Microfinance and the housing value chain: Part 2, tweak what you do now
Yesterday’s post on my experience teaching a brand-new course, Mortgages for the Poor; An Overview of Products and Supporting Infrastructure at the world-famous Boulder Microfinance Training Program (MFT), brought us to the point of wanting to follow the customer.
Whoever gets the customer first, wins!
The MFI customer needs and wants a housing-finance product, because traditional microfinance can’t lend enough money to buy large fixed assets (new homes, a one-room addition, installation of in-home toilet), and if you’re going to lend for long intervals (3-5 years may not seem like much to us, but it’s 6-10 times as long as the typical microfinance loan). Banks won’t enter the space, I said, because it’s too small and they’re afraid of it, so if housing finance is to come to informal housing, it’s going to be you MFIs as the change-agent MEEs. As I’ve put it before:
Though drawn into the space by a sense of mission, they are enterprises and subject to the normal business imperatives:
It’s got a mission, but it’s also a bank: SEWA in Ahmedabad,
* They generate revenue to sustain their operating costs (or reduce their costs to match their revenue).
* They make ongoing capital investments whose payback is long-term — either hard costs like land sites or pilot schemes, or soft costs like political advocacy and the catchall phrase ‘capacity-building’.
* They hire and retire staff; manage and account for their capital; secure resources via negotiation; protect themselves against malfeasance and waste by their executives; handle organizational turnover; and manage organic growth and evolution as their business ages.
In short, NGOs need business models.
All these problems are compounded because the entities tend to be short of classical business expertise and experience, despite their entrepreneurial approach to their missions. Nor does the technical assistance that reaches them emphasize entrepreneurship.
You have to bring the expertise to the customers, and you have to adapt what you know to what they need. Portability and flexibility are important.
With that as a preamble, I put the class through a role-playing exercise called Let’s make a loan –
When you lend on housing, you’d better know what’s behind Door Number 3!
– a role-playing game using this extremely cheesy graphic showing the roles in a home-purchase value chain:
I’d printed up name tents for each of the major roles I wanted played:
Home seller
Home buyer
Loan originator
Appraiser
Underwriter
“Funding desk”
Securitizer
Security holder
One by one, we introduced our dramatis personae, and I took volunteers from the group. It wasn’t hard; give people who know something a chance to ham it up, and you’ll be amazed at the results. Sure enough, the Brazilian district attorney volunteered to be the home doctor; Muaffaq the Palestinian community organizer was ready to be the buyer, and Hemantha the Indian microbanker (from Hand-in-Hand) was happy to be the loan originator.
Originating loans in Tamil Nadu and
As we introduced each one, we asked:
What does he or she want from the transaction?
How does he or she get paid?
What are his or her incentives?
When it came to the question of appraising the house, we got into a lengthy discussion about whether we needed an appraiser. “Why not just have the estate agent do it?” [Estate agent is Brit-speak for broker – Ed..] So we drafted Marianne of DIG to be the estate agent, and then deconstructed her qualifications and motivations (when it comes to a realtor, who really works for whom?).
I’ll give you a hint: I get paid only if it sells
Meanwhile, we’d already established that Hemantha the originator wouldn’t be on salary, so during the break I asked him sotto voce to interrupt me every few minutes with “I want my commission!”
Adding people to the role-play reversed the normal teacher-class dynamics; instead we brought out the people who knew quite a bit about the subject and could contribute it. Maria-Teresa from Habitat had plenty of experience in
Making loans that people can pay back
As often happens, the roles took possession of the players. When it came time to foreclose on our homeowner Muaffaq, I tugged at the table representing his house but he maintained a firm grip on it. Looking impishly at me, he asked, “What if I don’t want to leave?”
“I’ll get the bailiffs and they’ll remove you and your goods.”
“They’re friends of my brother’s. Why don’t you pay me three hundred to go?”
I turned to the class. “Is that immoral?” Lively discussion ensued. As it was raging, I asked, “is it illegal?” No. “Well, is it bad business?” Another lively discussion: several participants pointed out that the minute we pay off one delinquent homeowner, everybody else will expect the same payments to vacate – so there’s a value to consistency.
Day 3 brought us the case studies, and to illustrate how programs evolve, I took three successive experiments in one country (
(A useful comparison, commissioned by Cities Alliance, is available here in pdf.)
I finished with my personal favorite, which isn’t even a housing loan product per se: Patrimonio Hoy run by
For each case, the class worked through the essential questions to ask about any MEE’s` financial product:
Who’s their target customer?
What’s their core product?
What’s their business model?
Questions to ask about any MEE: Part 1
What’s their value proposition?
What’s their core competency?
What’s their comparative advantage?
Questions to ask about any MEE: Part 2
Which led me, as my class was flagging – it was Saturday morning, after all, and they’d had a solid week of these topics and more – to present this definition of a housing finance company:
A functional description of a housing finance company
“If you want to be in the housing finance business,” I said, “you can test market a product. You can limit your risk by piloting it.”
And if it doesn’t work, you try something else
“You can offer it only to repeat customers, or your best customers, or customers who live in particular neighborhoods. You can cut the rates after six months’ of good payment history.”
Somewhere in this sermon skeptical Samantha, who’d asked why do it, piped up with, “it’s just tweaking what we do now.”
That, it seemed to me, was a fine place to finish the class.
“My work here is done.”
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