7.4.2 Provision of other elements

The above section referred to recommendations concerning the provision of land, infrastructure, services and houses. The remaining element concerns methods of providing finance for investment in shelter.

There are many financial mechanisms for mobilizing savings and allocating finance for shelter investment Yet, there are few formal institutions that serve low-income groups. This is dye to the perceived high risk, low profit and frequent lack of collateral. It is unlikely that formal institutions can easily be modified to overcome these constraints. The greatest potential is most likely to come from enhancing the scope of locally based informal institutions, such as savings societies, credit unions, cooperative banks etc. The most widely cited example of such an institution is the Grameen Bank, in Bangladesh. This Bank has become a large-scale institution by addressing the needs of the poorest households who could only afford to save individually minute amounts, but that collectively, amounted to large sums. Conventional finance institutions lending in the shelter sector frequently find it difficult to lend for low-income developments. The risk of default on unsecured loans and the high transaction costs of administering large numbers of small loans are two main reasons for this.

Efforts to overcome these constraints have generally concentrated upon providing full tenure status (freehold or long leases) to project beneficiaries, so that they can offer effective collateral. Even this is unlikely to succeed, however, if institutions are prevented in practice from foreclosing on loans that are in default. Informal finance institutions avoid this problem by establishing credit worthiness based on regular savings, or peer-group pressure. Whilst this may entail a degree of default, this is not necessarily more than what is suffered by formal institutions, and is often considerably less. Such informal institutions are also locally accountable and achieve a balance of benefits to savers and borrowers alike which enables them to reduce transaction costs. Clearly, they deserve to be supported and expanded.