F. Financing shelter

1. Mexico

The scale of poverty in Mexico makes it impossible for few of the urban poor to save anything at all. FONHAPO has a credit scheme for housing the poor, “Credit to the word”. Normally, this is given with the support of an NGO and combined with a self-help project. The programme has been successful in communities having a building capability. It is, however, mainly a rural programme.

In addition to FONHAPO, FICAPRO (Fideicomiso Casa Propria), is the only public finance agency serving the poor, i.e., those with an income below one minimum wage. Its target group are those living in the Mexico City metropolitan area who rent their shelter and who have an income of less than 2.5 minimum wages. Yet, these agencies' share of total housing finance in Mexico is rather low, FONHAPO being the larger of the two, distributing 3.9 per cent of all housing finance in Mexico in 1991. FONHAPO was, however, responsible for 12.9 per cent of all completed housing units in 1991.

The largest housing-finance agencies, INFONAVIT (Instituto Nacional de Fondo de Vivienda para los Trabajadores) and FOVI (Fondo de Operaci Descuento Bancario para la Vivienda), which between them were responsible for 72.2 per cent of all housing loans and 59.5 per cent of all completed housing units in Mexico in 1991, do not cater for the poor.

Yet, only 25 per cent of FONHAPO's and 12 per cent of FICAPRO's loans are given to applicants with an income below one minimum wage. An additional 60 and 74 per cent respectively are given to applicants earning between one and two minimum wages. Although the Mexican Government avoids giving direct subsidies to housing, the low recovery rate of FONHAPO loans implies a government subsidy.

2. Indonesia

Housing finance to the poor and lower-income groups is in extremely short supply in Indonesia. Major reasons for this are high inflation and increasing land prices. The lack of low-interest credit for housing is recognized as a major impediment to the provision of urban shelter. In the present situation of structural adjustment policies limiting the funds and space for government action, few options for a change can be seen. It is thus a serious problem that the poor have such a low ability to save for housing purposes. Many among the poor cannot afford to save at all. Another group may save a little with a food security aim. In Indonesia those among the poor who may have a sufficient income to save for shelter improvement, are often reluctant to place their money in a bank. This is a fact in spite of the Government's effort to popularize a savings habit by several special programmes through BTN.

The housing loan system catering to the poor is directed at house ownership in regulated areas with basic services. Since these areas are at the fringes of the cities, many poor people, who otherwise could afford such housing, cannot take these loans because transport to workplaces in the city centre is too problematic.

Housing subsidies are given to people with low monthly incomes to enable them to acquire a very simple dwelling on a serviced plot. Most of the poor do not qualify for this subsidy because they either have no employer, have no savings account or because their incomes are irregular. They have to depend on the limited assistance provided by the arisan system (see box 41).

For the urban poor in Indonesia, lack of money is a dominant barrier in their struggle for decent shelter. The low-cost houses built by Perum-Perumnas are still beyond the reach of the poorest groups. They are only able to afford rental housing in the kampungs or to erect a makeshift shack in a squatter area. The Government provides a subsidy to families that live in kampungs and want to extend their dwellings with the view to providing others with rented accommodation. However, the reduced ability of the Government to subsidize house-building seriously affects the poor. The fundamental problem is the inadequate land regulation, unclear titles, lack of tenure and the operations of speculators and intermediaries. This is an obstacle to expanded investments in housing. Since the informal sector and the people themselves are the main force in shelter provision, the granting of land-tenure rights to urban poor households - especially in kampung areas - should be enforced. The problem is that granting building permits to squatters is regarded as legal approval of their occupation of the land. No real improvements of poor people's shelter are thus possible without regularizing land, and this is extremely difficult in practice. Even the housing provided by Perum-Perumnas and supported by BTN is today beyond the reach of the poor, due to a substantial reduction of the implicit subsidy. Many lower-income households have benefited by this government effort at shelter provision. This relieves some of the downward demand pressure on land and houses for rent for the poor.

3. India

Experience has shown that some of the poor in India do have the ability to save. Investments in housing may, however, not be their first or even second priority when it conies to making use of the savings. In general, the share of household savings used for the creation of physical assets has gone down over the years. The direct investment by households in house construction has declined.

Yet, the majority of the poor do not save, and have no ability to do so. In a sample survey in Bombay, 80 per cent of the poor with a shelter and 92 per cent of those without, did not report any savings at all (Acharya and Trikha, 1978). A study by the Bombay Metropolitan. Region Development Authority (1981) similarly concluded that for “industrial labour” expenditure exceeded income, leading to perpetual indebtedness. Ahmad (1982) found that households in Delhi earning Rs. 1400 per month or less were negative savers, while those earning between Rs. 1400 and 2428 were non-savers. The percentages of people belonging to these categories have been estimated to be 33 and 25 per cent, respectively. The conclusion is that the thesis of the possibility to mobilize savings among the poor for investments in housing by designing appropriate schemes and institutions is questionable. Moreover, according to an analysis made by Ribeiro (1993), projects requiring the urban poor to spend more than 11 per cent of their income on housing cannot be sustained given their present expenditure pattern.

The idea that the savings potential among the poor can be effectively mobilized through NGOs, cooperative societies and other institutional arrangements has been put forward in international literature, according to Kundu (1993). It is also thought that the urban poor have the capacity to make substantial down-payments and monthly instalments of about 20 per cent of their income. Kundu finds this to be highly questionable in the Indian case. In some parts of the developing world, a section of the urban poor may well have some untapped capacity to save and invest in shelter, given the right assistance and circumstances. Yet, it may be wrong to put pressure on poor people to reduce their food expenditures in order to pay more for housing. The same argument can be used regarding some non-essential consumption items which may give the poor great pleasure.

There are several credit schemes and subsidy arrangements for housing. The largest housing-finance agency is HUDCO (Housing Finance and Urban Development Corporation). It was established in the mid-1970s as a government agency under the Companies Act - to provide financial support to state governments, housing boards and local authorities for implementing housing and urban development projects. HUDCO has been the leading agency of the Government through which the major portion of public investments in housing has been channelled. The agency has a specific responsibility for improving the housing conditions of the lower-income group and the houseless. It works through different public institutions and does not lend to individuals. Expenditures on urban infrastructure constitute a small part of its activities. HUDCO receives funds from the Government as well as from foreign donors. The period of repayment and rate of interest on its loans vary from project to project depending on the income level of the beneficiaries. An emphasis is placed on cost recovery. No subsidy is thus involved, making this agency of less direct value to the poor. The institutions, through which HUDCO works, may, however, assist the poor by cross-subsidizing land and shelter projects. The development cost of an area is then mainly borne by those who buy the high-cost houses. HUDCO has fixed ceilings on the cost of housing for the poor and lower-income group, securing that the quality of materials etc., discourage a hijacking of the units by middle-income people. The thrust of HUDCO is now on self-financing schemes in which funds of public agencies are not tied up for long, and on cooperative housing schemes for which individual savings can be mobilized. This is partly based on the experience that the hire-purchase system blocked resources for a long time and the recovery rate under it was poor. Moreover, the Government has realized the inefficient role played by HUDCO in providing finance to low-income groups.

According to the National Housing Policy innovative savings and lending instruments will be introduced to integrate the housing-finance system into the capital market. This will be done by giving the housing-finance institutions access to the funds on a competitive basis, and by permitting the National Housing Bank (NHB) and HUDCO to set up mutual funds for housing. Steps will also be taken to introduce a secondary mortgage system in order to attract funds from a wide range of investors, including insurance and provident funds, and to integrate housing-finance with the overall financial system. The planning norms for housing at the neighbourhood level will be integrated with the lending guidelines of NHB and other financial institutions. Appropriate ceilings on plinth area will be stipulated in order to discourage large premises. It is envisaged that the housing-finance system as a whole will become self-financing in the long run, to meet the needs of different income groups and purposes, with longer repayment periods, graduated payments and simplified procedures, whenever necessary, to ensure affordable monthly instalments and larger coverage across different urban areas. It is moreover recognized that capital and interest subsidies for the urban poor must be targeted carefully, and that improvements be made in the housing-finance procedures and shelter-delivery system in order to reduce the cost of shelter for the poor to affordable levels. The subsidized housing programmes - such as the Indira Awas Yojna for Scheduled Castes, Scheduled Tribes and freed bonded labourers - will be restricted to the absolute poor. The housing-finance system will be devised so that it can be flexible and able to respond to a variety of shelter needs.

The National Housing Policy will give priority to the promotion of shelter for the homeless and the inadequately housed, i.e., such groups as:

· Households below the poverty line;
· Families displaced by development projects;
· People who become victims of natural calamities;
· Scheduled castes and tribes;
· Single women and female-headed households;
· The physically handicapped.

The NHB has a somewhat similar role to HUDCO, i.e., it is an apex agency working through sub-agencies. According to its chairman, the Bank has no ideological predilections on public-sector housing. The Bank encourages the public sector to acquire large plots suitable for building large townships. But it has the firm belief that public agencies should not preoccupy themselves in construction. Construction should be done by the private sector and cooperative societies (Business India, 4 February 1991). The NHB provides short-term loans to housing agencies for development of housing land, and long-term loans to individuals for house construction. It provides equity support and refinancing facilities to public and private housing companies.

There are also several private housing-financing institutions in India. What is common among these organizations is that they require security and/or previous savings as collateral for loans. The poor are thus left out. The commercial banks give individual loans under NHB's stipulations for a maximum period of 15 years, at annual rates of interest between 10.5 and 14.5 per cent. Loans from this and other private sources, however, require land titles that are marketable and free from any encumbrances. The insistence on security for loans has been the major hurdle for the poor and also for many among the lower-income group. Housing agencies have - by the financial and administrative stipulations guiding their activities - excluded the poor. The requirement of, for example, a permanent address and an acceptable guarantor have become major impediments for the poor to take advantage of the formal housing schemes. Central and state government departments undertake housing for their employees, but not many among them are below the poverty line. Moreover, the urban poor are unlikely to organize themselves into housing cooperatives, and thereby benefit from loans and assistance extended to these. Housing agencies must now be financially efficient. Many of them must therefore abandon - or at least drastically reduce - their schemes for the poor and lower-income group, in favour of the more commercially viable schemes.

Since the cost of housing normally becomes higher than originally planned, and because of the time spent by completing the elaborate administrative procedures, and that delays in construction normally occur, the poor get priced out of even the most generous schemes that are designed for them. The urban poor in India are unlikely to spend more than 10 per cent of their income on housing (Kundu, 1993). Hence, owing to the design of the housing schemes even under favourable circumstance, they fail to reach the poor. The subsidies intended for the poor thus flow to people with higher incomes through regular as well as irregular property transfers.

An overview of existing agencies and institutions (Kundu, 1993) reveals that they do not take appropriate consideration of the demands and affordability of the poor and lower-income group. Many of the organizations exclude the poor from the purview of their activities by their administrative and financial stipulations. One example is the Life Insurance Corporation. Funds from this organization benefit the middle- and higher-income groups. The requirements for obtaining loans from finance institutions are so stringent that housing credit is virtually unavailable to the lower-income group. Even with the relatively low interest rates charged by HUDCO on shelter loans to the poor, the monthly instalments are beyond the affordability of a large part of the target group. Government financial resources for shelter are limited in India, and can only reach a small fraction of the urban poor. The only way of reaching some of the poor at all is to allow for collective guarantees of loans. It is thus essential that CBOs are legally recognized. In view of the failure of the Government's financial institutions to reach the poor, it is necessary to encourage the establishment of housing savings societies catering for the poor by providing small loans with low interest that are repayable over a long time period.

The size of grants and loans from the Central Government and state authorities to the public housing agencies have been reduced recently. The public housing agencies like, for instance, HUDCO, have thus been forced to rely more on their own funds. This has contributed to the policy of self-financing projects. Moreover, the willingness to allocate funds to projects for the poor has weakened. This is due to the fact that the recovery rate on loans to the poor and the lower-income group is less than 50 per cent. The decline in shelter funds for these two groups is also caused by HUDCO's stipulation that 55 per cent of all loans must be targeted to these groups. The development authorities of the big cities are thus somewhat reluctant to approach HUDCO for funds.

It is evident that a considerable amount of subsidy has flowed into the housing sector over the past few decades. It is difficult to assess the percentage given to the poor because of lack of data on total subsidy per dwelling type and the illegal transfers of properties. Nevertheless, an analysis of the functioning of these agencies and the financial and administrative requirements on beneficiaries, make it clear that only a small number of urban poor could have benefited. To ensure that the subsidies reach the poor, a variety of means have been adopted, such as issuance of identity cards to the slum and pavement dwellers. Furthermore, subsidized services have been channelled through voluntary organizations. Yet, experience has shown that local power groups tend to intervene by buying or outright taking over provided facilities, shelter and loans.

During the 1960s and 1970s the funding responsibility was mainly on the Central Government. In the 1980s this responsibility was shifted to state governments and local authorities (see box 42). Many programmes are now facing financial problems that have led to slow progress and implementation. This has adversely affected the availability of basic services for the urban population, particularly the poor. Some programmes, such as the UCD, have been terminated by state governments due to lack of funds. In programmes supported financially by the World Bank - such as SUP and SIP - cost recovery has been sought by increasing water and property taxes. Many local authorities have found it difficult to comply with this requirement. Experience with EIUS shows that the ceiling on per capita expenditure is inadequate for the services to be provided. Even in those cases where improved sanitation has been provided with a SO per cent subsidy, the poor cannot afford to participate. The recovery rate of the investments is accordingly very low. It should, however, be noted that when NGOs are involved, the recovery rate is somewhat higher. Furthermore, in some of the poorest communities the maintenance of the basic amenities provided is not paid by the residents. The local authorities have thus been forced to bear this cost also.

Slum improvement on private land is questionable since the law does not safeguard against higher rents being imposed after improvements. As a consequence, no slums on private land have been included under EIUS. This has left out about 45 per cent of the urban slum population from the purview of this programme.

The general conclusion is that basic infrastructure and services in the slums are typically in an inferior state, and moreover, very difficult to improve and maintain in a cost-efficient way. Regarding house building and shelter for the poor, the responsibility has been passed on, to a large extent, to the people themselves, reducing the burden on the public exchequer. An example of a scheme combining grants and popular participation is outlined in box 43.

It is probable that slums will continue to grow and squatter settlements will continue to spread in Indian cities, at least in the near future. The significant progress in the agricultural and industrial sectors since 1950, particularly the substantial diversification of the industrial structure, should allow increased investments in housing. At present, housing contributes as little as 3.5 per cent to the GDP (Pugh, 1990). Its potential contribution to economic growth is much greater. The unavailability of land, building materials and housing finance explain this meagre contribution.

4. Nigeria

The existing housing-finance system in Nigeria is severely underdeveloped, and thus ill-equipped to mobilize savings and channel investments to housing. Although a Federal Mortgage Bank has been created to serve as an apex institution, the other components of a mortgage system, such as primary mortgage agencies (building societies, housing associations, credit unions, housing cooperatives etc.) have not become widespread. The critical absence of mortgage capital has had an untold negative impact on housing production. Furthermore, in the absence of life insurance policies or other securities, no institution will finance land purchase. Thus, only very few can make or buy a house with funds provided by formal institutions. The overwhelming majority is financing their housing by personal savings and through assistance from relatives. The poor have thus few prospects of obtaining a decent dwelling.