A new World Bank study said that one billion people around the world lived in inadequate housing, the majority of them in the South Asian region.!!!

Low income housing:
a lucrative business for banks?
October 10, 2010, 5:35 pm


By Devan Daniel in Washington D.C.



A new World Bank study said that one billion people around the world lived in inadequate housing, the majority of them in the South Asian region. Having decent living conditions is a basic human right and economists argue that a roof above ones head, a home, would improve economic and social wellbeing.



"One in every four people on the planted live in the South Asian region, and more than 14 percent of South Asians have no homes or live in such inadequate housing as urban slums and squatter settlements," the World Bank report titled ‘Expanding Housing Finance to the Underserved in South Asia: Market Review and Forward Agenda’.



Ms. Tatiana Nenova, the author of the report, said low income groups in South Asia had very low credit default rates compared to high and middle income households.



"It is more so in Sri Lanka and our study showed that compared to the region, Sri Lanka was in a better position. The magnitude of people living in slums in urban areas is much smaller although more pronounced in the estate sector. The microfinance sector too is much more vibrant than the other countries in the region," Ms. Nenova told The Island Financial Review after the launch of the report.



"Given the very low level of credit default among low income groups, financing housing loans can be an attractive business for banks and other financial institutions, especially in Sri Lanka. But the problem is that foreclosure laws in Sri Lanka does not exist and this is preventing banks from lending to them," she said.



Her study highlighted the dearth in low income housing financing in the region, with banks preferring to lend to high and middle income households. It also highlights the problems in acquiring, registering and titling land and poor planning and urban development policies.



The report said there was a shortage of 38 million housing units in South Asia, which translates to 212.5 million homeless people, 14 percent of the total South Asian population estimated at 1.5 billion. In Sri Lanka, official estimates put the demand-supply gap at 350,000 housing units, and the overall shortage could exceed 650,000 units this year. Slums are not as prevalent in other cities in South Asia. Around 1.5 percent of the population lives in slums but estate housing is characterized by abject living condition.



In Sri Lanka, a house valued at Rs. 1 million could be afforded by only 10 percent of the population. More than 80 percent of the population has no access to housing finance while 7 percent lack homes.



The World Bank report said micro finance would have a crucial role to play in the short to long term.



"Formal microfinance institutions have succeeded in profitably lending, including for housing purposes, without relying on the title to collateral. Frequently, loans to micro, small and medium size enterprises (or the profits made from them) indirectly fund home upgrades, repair, and maintenance because many of these businesses are run out of the home. Micro-lending remains confined to a modest scale, however, and is likely to provide a major part of housing finance in the medium or even the long term," the report said.



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Convincing banks…



Lanka Financial Services for Underserved Settlements (LFSUS), in partnership with the government of Sri Lanka and the United Nations Habitat has launched a project to bridge the gap between credit worthy low income households with repayment capacity and the formal banking sector.



Low income households in urban areas have difficulty to access housing loans from the banking sector. Many of them have no clear access to title deeds nor do they have approval to construct houses on land they already occupy which prevents them from accessing credit from the banking sector. Banks also perceive them to be not credit worthy with low repayment capacity.



But LFSUS is hoping to bridge this gap with a win-win proposal for everybody.



"We would ensure that these low income households are credit worthy and reliable when it comes to repayments. They would comply with any requirement an individual in the formal sector has to fulfil such as clear title deeds, land as collateral and payment of high interest rates," Ms. Ayanthi Gurusinghe, CEO LFSUS told a recent forum earlier this year.



"We have entered into agreements with the Ministry of Finance, Ministry of Urban Development and Ministry of Local Government Authority who would ensure that title deeds and all necessary approvals are granted to construct houses. These agencies would also expedite approval for electricity and other utilities," Ms. Gurusinghe said.



"We are not asking banks to lend at low rates. We are not looking for interest subsidies. We do not want them to include lending to low income groups in their CSR projects either. All they need is to be included into a banks usual corporate strategy, where market interest rates apply. We only ask that they be given the opportunity to negotiate the interest rate, just like everybody else in the formal sector," she said.



"There are compulsory savings schemes that households are required to implement and the savings would speak for themselves."



LFSUS was initially setup with assistance from UN Habitat which selected Sri Lanka, along with Ghana, Indonesia and Tanzania, to pilot a project to provide finance for low income housing.



LFSUS would provide a guarantee of 50 percent of the housing project, while government support would vary between 20 to 30 percent in-kind, as they would provide the necessary approvals.



The low income housing market is about 20 percent of all households and therefore presented a vital opportunity to the banking sector. "These households are not the poorest-of-the-poor, which are the government’s responsibility, but they represent a segment that can easily make up a viable and profitable housing market if only given a chance.



Many NGOs have in the past provided credit schemes for homebuilding and livelihood development through various micro-finance schemes spanning 20 years in Sri Lanka.



"We need to take this to the next stage. Better housing would endure and better livelihood opportunities and a better future and better lives for the next generation. By 2015, it is estimated that 50 percent of the population would be urbanised and the LFSUS programme would ensure a sustainable, profitable market for the banking sector," Ms. Gurusinghe reiterated.


Slums in Colombo…



The government is planning to build houses for families living in unauthorized constructions in Colombo with the hope of meeting twin objectives, that of providing decent houses and cleaning up the city of Colombo.



The Urban Development Authority (UDA) raised Rs.10 billion through a debenture issue which is listed on the Colombo Stock Exchange. The funds would be used to construct housing units for 65,000 families living in unauthorized construction in the city. These units would be located in the suburbs.

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