Tag Archives: Housing finance

How to get a Master’s in Affordable Housing?

By: Janaki Kibe, Project Manager

I live in Boston, Massachusetts, part of a larger metropolitan area that is home to over eight universities, including Harvard, MIT, Boston University, Boston College, Tufts, Northeastern, Brandeis, and University of Massachusetts – Boston. Despite the plethora of academic types and abundance of obscure course titles (i.e. “Alien Worlds” – yes a real course offered at Boston University), I haven’t found a school yet that offers a Masters in Affordable Housing. (And yes, I have looked).mad_scientist

Yet, with my inherent Tiger Mother DNA and the endless enthusiasm of my mad-scientist boss, David Smith, my colleagues and I have been stealthily crafting our own unofficial Master’s in Affordable Housing.

tiger_mother

After much anticipation—I know you were anticipating it—I am ready to unveil the curriculum.

Course 1: SUP-665 Real Estate Finance and Development Fundamentals

Harvard Graduate School of Design or Harvard Kennedy School

Professor: Ed MarchantHarvard_gsd

Ed Marchant, an enthusiastic practitioner (read: actually worked in the field!) and real estate teacher extraordinaire, is a wonderful person to introduce you to the world of real estate development, and really, aren’t we all in need of such a person? In Marchant’s class, which is offered in the fall, you’ll build your own pro formas, calculate IRRs and NPVs, and understand how discount rates impact your returns. The class is a mix of students who have worked in real estate and finance and then the rest of us, who are pretty much akin to blank stares, I mean slates. While the first few weeks of the course may be overwhelming—Marchant has a tendency to surprise students with a slew of rapid-fire questions “What is the IRR? What happens when vacancy rates increase by 2%? What does 40B say?”—there will be a eureka moment when things fall into place and you realize, “Geez! This is amazing!”. And that’s when the fun starts. I definitely recommend this course for anyone who has an inkling that they are interested in real estate and wants to understand what the heck people mean when they say NPV!

Course 2: SUP-666 Affordable and Mixed-Income Housing Development, Finance, and Management

Harvard Graduate School of Design

Professor: Ed Marchant

In the Spring, you can follow up on your newly developed real estate skills by taking Marchant’s Affordable and Mixed-Income Housing course, which is offered at the Harvard Graduate School of Design (GSD). In addition to learning a heck of a lot about subsidies and financing for affordable housing development in the US, students also have the opportunity to participate in an affordable housing development competition. In our small office in Boston, four of us participated in this competition over the last four years—and three placed a prestigious second in the competition. One claims that she was fourth place (note: they only give awards for the top three places). The competition is great. You form a student team comprised of architects, planners, MBAs, and the occasional policy folk, are paired with an actual Community Development Corporation, and are given the task of creating a development proposal for a specific site in the Greater Boston metropolitan area. The proposals must be architecturally and economically feasible and desirable. For most of us students, it was the first time that we were working on “real” projects and the opportunity to deal with real world constraints rather than theoretical ones was appealing.

AHI Staff win 2nd place at the Boston Affordable Housing Development Competition

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How do you solve a problem like Korea’s dysfunctional housing market?

By: Derek Long, Senior Housing Adviser 

(Re-posted from The Guardian, one of the UK’s top national newspapers and the world’s third most-read newspaper website)

Imagine a world where a £100,000 deposit for a small flat is cheap; where having 60% of the value of your next home means you haven’t saved enough and you’re running short of time because your tenancy (yes, that the huge deposit was only key money) will be over in two years. Welcome to jeonse and the Korean housing market.

And it is a strange market to British eyes. Homeownership is not popular. Unlike booming Hong Kong or Singapore, home prices fell about 8% last year. Rather than buy a depreciating asset, the middle classes look to rent. The only problem is that the sums no longer add up for the majority of landlords either….

Read the rest of the article on The Guardian’s website or in PDF version.

South Korea

The race against winter in the slums of Ulaanbaatar

By: Noel Sampson, AHI Nicaragua Regional Analyst

“There are so many new rich people and there is no place for them to spend their money” said Rob, a French- American investor I met on the flight from Moscow to Ulaanbaatar (UB). He told me he was building a new club and Irish pub – “the biggest in UB” he promised. I gave a dry smile.  The thought of yet another Irish pub is hard for me to get excited about because they all look the same to me. 

 

Hours later I discovered the city is already full of Irish pubs, crammed in amongst the office towers under a skyline cluttered with cranes. Up in the surrounding hills, beyond the cranes and city lights, the slums are populated by gers (traditional Mongolian tents) exhaling thick coal smoke. The khashaas (individual fenced plots) highlight the organic pattern of the informal urban fabric.

 

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Overview of Ulaanbaatar and its slums far in the back

 

More than 50% of Ulaanbaatar’s population lives in ger-areas and around 47% of ger residents live in poverty. Ger-areas have limited infrastructure and services such as heating, water and sanitation. Residents use coal-fired stoves to survive extremely harsh winters with temperatures below -40°C. Domestic coal fires are the main cause for air pollution in Ulaanbaatar where individual households cannot afford to connect to the city’s power grid. Improving access to services would help to upgrade these areas and improve the quality of life.

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Ger-areas in the district of Selbe

 

A major cause of the growth of slums in Ulaanbaatar is immigration to the city related to dzud – a concurrent natural disaster characterized by summer drought followed by particularly harsh winter with extremely low temperatures and heavy snow. The 2010 dzud affected an estimated 769,106 people (28% of total population) and has resulted in 8.4 million livestock deaths. Many were forced to move to the capital. Other causative factors for the increase of slums include high poverty levels in rural areas, the inexperience of local institutions in dealing with urban issues, natural population growth and the Free Mobility Law. This law, approved by the Supreme Court in 2003, grants every Mongolian the right to freely own a plot of land in the capital.

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View of one family Khashaa

 

The challenge in Ulaanbaatar is therefore a matter of land management and affordability of services and adequate housing. The extreme temperatures  and the spread  of slums make services difficult and expensive to implement. To address these issues, the most viable strategy is to densify ger-areas. Residents can not afford individual connections to services and grouping residents together could reduce the cost for such services.

 

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Lack of access to infrastructure and services are remarkable in Ger-areas

 

The question lies in how to implement such efforts, in particular how slum dwellers will participate in the development strategies of the city.  Another important challenge is how to create a financial flux that integrates private sector, residents and government. It is important to remark there is not small effort towards slum upgrading of ger-areas, any small improvement can create a flow-on effect on service provision to the surrounding slums that continue growing. Thus, opportunities for both residents and private sector, and the city’s development future lie in the provision of adequate housing and the improvement of ger-areas.

 

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Despite construction industry is booming, building season is just five months in a year due to the harsh winter

 

Perhaps, the creation of an entity to act as fair broker between private, residents and government can contribute to fill this gap. Under the support of a new created public-private entity residents could create community builders associations, or similar schemes of housing co-ops as an alternative for affordable housing construction. Residents can start a guided and progressive land pooling process, making land available for public facilities at the time they can have optimums living conditions. This process can allow to lease part of the land to the private sector and obtain in return the finance for the construction of housing buildings and improved urban spaces.

 

Moreover, the creation of such entity can address potential future concerns such as how to work out compensation systems, how to prevent land speculation and rise in land prices after the first residents gain access to services and, more importantly, how to guarantee that residents who take part in eventual slum upgrading strategies will get fair benefits for pooling or trading their land. Additionally, this entity can stimulate private sector investments in areas that have higher profitable potential such as the land along the primary roads.

 

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Formation of slums in the peri-urban areas of the city

 

As the opportunities rise in Ulaanbaatar, the private sector is ready to push forward with urban development, the national economy is booming due to rich mining resources, and the Mayor, Bat-Uul, has outlined a vision of creating urban corridors on the model of Los Angeles’ Wilshire Boulevard in the middle of the slums. Empowered residents stand to gain through improved housing and lives will be saved from the harsh Mongolian winter while contributing to the city’s economy. Perhaps Rob, my co-passenger from the flight in, would stand to benefit also by making a wiser choice and investing in the community.

The Mongolian urban challenge: A matter of growth, land management and the race against winter in the slums of Ulaanbaatar

By: Noel Sampson, Nicaragua Regional Analyst

 

“There are so many new rich people and there is no place for them to spend their money” said Rob, a French- American investor I met on the flight from Moscow to Ulaanbaatar (UB). He told me he was building a new club and Irish pub – “the biggest in UB” he promised. I gave a dry smile.  The thought of yet another Irish pub is hard for me to get excited about because they all look the same to me. 

 

Hours later I discovered the city is already full of Irish pubs, crammed in amongst the office towers under a skyline cluttered with cranes. Up in the surrounding hills, beyond the cranes and city lights, the slums are populated by gers (traditional Mongolian tents) exhaling thick coal smoke. The khashaas (individual fenced plots) highlight the organic pattern of the informal urban fabric.

 

P-1

Overview of Ulaanbaatar and its slums far in the back

 

More than 50% of Ulaanbaatar’s population lives in ger-areas and around 47% of ger residents live in poverty. Ger-areas have limited infrastructure and services such as heating, water and sanitation. Residents use coal-fired stoves to survive extremely harsh winters with temperatures below -40°C. Domestic coal fires are the main cause for air pollution in Ulaanbaatar where individual households cannot afford to connect to the city’s power grid. Improving access to services would help to upgrade these areas. Creating service hubs and promoting increased population density whilst simultaneously making services more affordable will improve the quality of life.

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Ger-areas in district-subcenter of Byankhoshu

 

In order to address these issues the Municipality of Ulaanbaatar (MUB) has requested the Asian Development Bank (ADB) to plan and finance a service and infrastructure provision strategy. This strategy is intended to increase population density and provide public utilities for the two ger district sub-centers of Byankhoshuu and Selbe.  It is hoped that a flow-on effect will be seen on service provision to the surrounding slums that continue to grow.

 

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Lack of access to infrastructure and services are remarkable in Ger-areas in Selbe sub-district

 

A major cause of the growth of slums in Ulaanbaatar is immigration to the city related to dzud – a concurrent natural disaster characterized by summer drought followed by particularly harsh winter with extremely low temperatures and heavy snow. The 2010 dzud affected an estimated 769,106 people (28% of total population) and has resulted in 8.4 million livestock deaths. Many were forced to move to the capital. Other factors include high poverty levels in rural areas, the inexperience of local institutions in dealing with urban issues, natural population growth and the Free Mobility Law. This law, approved by the Supreme Court in 2003, grants every Mongolian the right to freely own a plot of land in the capital.

P-4

Formation of slums in the peri-urban areas of the city

 

However, there is reason to be optimistic about the potential success of the program. The political will exists, Ger-residents have expressed interest and there are business opportunities for the private sector at a time when the country is experiencing strong economic growth.

The challenges lie in how to implement the program, in particular how slum dwellers will participate in the development strategies. A balance needs to be sought between any benefits and costs of such a program.

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Despite construction industry is booming, building season is just five months in a year due to the harsh winter

 

One option is for residents to pay directly for their connections. This way they need only sacrifice a section of land for road and infrastructure developments of their individual sub-district. However, the monetary cost of such a method would be high, and it would be unlikely to be financially viable for residents. Each heating technical room costs between 15 to 25 Million MNT ($17K USD). A variant of this option is for neighborhood residents to group together to build townhouses and share the costs of connections, but this adds the challenge of financing the construction of the buildings.

 

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View of one family Khashaa in Selbe

 

An alternative is a land trading process, whereby residents trade a portion of their land to the private sector in exchange for financing of connection costs. The private sector will therefore redevelop the land – building residential or mix-use buildings to be sold on the open market.  However, implementation would be a complicated, long process, and might prove unattractive to the private sector and residents. Success would depend on how much land needs to be sacrificed for low to middle density residential construction.

A third option is community land pooling, where neighborhoods from 10 to 20 Khashaas give up the land owned in its entirety to be redeveloped into multi-use compounds including residential, commercial and social service facilities. The private sector would compensate landowners with a “purchasing credit” that can be used to buy an apartment in the new redeveloped area. This alternative is risky because it puts residents at a disadvantage by making them dependent on the private sector. The main advantage lies in the provision of more land for complete service hubs.

 

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Many Ger-areas have consolidated to more permanent houses but still lack of access to services

 

In any of the alternatives there are several questions that need to be addressed, such as how to work out the compensation system, and how to prevent land speculation and a rise in land prices after infrastructure provision. Gentrification of these areas could further marginalise the city’s poorest residents.

To address all these concerns a Sub-Center Redevelopment Agency (SRA) will be established to implement the investment program  in a fair, stable and efficient manner for both citizens and private sector interests. The SRA will have a key role in the implementation of the program along with MUB and ADB’s partners such as UN-HABITAT, which is currently working on community mapping and consultation to address citizens’ preferences.

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Community consultation in Byankhoshu sub-district

 

In Ulaanbaatar the private sector is ready to push forward with urban development, the national economy is booming due to rich mining resources, and the Mayor, Bat-Uul, has outlined a vision of creating urban corridors on the model of Los Angeles’ Wilshire Boulevard in the middle of the slums. Citizens need to be empowered to participate in the city’s upgrading and redevelopment strategy. Residents stand to gain through improved housing and quality of life, and lives will be saved from the harsh Mongolian winter. Perhaps Rob, my co-passenger from the flight in, would stand to benefit also by making a wiser choice and investing in the community.

Mortgage emulators: pro-poor housing finance innovations (Part 1)

by Matt Nohn, AHI Senior Advisor


Last summer I came back to India to revisit the Mahila SEWA Housing Trust (MHT; see
www.sewahousing.org). I know MHT well, as I worked with them in Ahmedabad, one of India’s fastest growing cities, for three years. Still today I serve as an advisor to MHT, too. AHI and MHT are closely collaborating since around 2007, as AHI supports the larger SEWA network, to which MHT belongs, in launching a market-driven housing microfinance company that is co-governed by the urban poor.

 

MHT is a Mission-Entrepreneurial Entity (MEEs) founded by the Self-Employed Women Association (SEWA; see www.sewa.org). The support of poor, informally and self-employed women (and their families) to access improved housing and neighborhoods is its mission. MHT’s poor members are usually self- or informally employed—such as street vending day laborers and home-based piece-rate artisans and industrial outworkers. Particularly for the later group, rarely leaving their settlements and producing at home, housing improvements are of the highest relevance and closely related to income improvements (e.g. through access to electricity, subsequent use of more productive machines) and expenditure reductions (e.g. through better health but also reduced fees for access to subsidized or fairly priced public services).

 

In this regard, through slum upgrading in the scope of Ahmedabad’s Parivartan Slum Networking Program, MHT became a big player in low-income housing in India MHT implements various schemes for improving service delivery and basic infrastructure in low-income areas, especially informal ones; see e.g. https://www.box.com/s/6ui7j8zvfr8lc4lp5co8. Since inception in Ahmedabad, these poverty reduction programs have been replicated across multiple Indian states, often with the participation of MHT. For example, at present MHT works with DFID in order to replicate sanitation and solid waste service projects in Bihar, one of India’s poorest states. Since 2007 MHT, SEWA Bank and AHI collaborate in launching SEWA Grih Rin, an emerging housing finance company. To bridge the time until Grih Rin’s launch MHT works with two credit and savings cooperatives that also deliver housing finance. This work allows MHT to test new products and to innovate the housing finance space. One of these innovative products is what we call Home Asset Loan Finance at AHI: or, simply, HALF as it squares half way in-between typical microcredit and traditional mortgage finance.

 

No margin, no mission

Launching HALF for semi-formal properties is challenging because it requires to do all of multiple things right: failure to do so may even lead to extermination of the lender—as housing is a capital intensive product, and the lender is “nothing but” a group of poor women:

 

1.      To screen the loanee’s probability of repayment,
as in case of any typical microfinance product

 

These proceedings are basically identical to any microenterprise or consumer loan.

 

2.      To screen the security of the collateral (part 1),
proofing tenure of the land (and home), as in case of a mortgage.

 

However, unlike in case of a mortgage this can be hard in case of HALF, as the underlying asset’s title is neither illegal/informal nor fully legal/formal but is placed somewhere in-between. On this regard, UN-Habitat speaks of the continuum of land rights, which also reflects in the latest Report of the Special Rapporteur on adequate housing Raquel Rolnik to the UN Human Rights Council. Thus, how to establish the likelihood of eviction and loss of collateral?

 

land_rights_continuum

The continuum of land rights (Source: UN-Habitat (2012). Handling Land, Innovative Tools for Land Governance and Secure Tenure. Accessible online at: http://www.unhabitat.org/pmss/getElectronicVersion.aspx?nr=3318&alt=1)

 

3.      To screen the security of the collateral (part 2),
eliminating potential conflict with the urban planning regime

 

Even if land tenure is safe, the house may still be destroyed if it was in conflict with future development—such as this road in Wenling, Zhejiang province, China.

 

china_highway_house

Would you give them a loan? Will they hold out? (Source: Reuters)

 

china_highway_house_demolition

Well, they did not—even though they thought the compensation wasn’t worth it. (Source: Reuters)

 

4.      To establish contractual proceedings that, in case of default, allow the lender to take possession of the collateral—even without mortgage.

 

 Thus, how do you make sure you get the house in case you need to take the defaulting borrower to court (in absence of mortgage foreclosure, which would allow you to just take the house even without the court.)

 

5.      To screen the security of the collateral (part 3),
proofing the physical qualities of the collateral


Even if land tenure and construction site are safe, the lender still needs to ensure that the structural quality of the house is safe enough to e.g. withstand a disaster. Also the lender needs to ensure that the money is really invested in the construction of the tangible collateral.

 

demo_1 demo_2

Are you sure it is strong enough? (Gujarat Earthquake 2001; picture credit: CASA)

 

[To be continued in next week’s Part 2.]

Part II: How to build affordable, quality and sustainable housing?

Author: Delphine Sangodeyi, AHI Senior Urban Planning Associate

[Continued from Part 1]

The equation is not simple, and demands a new approach. Expertise, research and knowledge should be invested and there should be high social and environmental impacts as well as an economical gain. Housing quality is not only dependent on construction costs, but also related to the quality of housing conception, to social responsibility and to a new business ethic and mindset. A new business model is required.

      Reaching affordability

The term “affordability” applies not only to building costs but to maintenance costs as well. The recommended percentage of income to be paid for housing is generally capped at 30% of income. Higher mortgage payments impact a family’s ability to afford food, medicine and other necessities of life. Even if a family can afford mortgage payments on a house there may be other impediments to home ownership. These include difficulty in finding appropriate land, cash for a down payment and closing costs in order to keep expenses affordable.

In each country, region and city, the affordable housing market needs to be studied, since it covers various socio-economical categories. In many locations, the population living in poverty and working in the informal sector is still excluded from accessing mortgages through the formal banking system.

      Qualitative architecture, in coherence to local identity

Evans Essienyi in his AHI blog highlighted well the problem of quality of affordable housing in Africa, and that cultural and identity factor were insufficiently taken into account.

Affordable housing is most of the time treated in its most basic form, by constructing standardized block houses or apartments of 45 m² with 2 bedrooms. Compared to the degraded situation of dwellers, these types of constructions could look a fortiori as a situation of progress, but it can’t be seen as a correct solution, in a sustainable vision.

      Promoting mixed neighborhoods

Social and architectural diversity is very important in the construction of cities and neighborhoods. For instance, each affordable housing project can include different types of housing, and affordable for different social categories: from low income households to the middle class.  Less benefit can be made to build very economic housing since the global project is at a financial equilibrium.

      Access to the City

Due to the rising price of land, the tendency is to build affordable housing projects in the far periphery of cities. It implies problems of social exclusion, problem of access to transportation, services, education and employment.

For this reason, any affordable housing project has to be conceived in partnership with local authorities. A good option would be to determine available lands at a discounted price compared to the market, to avoid territorial inequalities. Taking into account the costs for local authorities for trunk infrastructures to cover the growing periphery of cities and megalopolis, road constructions and services, as well as the negative effects of segregated urbanization and high environmental impacts of urban sprawl; instead, participating to develop affordable housing through urban renewal and discounted land price closer to the city centers and employments poles should be regarded as a more sustainable urban strategy.

The international and multidisciplinary perspectives of the Affordable Housing Institute help in developing alternative and concrete solutions for a more sustainable vision of affordable housing.

Addressing the Housing Finance Gap in Tunisia

By: Josie McVitty, AHI Associate

 

Tunisia has undergone major social and political upheaval in the past two years since the Revolution in January 2011 set off the Arab Spring in the rest of the region. Significant unrest remains, as protests and strikes continue and Tunisians fight to claim their rights to fundamental civil liberties and socio-economic equality. There is a lot of pressure for the government and institutions to respond to the demands of the population, who are becoming impatient as poor living conditions and unemployment remain.

 

Housing is a critical building block toward a strong society and restored stability, particularly during a period of transition. There are many social benefits associated with increased housing production, finance, and home-ownership, including job creation, improving the asset base, and providing formal sector homeowners a legal stake in their community. Lastly, having a long term financing mechanism for housing is essential for any urban development strategy, which enables government to focus on upgrading of collective public services and infrastructure.  

 

Home ownership is of particularly high importance in Tunisia where the population has one of the highest home ownership rates in the world, up to 80 percent. Most of this housing is realized by self-construction. However, a major bottleneck slowing the speed and quality of construction remains, lack of access to finance. Households, without the possibility to take loans for housing construction and improvement must build incrementally as they collect savings or remittances from extended family. This process takes place over extended periods, meaning that many households live in unsanitary conditions, and must suffer a long time until they can improve the quality of their housing enough to make it habitable. As the price of land, and construction materials increase, and housing supply from the formal market becomes inaccessible – with price rises of 8 percent per annum averaged over the past 20 years – enabling access to finance to base of the pyramid becomes an even more important issue.

 

Tunisia has a long history of progressive housing policies and innovative programs. Since 1977, they have developed a program for government subsidized finance for housing, known as FOPROLOS, for salaried workers. However, the loan ceilings have not been increasing with housing prices and an applicant must be formally employed, so it excludes the majority of the most vulnerable and needy groups, which are precisely those that most need assistance.

 

The demand for housing microfinance to fill this gap is clear. In 2008, the largest microfinance institution in Tunisia, ENDA-Interarabe launched a new product called “Eddar” specifically for housing improvements, responding to the continued demands of their clients. Most loans are given from US$321 to US$1000, usually over a period of 12 – 18 months, and most clients take out subsequent housing improvement loans to complete a series of projects. At the end of 2009, the Eddar loan made up 6% of their total loan portfolio, with 3452 active clients, $2 million outstanding, average housing loans were for $900 and 15 months duration. Enda aims to increase the number of loans toward housing improvement to 13 percent of their total loan portfolio in 2012. Yet, this is still only a drop in the bucket.

 

With 800,000 to 1 million unserviced microfinance customers, as estimated by a 2011 European Union study, there is clearly extensive financial exclusion and untapped market. At the same time, there is the possibility of more financial competition to ENDA on the horizon. The restrictive Microfinance Law from 1999 was revised in November 2011 and is currently awaiting enforcement of the Decree. This will lift the interest rate cap (of 5 percent), which has previously made it financially infeasible for other microfinance institutions to operate in Tunisia. There are many established MFIs that are preparing to start operations in Tunisia, and the EU is offering grant funding to insure the start-up period of new MFI entrants. Once operational, these MFIs could too decide to offer housing improvement loans as part of their product base. The rapid growth of the MFI sector, and availability of housing microfinance, experienced in Morocco, could prove an example of what awaits Tunisia.

 

Another approach to encourage downstream lending can be drawn from Morocco, where partnerships between banks and the government makes lending more accessible through the Fogarim program. Fogirim is a mortgage guarantee fund for households with small and irregular income. Launched in 2004, outstanding guarantees amount to 11 billion dirham (US$1.3b) as of 2011, with 1200 new beneficiaries each month, and a total of 80,000 beneficiaries up to now. Key features of Fogirim are to guarantee 70% of a loan that a bank makes to a household with informal income. The loan must require low monthly payments of less than 1500 dirham (US$176) and have a fixed interest rate. Risk premiums were also introduced in 2009. The average housing loan offered on the programme in 2011 was at a fixed interest rate of 6.1% with a LTV ratio of 75%, average duration 21 years and repayments of 1150 dirham per month (US$130). These benefits are accessible to people who earn a monthly income up to US$566 per month, even from informal sources.

 

With one third of the Tunisian population restricted from any form of formal housing finance, either due to their lack of formal employment, access to formal land title, or low incomes, more innovative mechanisms for households to finance their dwelling needs to be introduced. As this article explores, there are examples of microfinance and government incentives that have elsewhere proven to be effective. It is just a matter of an entity taking the initiative to target this market, and investing into the economic and social value that is there waiting to be supported. The demand and opportunity is clear.

 

Incremental self-construction in Tunisia’s quartiers populaires