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Green financing solutions for housing in Africa: Paving the way for sustainable development

Posted on by The Helix Institute at MSC

Can we build household resilience among the unhoused without accelerating climate change?

MSC supported Habitat for Humanity’s recent studies. The findings revealed a substantial unmet demand for affordable housing across Africa. The research revealed a deficit of 2 million units in Kenya and more than 1.5 million units in Zambia. These numbers illustrate a continent-wide challenge. The growing impacts of climate change further exacerbate this issue. They lead to intensified poverty and increasingly unaffordable housing. Frequent climate-related shocks have damaged existing housing infrastructure, and the strategies that informal settlements have relied on have failed under environmental change pressures.

The building sector generates 37% of energy-related greenhouse gas emissions, a significant contribution largely due to conventional methods that rely heavily on fossil fuels. These conventional methods include the use of energy-intensive materials such as concrete and steel, inefficient heating and cooling systems, and poor insulation, which lead to excessive energy consumption and higher emissions. In many urban areas, especially in developing regions, substandard buildings are often constructed with inadequate materials, and poor design, which makes them vulnerable to climate impacts, such as extreme weather events and rising temperatures. The situation will worsen if we continue to address housing needs through conventional methods and increase the demand for energy as global temperatures rise. As we work toward the provision of affordable housing, we must recognize that conventional approaches will likely aggravate the climate crisis. Two things become clear: We must address the housing deficit and ensure it is sustainable and resilient against climate impacts.

Although green homes offer a solution, their construction is often expensive for most households. Additionally, the government will need to increase its spending on green homes. Thus, we must focus on innovative solutions that balance affordability with sustainability to address these challenges. Green financing presents a significant opportunity. It can make housing more affordable and provide governments with the funds needed to finance affordable housing initiatives.

The need for affordable, green housing

Africa’s housing crisis sees an estimated shortfall of 51 million housing units. Millions of people live in substandard conditions, particularly in countries like Nigeria, where the housing deficit is 28 million units. The Democratic Republic of the Congo and South Africa face deficits of 3.9 million and 3.7 million units, respectively. These figures are made worse by Africa’s rapid urbanization, which has outpaced both housing development and economic growth.

Africa is experiencing the fastest urbanization growth globally but has the least developed housing finance. Unlike other regions, Sub-Saharan Africa has not matched its urbanization with economic growth or housing investment. Over the next three decades, Africa will see 1.2 billion more urban residents. With the population growing at 4.1% annually, which is double the global rate, the situation will deteriorate further unless stakeholders take action.

Many households struggle with limited access to affordable housing finance when they try to secure decent homes. Traditional financial products often do not align with sustainable housing needs, as high interest rates and stringent qualification criteria create substantial obstacles. While financial challenges persist, the housing sector faces an additional burden—climate change’s ever-growing impact.

Climate change intensifies housing challenges in several ways. Firstly, it increases the frequency and severity of extreme weather events, such as storms, floods, and droughts. These events can cause significant damage to homes, particularly those built with inadequate materials and poor construction practices. Floods, for example, can destroy entire neighborhoods, displace thousands of people, and cause substantial economic losses. Secondly, rising temperatures increase the demand for energy to cool homes. This escalates energy costs and contributes to higher greenhouse gas emissions. This issue is particularly problematic in regions with already-strained energy infrastructure.

The convergence of these pressing challenges underscores an urgent call to action for innovative and comprehensive strategies, particularly to develop affordable and green housing solutions, reduce environmental impact, and provide safe and healthy living conditions. The path forward lies in the integration of sustainable construction practices with cutting-edge housing designs and pioneering financial solutions. The following section explores solutions to make this vision a reality.

Green housing finance mechanisms

  1. Green mortgages are designed to incentivize energy efficiency and environmental sustainability in housing. Green mortgages are home loans for homeowners who plan to buy energy-efficient homes or retrofit existing homes to improve energy efficiency. These mortgages often come with lower interest rates and longer repayment terms, which makes them more accessible to low-income families. Homeowners can save on utility bills through reduced energy consumption, which can make housing more affordable in the long run. Green mortgage programs that encourage energy-efficient houses have been implemented, for instance, in the Philippines, Uzbekistan, and Peru.
  2. Green bonds are debt securities issued to finance projects with positive environmental benefits. Governments and financial institutions can issue green bonds to raise funds for the construction of affordable green housing. These bonds attract investors who want to support sustainable development and provide a steady flow of capital for housing projects.
  3. Construction and mortgage loan guarantees are government-backed programs to support housing development and expand access to mortgage finance, particularly for first-time buyers and those with smaller deposits. These guarantees incentivize local financial institutions (LFIs) to finance the construction and purchase of affordable, green homes. These guarantees reduce the risk for lenders and, thus, make it easier for developers to access financing and help low-income families obtain mortgages. This mechanism fosters a self-sustaining housing finance ecosystem. Examples include:
    1. Construction support or guarantee: This guarantee provides construction lending and technical assistance to local developers, such as Peru’s Market Accelerator for Green Construction (MAGC) program. It includes construction guarantee facilities lending programs to developers and construction loans for innovative green home designs.
    2. Mortgage support or guarantee: This guarantee provides technical assistance to LFIs to integrate alternative credit assessments and expand mortgage access. Mortgage guarantees encourage lenders to offer higher loan-to-value mortgages through government support and backing and, thus, expand access to mortgage finance.
    3. Grants: These provide technical assistance for housing developers and LFIs to support increased housing supply, provide market research and feasibility study assistance, and offer training on sustainable building practices and energy efficiency.

 

The blame loop

Although we have an opportunity to shape green financing, we face the paradoxical challenge of the blame loop. The persistent demand-supply gap cycle leaves energy-efficient options underutilized as a market disconnect widens between the demand for energy-efficient homes and the supply of financing and construction options.

Case studies: Green finance models in Africa

The infographic below explores emerging practice case studies in Africa that evaluate the capacity of various finance products to reduce barriers to green building and enable value creation among all housing finance market players.

 

Affordable green housing finance can deploy decentralized credit enhancements to local financial institutions. It can, thus, catalyze, normalize, and scale private construction and mortgage lending. The mechanisms can be tailored to establish a self-sustaining ecosystem that supports the construction of affordable green homes and long-term homeownership.

Conclusion and recommendations

The development of affordable green housing in Africa presents a transformative opportunity. However, several significant challenges impede it. These include limited access to financing for both developers and potential homeowners, the high initial costs of green construction, and the lack of awareness and expertise in green building practices. Despite these obstacles, the need for affordable, climate-resilient housing continues to grow as urbanization accelerates across the continent.

We must take concrete action to bridge these gaps and use the potential of green housing finance. Our previous research, commissioned by Habitat for Humanity International (HFHI), HFH-Kenya, and HFH-Zambia, has laid the foundation for understanding affordable housing needs. The next step is to explore how green financing mechanisms can be adapted and scaled to meet the African housing market’s unique challenges.

Donors and stakeholders can play a pivotal role here. We can answer key questions that remain by funding targeted research:

  • What innovative financial products can make green homes more accessible to low-income households?
  • How can we reduce the financial risks for developers and lenders in the green housing space?
  • What policy interventions would incentivize private sector investments in affordable, green housing?
  • How can large multilateral climate funds and blended finance instruments help catalyze private capital to scale affordable green housing initiatives?

 

Green financing must gain traction through systemic coordination, collaboration, and value creation across all market players. The answers to these questions will help us build a compelling case for green finance and ensure it becomes a cornerstone of Africa’s sustainable housing agenda.

Decoding the financial health of women-owned microbusinesses, India

Posted on by Deepesh Singh

The ‘Decoding the Financial Health of women-owned microbusinesses in India’ initiative was launched to address the unique vulnerabilities of women-led microenterprises, especially in the aftermath of economic shocks such as the pandemic. MSC, in collaboration with Sa-Dhan, conducted a pioneering study on the financial health of women-owned microbusinesses (wMBs) in India.

The project involved extensive research, including secondary analysis, expert consultations, and primary data collection, to develop a comprehensive financial health framework for wMBs. The framework defines key dimensions, parameters, and indicators that assess and improve financial health outcomes for women entrepreneurs.

MSC led the study’s design and execution to ensure a robust and evidence-based approach to financial health assessment for wMBs. The team conducted Key Informant Interviews (KIIs) with supply-side stakeholders, held brainstorming workshops with industry experts, and engaged Enterprise Support Organizations (ESOs) and government bodies to refine the framework. The study resulted in a structured methodology for measuring financial health, providing actionable insights for key ecosystem players.

The study delivered a first-of-its-kind financial health framework and checklist, offering practical financial and non-financial tools for stakeholders—including funders, financial institutions, ESOs, and policymakers—to assess and enhance the financial well-being of women-owned micro businesses. It also contributed to the broader financial health discourse in India by bridging research gaps and strengthening the understanding of how ecosystem actors perceive and influence wMB financial health.

 J.P. Morgan Chase & Co.  commissioned this project.

Financial Freedom at the Last Mile: The Sathi Network

Posted on by Saumya Dixit

The Sathi Network, a women-led agent network, provides marginalized rural women in Bangladesh with access to financial services. Female agents build trust and empower unbanked women to engage in digital transactions confidently. They promote financial inclusion in a supportive environment. MSC carried out the impact evaluation of the Sathi Network for a2i one year after its intervention. Read the stories of Neela, Rahela, Fahmida, and Fahima. These women are working to overcome societal barriers, create sustainable businesses, and promote financial literacy among women in their communities.

Scaling up affordable housing finance in Kenya

Posted on by Deepesh Singh

The Digital Shift: Unlocking opportunities for India’s Microentrepreneurs

Posted on by Saumya Dixit

In our earlier blog, we looked at the digital revolution that has been brewing in India that continues to reshape the way microenterprises (MEs) function in today’s connected age. In this part, we dive deeper into the impact of digital platform adoption for MEs, variations within subtypes of MEs, and the way ahead for these small businesses.

The adoption of digital platforms has a nuanced but significant impact on MEs’ finances. Platformed MEs report a marginally higher income of INR 60,997 (USD 725) compared to INR 60,750 (USD 722) for unplatformed MEs. However, platformed MEs also face slightly higher expenses, with costs at INR 33,071 (USD 393) compared to INR 31,409 (USD 373) for their unplatformed counterparts. This increase is likely due to additional platform fees, logistics, marketing expenses, and increased inventory costs associated with digital platform use.

The impact of digital platform adoption also varies across different types of entrepreneurs. Male-owned MEs tend to incur higher business expenses, which could point to differences in the scale or type of businesses they operate. This suggests that platform adoption does not affect all MEs uniformly, as demographic factors like gender may play a role in shaping business outcomes. Despite higher expenses, frequent engagement with digital platforms tends to yield higher income, implying that MEs that invest more in the digital space can eventually realize greater financial gains. Thus, while digital platform use comes with added costs, the potential for long-term financial rewards remains strong for businesses that leverage these platforms effectively.

These observations underscore the importance of understanding the diverse ways digital platforms impact different groups of entrepreneurs. Gender-based differences in platform usage call for targeted interventions to ensure equitable access to the advantages of digital adoption. Furthermore, geographical differences emerge, as rural MEs tend to show better profit margins than urban businesses, while urban entrepreneurs express higher confidence in income stability. Together, these factors create a complex landscape of platform usage, requiring nuanced approaches to fully harness digital platforms’ potential for all entrepreneurs.

This financial impact extends beyond income and expenses, influencing how platformed and unplatformed MEs manage their financial operations. Our research shows that 79.7% of platformed and 81.2% of unplatformed MEs keep their personal and business finances separate. This demonstrates a fundamental level of financial discipline. However, the tools they use to track their operations vary significantly. Platformed MEs are more likely to use mobile money or bank statements and spreadsheets, while unplatformed MEs rely on memory and traditional bookkeeping methods. This suggests that digital platforms encourage the adoption of more modern, tech-driven management practices.

Interestingly, unplatformed MEs are more likely to reinvest their surplus funds into their business. This could indicate a difference in growth strategies or investment priorities between the two groups. Despite these differences, both platformed and unplatformed MEs embrace digital tools. A substantial 83.8% of unplatformed MEs use digital wallets for business transactions, which highlights the pervasive influence of digital financial services. As MEs adopt these new capabilities, they unlock opportunities to streamline operations, make data-informed decisions, and improve business outcomes. The digital transformation of ME business management is well underway, and many embrace these tools with the mindset that they will be well-positioned for success in the future.

Digital platforms contribute significantly to MEs’ resilience and growth potential. These platforms provide access to wider markets, streamline operations, and enhance financial flexibility, and, thus, empower MEs. Specifically, platformed MEs have access to a more diverse range of credit sources, which enhances their financial resilience. Our research shows that 39.5% of platformed MEs have borrowed money, with higher rates in urban areas. This diversification of credit options can help MEs weather economic storms and maintain financial stability.

Digital platforms are emerging as powerful tools to help MEs achieve several key business objectives:

  1. Expanded customer reach;
  2. Increased revenue streams;
  3. Improved operational efficiency;
  4. Enhanced access to financial resources, and;
  5. Greater business resilience.

However, it is not just about access to these resources but also how effectively MEs use them. The strategic use of digital platforms and the financial opportunities they provide can significantly impact an ME’s ability to grow, innovate, and withstand market fluctuations.

Platformed MEs are more likely to borrow for business than their unplatformed counterparts. This suggests that digital platforms encourage MEs to invest in their businesses, which lays the foundation for future growth. Platformed MEs are also more willing to switch lenders for better terms than unplatformed MEs. This flexibility allows MEs to adapt to changing economic conditions and benefit from more favorable financing options when they arise.

These platforms provide access to a broader range of financial tools and business investments to empower MEs to build stronger. In a rapidly changing economic landscape, digital platforms’ role in supporting MEs’ resilience and growth cannot be overstated. As more entrepreneurs embrace these tools, we can expect a new generation of MEs to be better equipped to navigate challenges and seize opportunities in the digital age.

We propose several recommendations to empower microenterprises (MEs) further and increase the positive impact of digital platforms:

Digital platforms are indeed revolutionizing small businesses in India. They offer unprecedented opportunities for growth, resilience, and financial inclusion. However, the journey is far from complete. Significant disparities persist, particularly in terms of gender and rural-urban divides. Digital platforms’ potential to transform microentrepreneurs’ lives is immense. However, all stakeholders, including platform providers, policymakers, financial institutions, and support organizations, must make concerted efforts to realize this potential.

We can address the challenges and implement targeted support mechanisms to create a more inclusive digital ecosystem that empowers all microentrepreneurs, regardless of their location, gender, or digital proficiency. Microentrepreneurs can use digital platforms’ true potential if stakeholders employ mechanisms for MEs’ growth as the digital ecosystem grows.

*We have assumed a conversion rate of USD 1 = INR 84.08, as of October 2024

Empowering India’s microentrepreneurs: How digital platforms are revolutionizing microenterprises

Posted on by Saumya Dixit

A digital revolution has been silently reshaping the landscape of microenterprises in India. Microentrepreneurs and India’s grassroots innovators have been delving into the digital arena with smartphones and a newfound enthusiasm for growth. This revolution does not just encompass a change in their manner of operation; instead, it involves a complete transformation of their business horizons.

Picture Meera, a small-town sari seller who showcases her vibrant collection to customers nationwide through digital platforms. Or think of Rajesh, whose local spice blend finds its way into kitchens hundreds of miles away. These are the faces of India’s digital microenterprise boom.

Digital platforms serve as catalysts for growth and resilience in an ever-changing economic landscape. They help increase revenues, provide a wider customer reach, and streamline operations. However, unfavorable policies for sellers and high commissions limit the broader adoption of these platforms. Hence, many microenterprises (MEs) stand on the sidelines, held back by various barriers. The divide between the digitally empowered and the unconnected is huge.

While this divide presents a challenge, it also brings forth an opportunity to bridge the digital gap and foster inclusive economic growth. We can achieve the following by addressing the barriers to platform adoption:

  1. Empower more MEs with digital tools and market access
  2. Stimulate local economies through an increase in the competitiveness of small businesses
  3. Reduce economic disparities between urban and rural areas
  4. Create a more diverse and resilient digital marketplace
  5. Drive innovation in platform design and policies to better serve MEs’ needs

A wide array of digital platforms have been transforming the way MEs reach and serve their customers. These include e-commerce powerhouses, such as Amazon and Flipkart, and social media storefronts of Instagram, WhatsApp, and Facebook. These platforms can aid financial inclusion, enhance access to credit, and enable interaction with other MEs. This digital revolution means much more than convenience for MEs. It can unlock new possibilities, such as the ability to reach customers in far-flung cities and manage finances with a few taps on a smartphone.

Our study intended to understand MEs’ status on digital platforms, the consequences of their exclusion from digital platforms, and the type of support they needed to make digital platforms more accessible and effective. We surveyed 460 microentrepreneurs across India, with a careful balance to represent the diversity of the country’s microbusiness landscape. The sample included an almost equal gender distribution among platformed and unplatformed MEs, with about 73% in retail trade and 27% in social selling. We ensured equal representation from urban and rural or peri-urban areas, which allowed us to gain comprehensive insights into MEs’ varied experiences across different demographics and regions.

Our research paints a fascinating picture of the digital adoption landscape. Age and gender play surprising roles. The digital platform users tend to be younger, with a noticeable tilt toward male entrepreneurs. Education emerges as a vital factor—most digital platform adopters have at least a secondary education. Most platform users easily navigate the Internet, which showcases a growing digital savviness among India’s small business owners.

Microentrepreneurs are highly resourceful in finding ways to learn about these platforms. Most MEs rely on their research to understand digital platforms. The grapevine effect is real—friends and family often spark microentrepreneurs’ initial interest in digital platforms. However, a confidence gap persists—male entrepreneurs generally feel more self-assured when they navigate digital platforms independently. This tapestry of factors offers crucial insights for those who seek to bridge the digital divide and empower India’s microentrepreneurs in the digital age.

MEs’ journey on digital platforms is as diverse as the businesses themselves. Many MEs independently take their first digital steps and navigate the sign-up process. This self-reliant approach is seen across rural and urban areas, which shows the growing digital confidence among Indian entrepreneurs. Peer support plays a crucial role, especially for women entrepreneurs. In rural and peri-urban areas, friends and family often step in to help MEs get started on digital platforms. This highlights how social networks can help drive digital adoption.

Urban areas present a slightly different picture. Here, platform agents often play a key role to onboard MEs. They help people who are less comfortable with technology.

Retail sellers are drawn to platforms that offer competitive pricing and easy comparison tools. They seek ways to keep costs low and stay competitive in a crowded market. Social sellers, on the other hand, value user-friendly interfaces, powerful marketing tools, and responsive customer support. These features help them build their brand and maintain customer relationships effectively.

Despite the benefits, digital platforms are not without their challenges. High commission rates and unfavorable return policies are major pain points for many MEs. These issues, combined with complex platform interfaces and occasional technical glitches, can lead to frustration and, in some cases, compel MEs to leave the platform.

Yet digital platforms are evolving beyond marketplaces. They have emerged as crucial financial hubs for MEs. The adoption of digital wallets and payment apps has skyrocketed among platformed and unplatformed MEs. It has revolutionized how small businesses handle transactions. UPI, in particular, has gained significant traction among platformed MEs for business transactions. It offers previously unimaginable speed and convenience.

While digital payments are on the rise, cash still reigns supreme among unplatformed MEs. This dual reality highlights the ongoing digital transition in India’s microenterprise landscape. Credit access through digital platforms has been reshaping financial inclusion for MEs. Buy now, pay later (BNPL) programs have become a game-changer. They have allowed entrepreneurs to manage cash flow more effectively and invest in inventory without immediate capital. However, this financial revolution does not reach everyone equally. A stark gender divide exists in credit usage—male entrepreneurs more readily tap into these digital credit lines. This disparity raises important questions about financial access and literacy among women entrepreneurs in the digital age.

In the next part of this two-part blog series, we will look at the impact of digital platforms on MEs, the differences between MEs who are on platforms and those who have not adopted platforms, and ways to increase digital platform adoption for MEs. Read the next part here.