Financing housing for the urban poor: opportunities for civil society-state-private sector collaboration

The value of real estate held, but not legally owned, by the poor in the developing world, is at least US$9.3 trillion. How can this massive asset base be most effectively valued, applied and leveraged? How can community housing finance initiatives be connected to formal financial mechanisms?

Findings from research conducted by Homeless International in six developing countries identify opportunities for civil society-state-private sector collaboration in urban development partnership. Arguing that secure shelter is necessary if poverty is to be eliminated in a sustainable way, the reports suggest ways to increase poor people’s access to the forms of financing needed for the development of community-led housing and infrastructure initiatives.

Many obstacles have to be overcome to enable the urban poor to access finance and credit. Financial institutions are wary of taking risks when lending to institutions whose members are poor. Bank staff usually know little of factors that could minimise risk of loan default by the urban poor. They are reluctant to provide finance to enable organisations of the urban poor to develop capacity to manage large projects. Regulatory frameworks often prevent banks from lending to organisations unable to provide conventional collateral. Even when pilot community projects succeed, getting finance to scale up to city-wide initiatives is highly problematic.

Case studies assess the experience of community-led housing and infrastructure projects across the developing world. Grant funding is being used to assist organisations, often emerging out of women-led savings and loan groups, to develop capacity to build information about their own resources and use this to negotiate with public and private sector agencies.

Where strong organisational capacity and finance are available, organisations of the urban poor are rehabilitating slums, building access roads and providing water, sanitation and solid waste services while building new relations with government and financial institutions. However scaling up requires much larger funding that cannot be provided on a grant basis. The financing gap becomes dramatically apparent when organisations of the urban poor seek to access the kind and size of loans that are required.

The reports note that:

• Organisations of the urban poor need access to a range of financial products if their resource base is to be leveraged effectively in urban upgrading projects that can be implemented at scale.
• Where pilot scaling up projects have been initiated the major project risks are taken by organisations of the urban poor and the non-governmental organisations (NGOs) that support them.
• Public and private financial institutions lack the knowledge and systems to carry out appropriate financial viability analyses of community-led urban development initiatives.
• The most significant collateral that organisations of the urban poor possess lies in their knowledge capital and the institutional/political relationships that they have established as a result of their own investments in pilot projects; and this allows organisations to manage and mitigate risk.
• While credit is available for individual solutions there is little wholesale capital available to support investment by organisations of the urban poor in upgrading solutions that work for them and the city as a whole.

In order to address the urgent need for a new form of financing facility, the UK’s Department for International Development (DFID) has initiated the Community Led Infrastructure Financing Facility (CLIFF). CLIFF aims to increase poor urban communities’ access to commercial and public sector finance for medium to large scale infrastructure and housing initiatives. Financial support from DFID and Sida, the Swedish International Development Agency, is channelled through Cities Alliance, with Homeless International functioning as the implementing agent. The first pilot is being implemented in India with SPARC (the Society for Promotion of Area Resource Centres). CLIFF is:

• Providing bridging loans, guarantees, knowledge grants and technical assistance to initiate community-led urban rehabilitation in cities in the developing world;
• Working in partnership with community-based organisations and/or NGOs who have, or can be assisted to have, a track record of delivery in slum rehabilitation;
• Seeking to attract commercial, local and public sector finance for further schemes;
• Establishing local CLIFF agencies that can operate on a sustainable basis in the future.

Source(s):
'Research on Bridging the Finance gap in Housing and Infrastructure and the Development of CLIFF', CLIFF Background paper, by R. McLeod, Homeless International, 2002
'Bridging the Finance Gap in Housing and Infrastructure – SPARC, India – a Case Study', by R. McLeod, Homeless International, 2000
'Humpty Dumpty, Poverty and Urban Governance – An Exploration of Investment Partnerships with the Poor', paper prepared for the 2nd Regional Meeting of the UNCHS Urban Management Programme, by R. McLeod, September 2001

Funded by: DFID (IUDD)

id21 Research Highlight: 22 April, 2003

Further Information:
Ruth McLeod
Homeless International
Queens House
16 Queens Road
Coventry CV1 3DF
UK

Tel: +44 (0)247 663 2802
Fax: +44 (0) 247 663 2911
Contact the contributor: ruth@homelessint.u-net.com

Homeless International

Contact the contributor: info@homeless-international.org

Other related links:
'Urban reforms in China: improving housing for the poor?'

'More than just a place to live: shelter and livelihoods of the urban poor'

'The peri-urban poor as land development managers?'

'Community participation: in whose interest?'

'In defence of landlords: getting rental housing onto the policy agenda'

Take a look at the Microfinance Gateway's collection of reports on housing and microfinance

Shack/Slum Dwellers' International is a network of urban poor community groups in Asia, Africa and South America which aims to strengthen grassroots savings and credit schemes