Incremental Housing Finance: Opportunities for Impact Investment in End-User Financing For Africa

Author: Dr. Jonathan Oladeji, PhD

It’s common to find literature outside the continent describing incremental housing in theory and often making far-fetched assumptions about practicality in affordable housing markets. Meanwhile, Africa has had a longstanding relationship with building incrementally. Our fathers, mothers, and grandparents built this way. What more could be innovative than a business and investment approach that is culturally relevant and socially inclusive?

Quite little has been done to redesign products that are truly representative of the ideals of impact investing which is what Africa needs in the place of highly capitalist mortgages and demeaning piecemeal charity projects infiltrating the market currently. Across the continent, it’s easy to bear witness to the exclusive nature of mortgage regimes across the continent. Compared to the rate of urbanization and the growing demand for habitable homes in and around urban hubs and city centres, affordable housing projects are mere drops in the ocean. In a study of Botswana’s housing finance system, Berge & Jing (2010) discovered a small housing finance market dominated by commercial banks. Despite the gains of a stable macroeconomy, they noted a lack of competition, focus on high-income groups, inexistent secondary market, and hesitation to lend to other low-income groups. They also believe that, unlike many other developing countries in Africa, Botswana’s stable macroeconomic development since the 1980s and 1990s has ensured that housing finance is unhindered. However, despite the shift in the structure of bank lending to households, with property loans increasing rapidly between 2002-2006, development still remains slow. In their consideration of the development of housing finance in Botswana, they attributed the lack of scale to a large population that is considered low-income and risky subsequently excluding most of the financing of the poor household. The story isn’t much different across the continent.

This huge gap between what must be done and what can be done will unfortunately not be addressed the conventional way. Impact investors are critical to the future of Africa. This young, highly urbanized, and growing continent is strategically positioned to supply human capacity, skill, and value-added products in the near future. Studies that have considered the housing finance gap in the continent agree that incremental housing finance seems less stringent when compared to mortgage finance. This is because this funding type is typically sourced from friends and family, savings, and community contributions. This makes it the more accessible option for most homeowners. However, because of the nature of these forms of financing, they are inconsistent, piecemeal, and not always available.

There is also a need to distinguish between supply-side and demand-side financing when it comes to incremental housing. Based on this, it is important to note that housing finance in the African context needs to be considered from the end-users perspective. If incremental housing finance must be designed to reach the neediest, it should give cognizance to how Africans incrementally build their homes and as such rely on informal and incremental finance. This perspective draws from John F.C. Turner’s theories that advocate assisted self-help housing as the most affordable housing option in developing economies as against formal options like mortgage finance.

While referencing JFC Turner’s self-help theories, Ntema (2011) notes that Mortgage finance adopted from developed economies forces the purchase of ready-developed housing. This contributes significantly to the problem of affordability. Therefore, investment and financing of affordable housing must begin to shift towards a framework that is more suitable to the economic realities of Africans and the need to build incrementally. The framework is expected to closely align the financing of a home purchase or ownership with the socioeconomic status of African households. In most African settings, households develop or own their houses in bits or incrementally such that at year 0, the land is acquired and development might take several years. The time taken to gather the required equity or debt finance for acquisition may have taken several months or years by household. In countries like Nigeria, for instance, low-income home buyers or developers rely on pooling resources together from friends, relatives or work colleagues to raise funds. Others look to workplace cooperative societies for raising required finance with a limited repayment period.

Thus the proposed house financing framework must incorporate the income source and level, family size to determine the appropriate type of accommodation for households, cheaper building materials and length of repayment among others.

Among various studies that have considered the subject of affordable housing in Africa, Groves (2004) makes one of the earliest cross-continental contributions. His study investigated the challenges facing the provision of affordable housing in African cities. He pointed out that privatised African housing markets are often small-scale and largely financed by building societies – a reminder of colonial pasts. Financing in these times struggled because of poor macroeconomic conditions and Structural Adjustment Programs that withdrew government funding, tax, and regulatory privileges. It can be inferred that financial failure is partly influenced by the apathy or lack of government role in developing scalable markets.

On one hand, the role of government in creating poorly functioning housing finance markets must be considered a critical consideration. Investments in research and policymaking should be considered as a long-term impact-driven approach. On the other hand, several studies have blamed the failure of formal housing finance in Africa on neoliberal market systems. Some of these studies believe that liberalizing the market would only seem to absolve the government of its responsibility towards housing the poor. However, in the journey towards innovative finance for incremental housing, enabling markets can be seen from a different and more positive perspective. The need for impact doesn’t override the opportunities for a sustainable housing finance value chain. There needs to be a careful blend of these objectives as a longer-term approach is taken to recouping investment returns.

Furthermore, the question of risk and how it is shared among the stakeholders in housing development is critical to financing. In addressing risk and transaction cost, Ferguson & Smets (2009) believe that every finance framework must include a legal aspect; user credit information, trust, or collateral; and it must redefine the role of government. Across the continent, solutions like the FORGARIM government guarantee in Morocco, and the National Housing Finance Corporation’s efforts in South Africa, provide valuable insights into risk-mitigating roles that government can play. They also provide a sufficient basis to argue for greater innovation and scale in the deployment of incremental housing finance products across the continent.

References

Berge, C., & Jing, F.-F. (2010). Housing Finance: The Case of Botswana [Stockholm

School of Economics]. http://www.hofinet.org/upload_docs/Housing Finance - The case

of Botswana.pdf

Ferguson, B., Smets, P., and Mason, D. (2009). Affordable Housing Finance. Affordable

Housing Finance, 40–54.

Groves, R. (2004). Challenges facing the provision of affordable housing in African

cities. Housing Finance International, 18(4), 26.

Ntema, L. J. (2011). Self-Help Housing in South Africa: Paradigms, Policy and Practice

(Issue May).

About the author: Dr. Jonathan Oladeji is a Post Doctoral Research Fellow at University of Johannesburg, exploring Green Housing opportunities for low-income communities.  He is also a content writer for SME's.