Microfinance and Rural Housing

This paper illustrates the challenges and potential benefits for microfinance institutions (MFIs) interested in diversifying into the housing microfinance field, by focusing on the Indian case. The paper explains:

• The objectives of microfinance housing, which are:
  • To meet a basic human need;
  • To help in the establishment of a personal asset;
  • To generate a productive asset.
• The market potential of rural housing and its financial sources, which include private and commercial institutions, the public sector and MFIs.
• Housing loans as an alternative for MFIs in a saturated market.
• Market segmentation and penetration.
• Various housing loan products, such as:
  • Housing repair/improvement loans;
  • New housing construction loans;
  • Land acquisition loans;
  • Infrastructure provision loans.
• Different lending methodologies in housing loans.
• The processes of determining loan eligibility, fixing building standards, risk management and technical assistance.
• The profitability challenge that includes:
  • Cost versus affordability;
  • Term mismatch and interest rate risk;
  • Credit analysis.
• Bottlenecks in the housing program, such as:
  • Locating sources of capital;
  • Lack of understanding of the appropriate relationship between subsidies and financial services;
  • Insecure land tenure.

The paper concludes that low income housing finance is not a myth and states that with the application of innovative credit modalities, housing finance for the rural and semi-urban classes can be a viable business for MFIs.