Can we design affordable housing products for Kenya’s low- and moderate-income people?

Posted on by The Helix Institute at MSC

Mary is a small trader in Nairobi who aspires to own a home one day. She earns a consistent income, yet the barriers to homeownership are daunting as the costs are high and her financing options are limited. Her modest income is sufficient to cover her daily needs but not enough to buy a home in Nairobi’s skyrocketing property market. MSC’s recent research commissioned by Habitat for Humanity International highlights that Mary’s situation is far from unique.

Like Mary, many Kenyans face hurdles when they seek access to affordable finance tailored to their needs and income levels to construct, improve, or expand their existing house. Lack of collaterals and proof of consistent income, high interest rates, upfront contribution fees, and the stringent requirement to access financing have demolished her dream of owning a home, either in Nairobi or in her rural village.

This blog addresses the challenge of designing affordable housing products for low- and moderate-income earners in Kenya, where rapid urbanization has outpaced the housing supply. Innovative financial solutions that focus on affordability and build the capacity of financial institutions are essential to serve this segment effectively. We explore new strategies to highlight how institutions can create sustainable housing products that meet the real needs of people from this segment and deliver tailored solutions to them.

The housing landscape

Kenya faces a significant housing deficit, with an annual demand of 250,000 units and a supply of only 50,000, among which 49,000 units target the upper-middle and high-end market segments. This shortfall has led to the growth of informal settlements and overcrowding in urban areas like Nairobi. High construction costs, limited access to affordable financing, and outdated building codes further complicate the situation. The Bottom-Up Economic Transformation Agenda seeks to address these challenges by prioritizing affordable housing as a key pillar. The plan intends to build 250,000 new housing units annually through government investments worth KES 50 billion (USD 386 million) and an additional KES 200 billion (USD 1.56 billion) from private investors. The goal is to increase affordable homes from 2% to 50% of total housing, expand the mortgage market from 30,000 to 1 million through low-cost mortgages, and, in turn, create jobs and boost economic growth.

However, this plan faces significant pitfalls, including the controversial housing levy that has met with public resistance, as many citizens feel overburdened by mandatory contributions. Moreover, the initiative may fail to deliver long-term solutions unless it addresses structural issues, such as land ownership challenges, outdated building codes, and high construction costs. While the plan may boost short-term construction jobs, it risks not solving the underlying housing affordability problem if financing remains inaccessible for most low- and moderate-income earners in the long run. The initiative’s success hinges on overcoming these barriers and ensuring that the financial mechanisms are truly accessible to those who need them most.

Supply-side challenges for financial institutions in housing finance

Financial institutions in Kenya face substantial hurdles when they seek to develop housing products for low- and moderate-income earners. A significant challenge is the perception that lending to this segment is risky. About 83% of Kenyans work in the informal sector. They earn irregular incomes and lack formal credit history and collateral. As a result, these informal sector workers often do not qualify for traditional mortgage products, severely limiting their access to housing finance.

According to the Central Bank of Kenya, the mortgage market faces difficulties, with a 12.5% non-performing loan (NPL) rate for mortgages. These NPLs primarily result from borrowers who, despite having formal loans, struggle to meet their repayment obligations due to various economic pressures. Housing finance remains inaccessible to many, as average mortgage interest rates range between 12% and 14%. SACCOs, which offer slightly lower rates of around 10-12%, provide some relief but struggle due to limited access to long-term capital.

High construction costs make up 50-60% of housing prices. These costs constrain financial institutions and limit them from offering affordable mortgages. Strict compliance under the Banking Act raises costs for financial institutions and holds back innovation in housing finance. In rural areas, limited digitization makes credit risk assessment difficult, while SACCOs struggle to secure long-term financing. These barriers limit their ability to offer sustainable housing loans for low-income earners.

Key strategies for affordable housing design for financial institutions

In the section below, we outline three key strategies and innovative approaches that can help financial institutions develop effective housing finance solutions:

  1. Integration of housing support services: Housing support services should be at the forefront of efforts to enable low- and moderate-income earners to access and sustain affordable housing. These services offer crucial assistance, including construction oversight, guidance on material procurement, and supervision of loan disbursements to ensure effective fund use. This comprehensive approach helps mitigate risks for financial institutions, builds trust with borrowers, and ensures housing projects remain sustainable in the long term.

 

  1. Tailored financial products and innovative design approaches: Financial institutions must develop flexible housing finance products, such as micro-mortgages, income-based repayment plans, and incremental housing loans to cater to the specific needs of low- and moderate-income earners, particularly those with irregular incomes. An example is the Nyumba Smart Loan of the Kenya Women Microfinance Bank (KWFT), which has successfully expanded access to affordable housing, particularly for underserved populations and women. Incremental housing loans like the Nyumba Smart Loan allow borrowers to build homes in stages as they disburse smaller, flexible loans for each phase of construction. This phased approach reduces financial strain, aligns with cash flow, and makes homeownership more achievable for underserved groups. Alongside innovative, cost-effective housing designs, these products provide sustainable solutions that expand access to affordable housing without compromising quality or essential services.
  1. Risk-sharing facilities (RSFs): RSFs reduce risk for borrowers through guarantees or cover potential losses, which help financial institutions lend to low- and moderate-income earners. In Kenya, the Kenya Mortgage Refinance Company (KMRC) uses RSFs to help lenders offer affordable mortgages to informal sector workers with irregular incomes, which helps reduce the cost of loans and makes them more accessible.In West Africa, the Caisse Régionale de Refinancement Hypothécaire (CRRH) provides liquidity to banks that allows them to offer lower-cost mortgages to low-income households. Loan uptake increases as a result. However, these initiatives still need more technical assistance and resources to reach a wider group of low-income earners. Currently, the Tanzania Mortgage Refinancing Company (TMRC) has partnered with two financial institutions to develop affordable housing products with support from HFHI and MSC. After the pilot phase, the TMRC plans to offer refinancing solutions to these institutions to scale the products and make housing finance more accessible to low- and moderate-income borrowers. This approach demonstrates how RSFs can enhance lender confidence and expand affordable housing opportunities.

Conclusion and recommendations

The development of housing finance products requires time and resources, which makes partnerships essential. Collaborations between FSPs, MFIs, governments, and development organizations create scalable solutions for low-income earners. Examples include partnerships, such as TMRC with HFHI and KMRC with the World Bank and IFC, which work to expand affordable housing financing. These collaborations are vital to enhance financial inclusion and build a sustainable, accessible housing market for underserved communities.

Governments should play a leading role by establishing clear regulatory frameworks and offering targeted subsidies to break down barriers to affordable housing finance. Development partners must contribute funding and technical expertise to drive innovation and ensure financial products meet the needs of low- and moderate-income earners. The KMRC can play a crucial part to create tailored refinancing strategies that address this group’s unique challenges, such as irregular incomes and limited collateral. Financial institutions, governments, and development partners must collaborate urgently to bring real progress, transform these solutions, and close the housing finance gap. Now is the time to build a sustainable, affordable housing market that truly includes the underserved.

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.

49% of women-owned micro units wouldn’t be able to survive at all amid sudden revenue loss: Study

Posted on by Deepesh Singh

61 percent of women-owned micro businesses in India remain unregistered with formalization being a key barrier to the support of such enterprises, said a report on Thursday by global consulting firm MicroSave Consulting (MSC) in collaboration with microfinance association Sa-Dhan and supported by JPMorgan Chase. Moreover, sustainability is another key challenge faced by women micro businesses as nearly half of them (49 percent) said they would not be able to survive at all in case of a sudden loss of revenue.

The research, covering six regions—Delhi-NCR, Gujarat, Maharashtra, Telangana, Karnataka, and Tamil Nadu— collected data through 1,460 computer-assisted personal interviews, key informant interviews with financial institutions and support organizations, and desk research.

The report “Decoding the Financial Health of Women-Owned Micro-Businesses (wMB) in India” highlighted the financial challenges faced by women entrepreneurs.

Autonomy was also revealed to be another critical issue for women micro units as about 44.3 percent of women entrepreneurs said they rely on their spouses or other family members to support their businesses, which reflected a significant dependence on external help.

Further, a majority of these businesses do not generate employment. The report said approximately 55 percent of these businesses do not employ any staff and operate as solo ventures, which limits their contribution to job creation and the broader economy.

Among other key deterrents to the growth of women-owned micro-enterprises highlighted in the report were 60 percent of respondents didn’t maintain any written records for their operations; 51 percent who didn’t maintain the records reported that they struggled to pay EMIs or loan dues, 68 percent had no separate bank account for their business, 69 percent said they have not availed any formal loan, indicating potential barrier to accessing financial services; and over 45 percent said they don’t maintain any emergency funds for business at all.

The study defined women-owned microbusinesses as those with annual revenues between Rs 1.5 lakh and Rs 9 lakh, employing three individuals.

Another study in September this year by Crisil and DBS Bank India which included survey of 400 self-employed women highlighted that bank loans were the preferred choice of only 21 percent of respondents looking to fund their business.

On the other hand, as many as 65 percent of self-employed women said they depend on personal savings or financial assistance from family or friends to finance their business.

To boost credit access for women-owned micro and small enterprises, the government last month had enhanced the loan guarantee coverage under the CGTMSE scheme to 90 percent.

MSME Minister Jitan Ram Manjhi had said that 27 lakh women-owned MSEs are likely to benefit from this initiative.

The article was first published on the Financial Express website on 10th October 2024.

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