A. Introduction

Finance is one of the most important factors in the provision of housing everywhere, and for low income families in developing countries it is critical. Like most other families, who want to buy or build a house, they cannot pay for it out of their existing savings. They need access to credit in one form or another.

The formal housing finance systems play a major role in mobilising and allocating funds for housing also in developing countries. However, they often fail in providing credit on terms which meet the special requirements of those most in need, namely the poor. This situation is understandable from the point of view of the formal institutions, because there is normally a large effective demand for housing finance from borrowers who have little or no problem accepting the terms on which such finance is being offered.

It is too simplistic to view the problem of housing finance for the poor as merely a matter of reducing the cost of houses through subsidies or the price of finance through lower interest rates. There are many other constraints - apart from affordability - to potential borrowers’ willingness to take up a loan. Some of these constraints are in areas such as: ownership rights, collateral requirements, unsteady income and cash-flows.

Informal or community-based credit systems have been able to break through some of these barriers when providing finance for consumer goods, cattle, seeds, school fees and a variety of other household needs. In some countries they have also shown an ability to meet the need for low income housing to such an extent that informal finance, comprising loans from friends, money-lenders and community-based institutions, now accounts for 80 per cent of shelter investments in developing countries.¹ This fact gives encouragement to our efforts of describing how such credit systems operate. To disseminate information about their activities should stimulate the creation of new user-friendly credit systems and the expansion and strengthening of existing ones to the point where they become accepted as part of the formal financial system.

Community-based credit systems - which are an integral part of the so-called informal sector - consist of a large variety of organisational arrangements ranging from the small locally-based savings and credit clubs to some large city-based housing co-operatives to nationwide organisations such as the well known Grameen Bank in Bangladesh. All of them have certain unique characteristics, but with one thing in common: to extend credit to their members on the basis of their savings. The distinction between formal and informal is largely a false dichotomy, but with respect to mobilisation and allocation of funds community-based organisations distinguish themselves from formal sector institutions in two important respect:

(1) The organisation is owned by its members in equal parts, thus being a democratic entity as opposed to a corporation or company.

(2) With a common bond between members they rely on them to run the organisation through elected - sometimes paid - leaders and to enforce its rules especially with respect to repayment of loans.

Four case studies form the basis for this publication - two are from Asia, one from Africa and one from Latin America. They are all different in certain respects, and they are used here to illustrate how poor families overcome the hurdles which prevent them from being borrowers in the formal housing finance market. Of the two cases from Asia one is from India and one from Sri Lanka. There is a case from South Africa while the Uruguay case represents Latin America.

The reason for publishing yet another study on housing finance for low income groups is - apart from the significance of community-based credit systems - the importance of introducing new paradigms into the frequently stale discussion of how to “solve” the housing problem in developing countries. Terms such as “housing needs”, “affordability” and “subsidies” have become standard phrases which most people accept as universal and virtually static concepts. The result is that the housing problem also becomes static and one which can only be tackled (not solved) by cutting costs and increasing subsidies. Instead, concepts such as “effective demand”, “user-value” and “willingness-to-pay” combine well with those long known to community organisations, such as “mutuality”, “responsibility” and “self-help”. Possible combinations of new theoretical concepts with old, practical approaches are described in the following section (B).

Chapter two is a case study of Urban Thrift and Credit Cooperative Societies in Colombo, Sri Lanka. They are formed within a clear legal framework and characterised by their separation from public sector interference. Membership tends to be from middle and lower-middle income groups where literacy and numeracy are the norm. Investing in housing is not the only aim of these members, but in those cases members start saving with their society. These savings will eventually pay for a large part of their house cost.

Chapter three first describes in detail the Indian “Punervaas Habitat and Livelihood Movement”, which is an Apex organisation set up to assist housing co-operative societies - much like the National Co-operative Housing Union in Kenya² or Technical Service Organisations (TSO) in some Latin American countries. A specific example of how it operates is then explained in the case of the Ekta Vihar squatter settlement in Delhi.

In contrast to the Sri Lanka case, chapter four describes a case from Uruguay of state-supported Mutual Aid Cooperatives typical for many countries in Latin America. It is characterised by its simplicity and for being able to cope with a high rate of inflation which otherwise discourages long-term savings. But its over-dependency on the public sector, which by policy or simple directives can spell its demise, is a lesson to heed.

Chapter five is the story of the Group Credit Company in South Africa. While not exactly a success story, it helps illustrate many of the typical things which can go wrong when trying to transform existing “savings-and-credit” societies (called Stockvels in S.A.) into a housing finance mechanism. The case history has been thoroughly analyzed and remedial action taken. It serves as a recipe for new groups who would like to expand their lending activities from small, short-term consumer loans to large, long-term housing loans.

Finally, chapter six contains some observations on the Danish system of “Mortgage Societies” which has flourished to the point where 98% of all family homes and many other types of properties are financed through them. In this case, what was once a typical community-based housing finance system has transformed itself into a very effective formal sector system. The advantages of this transformation will be explained for the benefit of the inevitable long-term development of informal systems.