customer.
The Bank’s target microfinance clients are families with a
monthly family income between US$200-US$1,000, salaried
employees or self-employed informal workers and families that
receive remittances. Products and services include loans for
micro and small enterprises, home improvement, expansion of
existing houses, new construction on an individual plot, sites
and services, and new home purchase. Additionally, the Bank
offers its microfinance clients a variety of financial services,
including current and long-term savings accounts, micro
insurance, and pensions. The following table shows the main
terms and conditions of the housing microfinance products.
Table 1.
Terms and Conditions of Micro Loans for
Housing
Maximum
Amount |
US$21,000 – or US$4,800 for BOP |
Loan
Term |
1-5
years – Housing Improvements
1-5
years – Site and Services
Up to
15 years – Construction on Individual Plot and New Home
Purchase |
Interest Rate |
16-18% |
Banking
Fee |
1% |
Guarantee |
Fiduciary – up to US$6,000
Mortgage – over US$6,000
Mixed
guarantees are accepted |
Source G&T Continental, August 2008
Growth rates have been impressive. According to the
Economist, G and T Continental now has the largest market
share in microfinance in Guatemala (Economic Intelligence Unit,
2008). In the first 26 months the total active microfinance
portfolio has reached US$102 million, and over 18,000 active
clients. Microfinance represents 5.6% of the total active
portfolio. The housing microfinance active portfolio is US$4.2
million, with over 1,700 active clients. The average housing
loan is US$2,900, 66 % of the portfolio carries a five-year loan
term, and 91% of loan guarantees are fiduciary. As shown in the
follow chart, housing improvements is the main product,
representing 54% of the loan portfolio, followed by construction
on individual plot.

As in the rest of Central America, a very high share of
households – 86% of Guatemalan families – have secure rights to
a home or plot (although many lack full title to the property).
In comparison, 61% of families in the EU countries and 69% in
the US are homeowners.
This high share of homeownership suggests that the Bank’s two
main housing credit products – home-improvement and new
construction on individual lots – target a mass-market including
most low and moderate-income families.
Nevertheless, reaching the scale necessary for profitability
presents numerous challenges for these products. Clients are
dispersed rather than concentrated in new developer-built
subdivisions. Thus capturing and attending each client’s needs
may add extra time to the loan application process. The extra
step in technical evaluation of each individual client’s needs
can add to costs. Re-modeling existing units adds an extra
dimension of complexity given that each improvement process is
unique, thus solutions can be taken off-the-shelf less
frequently.
In response to these realities, the Bank´s business model has
two strategies for reaching low-income families: developing its
own in-house capacity to provide micro loans that include
technical assistance in construction with a streamlined method
that offers personalized services to client needs; and through
business partnerships with land developers, construction
companies, and a large cement manufacture in a joint sales/loan
processing strategy.
To date, the Bank’s own in-house capacity of nine technical
advisers has generated 50% of the HMF portfolio, almost
exclusively housing improvements; the other 50% of the portfolio
has come through its business partnerships. The next section
will examine both these strategies and some of the preliminary
outcomes.
Joining HMF with Technical Assistance in Construction
In microfinance circles, whether to include technical
assistance or not is one of the unresolved debates. According
to a recent review of Accion’s International key MFI partners,
provision of formal construction advice is not common (Mesarina
and Stickney, 2007). The arguments for and against are
numerous.
Many MFIs view technical assistance as inessential for
eligibility or repayment performance (see Tilock´s chapter on
technical assistance in Daphnis and Ferguson, 2004). From the
perspective of the MFI, construction technical assistance falls
outside the scope of their expertise. Further, some MFIs think
construction assistance may negatively affect payments if there
is poor customer satisfaction with the service or the quality of
construction.
A small study commissioned by Accion International, of two
MFI experiences in El Salvador has become the cited reference
among those that affirm that technical assistance is
superfluous, since it suggests little demonstrable difference in
housing quality between houses built with or without formal
technical assistance (Shumann, 2004). Interestingly, the same
MFIs studied have continued to innovate and refine their
technical assistance services. In summary, the minimalist
approach, or “credit-only” housing product, assumes that access
to a micro-loan is sufficient and that clients will rely on
their own builders, which proliferate in the informal
construction sector. Hence, in many cases, clients manage their
home construction.
Advocates for the inclusion of technical assistance, argue
that to ignore the technical challenges of low income housing
provision is to ignore half the problem. Hence they urge that
the “housing” be put into “housing finance.” To do so
microfinance providers will need to seek new business models to
provide technical construction services directly, or indirectly,
through other distribution channels.
There is a mounting body of evidence to show that unguided,
self-help home construction constitutes one of the principal
challenges of informal shelter and settlement. Unplanned
construction, which characterizes progressive building of
additional spaces in a piecemeal fashion, typically costs more
due to waste of building materials, errors (e.g. crooked walls),
poor use of available space, and lack of proper ventilation and
illumination. It also often takes much longer – an average of
16 years to build a self built house in Mexico according to a
CEMEX study. Household surveys and focus groups in a recent
investigation sponsored by Cities Alliance and the municipality
of Sao Paulo (2007) found that most Brazilian low-income
families strongly want assistance in planning and construction
of their home improvement, and many are willing to borrow at
market rates to hire specialized labor for construction.
Technical assistance in construction becomes more important
as the complexity and size of the work increases and as
household incomes rise. Structural work such as pouring a
foundation, adding a second story, building a new house, or
altering a load bearing wall demands expertise. Particularly as
rising earnings joined with social programs increase real
household incomes for the BOP in many emerging countries (e.g.
much of Latin America and Asia), families want and can afford to
pay for technical assistance in construction and specialized
labor. A study carried out by FIDEG, for the Foundation for
Local Development, PRODEL in Nicaragua, which has over a decade
of experience in combining micro loans and technical
construction assistance, shows that not only are families
willing to pay, the service has additional add value,
particularly for women heads of households, in cost opportunity,
since they have neither sufficient knowledge of building or time
to supervise the work of the hired mason (FIDEG, 2006).
From a business perspective, joining technical assistance in
construction with other elements of the affordable housing value
chain (credit, a quality building materials, title, urban
services, remittance services etc.) increases the market size
for each of these components (see Ferguson’s policy introduction
on the value chain framework in this issue of Global Urban
Development Magazine). In contrast, providing only one of
these essential products or services without integration into a
package holds much less value for households. For example,
CEMEX concluded that offering only cement -- its core product --
would generate much lower cement sales than a package of quality
building materials (including cement), construction technical
assistance, microcredit, and a savings program in order to
construct a major home addition more quickly at lower cost
(typically, building a bedroom). Not surprisingly, Mexican
families really value a bedroom and not the cement to build a
bedroom. This market study laid the basis for this company’s
award-winning Patrimonio Hoy program (see Schmidt’s paper
in this issue of Global Urban Development Magazine).
The decision to join HMF with technical assistance in
construction also depends on institutional perspective. An MFI
that extends mainly small home improvement loans and considers
HMF a secondary adjunct product to its central goal of
microenterprise finance (the norm for MFIs with HMF products)
may well have little incentive to add technical assistance in
construction. FDLG, in Guatemala and PRODEL in Nicaragua
encourage all the MFIs to provide the service either as part of
their own non financial services or through outsourcing,
especially since each recognize that there is a huge unmet
demand for specialized building construction services for the
poor, and these services generate employment in the construction
sector. A large commercial bank responsible for financing major
home improvements, construction of new units, urban
infrastructure and services, and other aspects of much of a
metropolitan area and that values housing finance as part of its
core mission has a compelling interest in the quality of the
result.
How can technical assistance be packaged efficiently and
effectively for both the provider and the customer? Does
technical assistance have added value for all types of
progressive improvements? Is it viable for financial
institutions to provide this as an in-house service or is it
best outsourced to specialist NGOs in the private sector? These
are among some of the most pressing questions that are addressed
in the business model of G&T Continental, a bank that considers
that technical assistance is key in the housing value chain.
From the outset the housing loan product was designed to
include technical assistance in construction, provided by the
Bank’s in-house capacity to families to whom they grant micro
loans for progressive housing improvements. The Bank considers
that technical construction assistance adds value both in the
pre-credit and post-credit process as well as providing a better
quality housing solution suited to the needs of the client.
Hence technical assistance is justified for several reasons:
clients often do not have sufficient knowledge of pricing,
quality or quantity of building materials required to prepare an
accurate budget. Frequently they rely on a local informal sector
builder, which greatly raises the risks of inaccuracy;
over-budgeting or under-budgeting are not uncommon.
The setting up of the technical assistance facility has been
supported by FDLG. In addition to the credit line for lending
to families in the US$200-US$600 income segment, a grant from
FDLG has assisted building capacity for construction technical
assistance within the Bank, covering a six month pilot and
start-up phase.
Financial institutions that offer in-house construction
assistance can do so in several ways: by adding technical
advisers as a separate service in addition to loan officers; or
by combining the two skills. The former can add to cost, since
the processes of loan application, and the review of technical
building aspects are carried out in parallel by two staff
members. The Bank has opted to combine the two skills. The
advisers have a background in technical drawing and
construction, and have been trained in microcredit analysis.
Other important qualities are knowledge of the local language,
and an understanding of cultural norms. The Bank has also
trained loan officers in the fundamentals of some of the key
aspects of technical assistance to the client, namely the review
of the budget and the building materials; which are verified
against the building plans proposed by the builder. In this way
the loan officers are part of the sales force and can provide
the core advisory services. Technical assistance is classified
according to the complexity of the progressive improvements, and
the type of product e.g. site and services or construction in an
existing plot and also be the type of guarantee. Technical
construction assistance is charged to the client, as part of the
interest rate, and represents one percentage of the loan amount.
All clients receive the following technical assistance:
(i)
pre credit site inspection: The site inspection is part of the
due diligence and loan assessment process, to ensure that the
proposed improvement, or land purchase (in the case of sites and
service) is both technically feasible and in function with the
capacity to pay. For progressive housing improvements and new
construction on an existing plot, a detailed plan, or a detailed
sketch of the proposed improvement is prepared. Client
preferences are taken into account, although often the value
added of the technical assistance at this early stage is to help
the client´s decision in giving priority to most urgently needed
improvements to safeguard structurally sound building, over
personal preferences, and, in the case of new construction on an
existing plot, guidance on how to position the unit to allow for
a logical sequence of subsequent additional rooms in the
future. A timetable is prepared, and verified.
(ii)
a second visit takes places a week after the loan disbursement:
this follow up ensures that the loan has been invested in
housing, that building work is in progress, and/or provides
orientation to the mason, or family members.
(iii)
a third visit is carried out to verify the building work is
executed according to plan, and provide orientation to the
mason, or family members.
(iv)
a
final evaluation is made with the builder and the family.
Business Alliances for providing Housing Loans at Scale
One of the
challenges of housing microfinance is how to generate sufficient
growth to be profitable. Even though some repeat borrowings can
be expected, sustained growth depends on capturing new clients,
expanding to new areas of operation and providing new products.
Reaching scale with housing loans that carry construction
assistance adds an extra dimension of complexity to both scale
and financial sustainability. The Bank’s in house capacity with
nine technical advisers can reach 30 new clients per month to
their portfolio, generating some 150 new clients per month, and
each adviser can manage a pool of 300 clients on a roll-on, roll
off basis as new and old clients enter and complete the building
work. The Bank’s aims to attend to several, rather a few
thousand clients, annually; according to its business plan
housing micro-loans will represent 15% of the total portfolio in
the next five years.
Housing finance
providers can establish strategic business partnerships with a
variety of construction companies and building materials
suppliers to market housing microfinance. From the outset,
forming business partnerships has been central to G&T
Continental´s housing microfinance strategy. To date,
partnerships have been established with 14 firms; seven land
developers, five large and medium construction companies as well
as the largest cement manufacturer in Guatemala, Cementos
Progreso.
The partnerships have three objectives. First, alliances
with the land developers and construction companies seek to
enhance the ability to reach a larger number of customers
without expanding extensively the Bank´s human resource base.
Training and employing partners’ sales force to prequalify
loans and construction projects can provide the Bank with a
steady supply of viable loan requests and cover a wider
geographic area, effectively. In the pilot phase, the
construction companies showed that they could double the number
of clients captured by the Bank, essentially because of their
large network of sales staff.
Second, diversification and new product development;
alliances facilitate offering a wider range of low-cost housing
solutions – land purchase, site and services, construction on
existing individual plot and progressive housing improvements –
than the traditionally limited offerings of completed units by
construction companies.
Third, the Bank’s partnership with land developers, local
builders, and building material suppliers create economies of
scale in at least two HMF products – housing improvements and
construction of houses on individual plots. To tackle these two
products at scale will require new hybrid value chains.
Essentially, these partnerships recognize that assembling the
major components for the delivery of affordable housing – land,
infrastructure, services, finance and technologies – demand new
business models for families further down the income pyramid.
G and T Continental has been involved for many years in
mortgage finance so a number of the partner companies have
previously worked with the Bank. Nevertheless, the companies
involved in this new business model are vetted by the Technical
Unit in order to assess top management’s commitment to working
with low-income families, and willingness to adopt a methodology
which includes training staff to carry out pre- and post-credit
technical services to customers. For larger companies that have
traditionally built completed units, this implies a significant
shift in working arrangements. The sales staff works within the
communities; their role is more akin to social promoters since
they work closely with the families assisting potential clients
prepare the loan application. As a result of the joint sales
strategy the construction contractors can double the number of
clients per adviser because they generate all the relevant
information from potential clients.
The partners companies’ technical staff also offers the
clients the same technical assistance services that the Bank
offers its individual clients. This is possible because the
Bank has trained the construction companies’ staff in the
application of a set of standardized formats, which cover:
assessment of housing needs, house layout (in the case of
improvements) and different design options (in the case of new
construction). These are part of the pre-credit process
undertaken irrespective of the housing solution: land purchase,
site and services, and housing improvements.
The Bank’s Technical Unit carries out the following checks,
prior to loan approval, during the building work, and post
construction.
ü
Assesses the technical and financial quality of the proposal.
ü
Evaluates the adequacy and appropriateness of design, pricing,
quality and suitability of materials according to climatic
factors.
ü
Reviews the budget
ü
Assesses the appropriateness of the proposed solution against
low income household needs, checks the plans, building permits
etc.
ü
Site inspections one week after loan disbursement and at the
conclusion of the building work.
ü
Prepares technical reports from the site inspection, providing
feedback to the constructor.
The Bank’s Technical Unit charges the developer/constructor
for its services including a one-time fee for each approved
design, which goes to cover costs of the Unit. At present, costs
are modest given its small size; by 2009 the number of
professional staff will increase, but to no more that
three-to-five staff, as well as additional technical advisers.
The General Manager expects to reach a breakeven point for
construction technical assistance by 2009.
What are the benefits of the joint sales strategy and the
technical assistance? From the Bank’s perspective the technical
assistance in construction services and supervision enhances the
homeowner’s satisfaction, increases the market for housing
microfinance by improving the efficiency of home construction,
and shortens the time of progressive building. Loan
applications can be processed more quickly and disbursements
made within three-to-five days of presentation of paperwork.
Hence, business alliances for technical assistance are time
effective. In addition to savings in time and resources and a
greater potential for scale, the General Manager notes that
technical assistance builds customer loyalty.
From the client’s perspective, the household enjoys savings
in cost and quality of service. From the perspective of the
developer, the partnership of joint sales and technical
assistance produce a constant flow of clients.
The business alliances also enhance the understanding of
customers’ values, and help to create a more tailored product.
Each company offers different housing solutions appropriate to
the various sub-segments of the low/moderate-income housing
market. A more detailed examination of three of the Bank’s
partnerships will illustrate this added value.
ADPROSA
ADPROSA
has been in the land development/home construction business for
12 years and is the largest home builder in Guatemala. According
to the General Manager 1% of all developer constructed homes in
Guatemala have been built by ADPROSA. From its inception the
company has sought to provide options for low/moderate income
families; the first project were homes of US$5,000. It is one
of the key partners in the joint sales strategy with the Bank
for going down market. ADPROSA has taken the lead to date in
building on individual plots – one of the two main housing
credit products financed by the Bank.
This program,
called GUATECASA, is a new concept for ADPROSA because it
recognizes that low income families need flexible solutions that
fit with the different stages of household growth and income.
ADPROSA´s market studies indicated that, especially in the
interior of the country, plot owners have paid for their land
and gradually saved modest amounts for future construction, but
had scant knowledge or access to credit.
Working closely
with local land developers and community leaders ADPROSA´s sales
staff identifies a critical mass of potential clients,
sufficiently concentrated in one area. Clusters of 10 to 15
clients are needed to be viable. Local land developers know the
clients and their credit history. ADPROSA does the paperwork
for loan application, credit screening, technical appraisal and
design options, coordination with local building suppliers and
supervising the building work.
Cost saving
technologies and economies of scale are key factors in reducing
costs and maximizing the loan. Large companies are well placed
to develop products that can reduce the time of building
progressively by using modular prefabricated materials.
However, one of the major limitations of new technology is the
lack of acceptance by customers. In Guatemala, as the rest of
Central America, low-income families prefer reinforced cement
block. Typically a unit of 49 square meters, built in
traditional reinforced concrete block, would take two-to-three
months to construct. By adjusting the internal production
chain, ADPROSA has been able to complete the building work in 28
days. A range of seven house designs is available, from a home
starter module, apt for incremental progressive building to
units of 54, 70, and 116 square meters. Prices range from
US$12,000 to US$15,000 and up to US$20,000.
Sites and
services is a less expensive option for low income families to
obtain a first foothold in the housing market. Historically,
site and services projects throughout Latin America have
typically produced disappointing results, especially under
government programs. ADPROSA offered site and services between
1998-2000, producing more than 6,000 solutions, including land,
water, drainage and electricity, with three walls, in a “U”,
leaving the fourth wall to be completed by the family – a basic
solution. ADPROSA has re-initiated its site and services
product within the Bank`s housing micro lending scheme; ADPROSA
has available land throughout the country. Joining a housing
plot with serial micro loans and construction technical
assistance shortens the time necessary to build a unit and
ensures that the home is built to technical specifications. A
revamped new generation of site and services is likely to
respond to low income households where overcrowded conditions
and weak purchasing power persist.
The traditional
core business of large construction companies is to produce
large scale projects. Addressing some of the key challenges
embodied in the housing needs faced in developing countries will
require an assembly line technique to lower cost and improve
quality, applying an approach that combines logistics,
management and technology. Large housing schemes, even when
costs have been reduced to fit the affordability criteria, have
failed on several counts to meet low income people’s needs. In
particular, large housing schemes fail to include key amenities
and services that make the resulting projects habitable. Using
economies of scale, (production of 50-60 units per month),
ADPROSA has been able to produce homes that include all basic
utilities (water, drainage, electricity, paved streets) as well
as an impressive range of community services; fully equipped
schools, police station equipped with patrol units, day care
centers, bus stops, recreation space, marketplace with stalls
for small businesses and 24-hour security services. Homes in
these urbanizations are priced between US$12,000-15,000.
Low income
families require flexible solutions and in line with their
capacity to pay that can grow in size according to the different
stages of the household cycle. It is not uncommon for a family
to forgo investments in housing until first securing the
education of children. ADPROSA offers a range of house types
within the same neighborhood – small start up units, at 30
square meters, and two and three room units in which space has
been allocated for small business. The income from home based
business recognized that the home is a productive unit, and the
income generated goes toward the repayment of a housing loan. ADPROSA
also offers a buy-back policy, allowing families whose
purchasing power over time increases and thereby permits them to
move up the housing ladder by buying a new larger unit within
the same neighborhood. Staying in the same location is important
to low-moderate income families who tend to choose to live near
to the place of work, and maintain family and social networks
that are important social capital in times of economic shock
(Moser, 2007).
With rapid
urbanization, the availability of low cost land suitable for
residential use has become the major barrier to housing for the
low income population. According to ADPROSA, currently the cost
of urban land in Guatemala represents 15-20% of the cost of a
house. In 2007, ADPROSA began the first social-interest housing
built vertically; apartments of 49 square meters. ADPROSA aimed
for a technological solution that would reduce construction time
as well as land costs. Using modern construction technologies a
thousand solutions can be produced in six weeks. Each project
includes schools, market, commercial areas, parking, church,
security, and is priced at US$17,000. The goal is to create
communities, close to the city, strategically located near to
places of work.
The business alliance between the Bank and ADPROSA is mutually
beneficial for both partners and this hybrid chain responds to
the needs of various segments of the low income market. From
the Bank perspective, tapping the strong sales force that
ADPROSA can mobilize for marketing housing loans provides a
robust platform for taking housing micro finance and housing
finance products and services for low-moderate income
households to scale effectively and efficiently without
additional costs to the Bank.
ADPROSA`s diverse range of commercial housing solutions
(including land parcels) respond to the price demands of
different sub-markets, including the segment of households with
incomes high enough to jump the frontier between informality and
formality as well as new poor households that need a first
foothold in the housing market. They have been able to package
products for families that already have a plot but lack finance
and a readymade housing solution that is affordable and
expandable. Hence ADPROSA has broken the traditional mould of
limited options above the capacity and willingness of the poor
to pay.
There is mutual interest for both the Bank and ADPROSA to
produce high quality, solutions that with an inclusive technical
assistance approach for clients needs. It will enhance client’s
willingness to pay and foster customer loyalty. For ADPROSA a
continual stream of financing of low income clients represents a
sustained volume of business and for the low-moderate households
a greater choice of options for meeting their housing needs.
Cementos Progreso
Cementos Progreso, CEMPRO, is a major family-run company with
over a century in production of cement and building materials
products in Guatemala. CEMPRO began to explore the
possibilities of servicing the BOP market in 2005, and launched
its pilot program, Su Hogar y Progreso program, in
November 2007 in alliance with the Bank. The CEMPRO business
model is based on the premise that this cement
manufacturer/retailer can add value in two areas of the housing
value chain: on the one side, the manufacture and supply of high
quality materials and on the other, by working with the local
informal sector labor force and families in the self build
progressive house construction process.
CEMPRO prospects and identifies clients, screens local
builders, supplies the building materials, provides design
options, and supervises the local builders. Unlike the CEMEX
Patrimonio Hoy program in Mexico, which provides credit in
the form of delivering building materials prior to payment,
CEMPRO does not offer or manage the loan. Rather, it has a team
of 24 promoter/advisers that work in client outreach,
principally facilitating the creditworthiness analysis and
preparation of the loan application for the Bank. According to
CEMPRO, their market studies show that clients are highly
interested in having a house built in less time. The Su
Hogar en Progreso program offers nine design options,
including a house-kit. Two of the designs are for incremental
construction or an initial starter home for extremely poor
families.
CEMPRO has introduced a prefabricated block technology which
preserves the same appearance as traditional concrete block.
The prefabricated model achieves a cost savings of 25-30%,
chiefly as a result of the reduced amount of reinforced steel
required, and the speed of assembly. Construction of a 36 to 44
square-meter unit can be completed in less than two months
instead of three. To date CEMPRO has provided 800 solutions.
The target for 2009 is 3,000 solutions, the breakeven point.
The kit homes were assembled through family labor, with
supervision from CEMPRO staff. However, results from the pilot
phase indicate that more skilled labor is required, since the
process is too complicated for the do-it-yourself builder. CEMPRO
developed a user manual but results were less than expected. It
would seem that manuals are less effective methods for community
education in building skills. In Tamil Nadu, India, the Indian
Association of Savings and Credit offered a course on cost
effective construction methods to its clients. A survey
revealed that only 5% who attended the class incorporated the
course concepts of cost effective methods into their building
methods and thus the class was discontinued.
CEMPRO has concluded that prefabricated systems are
challenging from the construction standpoint in the short term
but promising for large projects in the long-term. For the Bank
the key lesson from the CEMPRO experience is micro loans to
support the formation of small builders companies together with
training and preferably with certification by the Chamber of
Construction would greatly improve the standards of building and
help to close the enormous gap between the informality of the
low income housing market and the formal commercial building
industry, as well as generate employment in the construction
sector.
SECORINSA
SECORINSA is a small construction company set up in 2007 with
support from the Bank. The general manager has over 30 years of
experience in one of the largest commercial construction firms.
SECORINSA´s business goal is to specialize in progressive
improvements, which represents a massive proportion of the
bottom of the income market. The major challenge in packaging a
product for progressive housing improvements is the
heterogeneity of the types of improvements which limits the
possibilities to standardize solutions – in any one neighborhood
at a particular time, loan requests will cover a multiplicity of
construction activities, the addition of an extra room, a tiled
floor, replacement of a roof, as well as the building processes
of the poorest households that build a wall at a time. SECORINSA
keeps fixed costs to a minimum by maintaining a small core
staff, and works closely with community leaders to identify
clients in a concentrated area to achieve volume. They also uses
local supply chains to obtain favorable rates on building
materials. These suppliers are often small business firms that
are borrowers with the Bank. There are mutual benefits for all,
competitive prices for SECORINSA, which has added value for the
families and increased sales for the suppliers.
In the pilot trial SECORINSA has generated a housing
portfolio of over US $800,000 in new clients, and carried out
150 housing improvements. Although SECORINSA is in the initial
stages of product development (CEMEX reached 75,000 clients
after five years), the joint strategy with the Bank and
SECORINSA may shed light on two traditional problems, how to
manage risk and how to distribute low value, high volume
products for low income families.
Conclusions
The low-income housing products and services that G and T
Continental and its business alliances are bringing to the
market are innovating in several ways
·
Diversification of housing products that meet the needs of different
sub-segments of the bottom of the income pyramid.
G and T
Continental Bank and its partners show that commercial banks can
assemble packages for housing improvements, sites and services,
and new construction with various price tags ranging from
US$5,000 – US$25,000. As a larger number of financial
institutions and private sector construction companies recognize
the needs of different segments of the low income housing
market, and diversify products for different sub markets, this
would go a significant way in bridging the gap between housing
microfinance and housing finance in general for the poor. Over
time the two markets might merge. The expansion of housing
options at different prices, as a function of the capacity to
pay, is the flexibility that low income families require to
facilitate different entry points to the housing market. Hence
the break with the traditional “one size fits all” mentality for
addressing low income housing is one of the major breakthroughs
both for the construction sector and commercial banks
·
Joint sales provide a basis for rapid growth.
The joint sales and marketing methods appear to be a cost
effective strategy to reaching a greater number of clients. The
partnership approach recognizes that no one entity has the
ability to provide all the pieces that make up the housing value
chain given the complexity of housing finance outreach, where
closeness to the client is crucial. Marketing housing finance
requires more intensive promotion than traditional microfinance
and may be a factor in explaining why housing microfinance
portfolio size generally is small. Marketing capacities need to
be sufficiently robust to be able to extend to new geographic
areas since the frequency of repeat loans is also much lower
than in microfinance. G and T Continental´s strategy of
alliances with a number of companies is geared to managing scale
and future results will depend to some degree on the internal
capacity of the Bank, to receive and process the volume that
this platform could generate. Appropriate information systems
for managing large numbers of housing transactions including
technical assistance records, still need to be developed.
·
Provision of technical assistance in construction at scale is set to be
the next key innovation that would revolutionize the quality of
progressive housing improvements. When talking of scale in housing finance circles this almost always
refers to and is synonymous to scale lending. Much less
attention has been given to exploring mechanisms to scale
technical construction assistance services, a key non financial
service. Yet, this article has presented some compelling
evidence which suggests that technical assistance could be one
of the missing links in the housing value chain. Technical
assistance provision not only will impact on the quality of low
income housing, but for the Bank, in the absence of real
collateral it provides tracking for cost recovery and building
client loyalty. The incremental housing process raises a whole
host of technical challenges, and to date most MFIs have chosen
to avoid, yet, the SECORINSA experience suggests that the
formation of small building companies that can offer efficient
technical services for housing improvements and incremental
building has possibilities to help lenders make their way down
the income pyramid, by mitigating some of the perceived risk
inherent in microloans to the informal housing market.
·
Reaching scale: Likewise, the entry of the construction companies, material suppliers
and cement manufacturers to provide more holistic services shows
promise in both enhancing scale, and the quality of housing for
the poor should continue to improve. Good construction
practices decreases housing costs and increases the value of the
home, which is the key asset of the poor. As the ADPROSA
examples shows, large construction companies have the capacity
to innovate with new technologies which can deliver housing
sooner and cheaper to low income families, and which could go a
long way in expanding solutions for the vast numbers of
potential clients. New technologies at scale are also part of
the housing chain that potentially can tackle the affordability
barrier for moderate income families. In all three cases,
ADPROSA, CEMPRO, and SECORINSA there is evidence of what
Prahalad indicated were some of the principles of business
innovation for the bottom of the pyramid markets – focus on
hybrid solutions and blending old and new technology.
·
New distribution channels. The expanding number of firms entering the under banked
market with innovative products gives reason to be optimistic
that companies entering this market can meet the needs and
criteria of the low to moderate income families with innovation
and profitably. The financial services industry may be better
placed to reach scale in housing finance through partnerships
than a “stand alone” credit only product. Alliances between
banks and the construction sector, similar to G and T
Continental appear to be the growing trend to meet the market
opportunity of the BOP. CEMEX’s Patrimonio Hoy program,
initially provided the loans in materials, but it is now seeking
to work with financial institutions to manage the lending
operations. Mi Banco, Peru works with building material
suppliers, and Holcim, a large international cement company has
partnerships with NGOs and local supplier networks. The growth
of new distribution channels for both loans and housing products
entering the under banked market with appropriate frameworks is
well positioned to provide low-moderate housing on the required
scale.
Irene Vance
is Human Settlements Adviser to the Swedish International
Development Cooperation Agency (SIDA) in Central America working
on housing microfinance and urban development programs, as well
as SIDA's Adviser to the CGAP Housing Finance for the Poor
Working Group. Previously she worked for UN Habitat in Bolivia
developing holistic livelihoods approaches through financial and
non financial services for housing in rural and peri-urban
communities.
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