The low-income housing finance problem concerns not so much affordable terms of loans as the lack of access to credit itself. Formal-sector financial institutions seldom loan down-market to serve the needs of the poor. The poor are invariably cut off from the conventional housing market that requires large down payments and expensive credit, to buy ready-made housing that is often not suitable for the buyer. Low-income families are very often denied access to credit altogether, making the discussion of the level of interest rate and other terms of housing finance irrelevant.
Many governments try to tackle the low-income housing finance problems by creating specialized lending institutions and providing seed capital or low-cost funds to them so that they will extend credit to the low-income clientele at subsidized interest rates. This approach tends to miss the point since it does not address the root of the problem which places the poor outside access to normal commercial lending services. Besides, subsidized loans end up reducing the size of the pool of resources available to finance housing for all households, including the urban poor. In addition, such programmes frequently fail to reach the target group and are instead raided by the middle-income group. Finally, the trend of financial integration and liberalization will reduce the scope of specialized financial institutions. Instead, attempts to solve the problem of lack of access should start with measures to enhance the creditworthiness of the urban poor and to make them more 'bankable' to financial institutions.
Studies also demonstrate that formal-sector housing finance institutions can better serve the demand of low-income households by allowing greater flexibility in repayment terms as well as in the use of funds. More frequent payments can help families with irregular incomes, and the payment schedule can be tailored to fit the borrower's income stream over time by gradually increasing monthly payments to reduce the initial burden (graduate payment mortgages). Payments can be indexed to inflation to ensure that a positive real interest rate is paid to lenders; and to the income profile of the borrowers, so that affordability is maintained within a reasonable range (dual index mortgages). Flexibility in the use of funds can be provided by giving borrowers the choice of purchasing land, construction materials and labour for building new dwellings, or for upgrading or expanding the existing structure according to their schedule, and taking into account their housing needs and the availability of resources. Multi-purpose loans which include housing as well as income-generation components through business loans are even more useful for low-income households.
A recent, promising, approach is to use partnerships between private financial institutions and community-based organizations to link the formal and informal sectors to extend credit to low-income households. Such partnerships take the form of the funding of formal institutions through the participation on NGOs or the setting up of NGO subsidiaries or special projects projects by institutions. The Grameen Bank of Bangladesh, the Cooperative Housing Foundation of the United States of America, and the Community Mortgage Programme in the Philippines are examples of the former, while the Urban Community Development Office of Thailand is an example of the latter.
The Grameen Bank Housing Programme was established in Bangladesh in 1984 and to date has enabled over 400,000 poor rural families to provide themselves with a permanent and cyclone-proof home. The programme provides affordable housing loans of between US$300 and $625, without formal collateral and repayable over ten years. Repayments amount to little more than a family would have to spend every year in repairing their temporary shelters. The title to the home is vested with the woman, who thereby obtains financial security and improved status within the family and society. The Bank has achieved a 98 per cent recovery rate for these loans and is continuing the programme with 7,000 new loans being issued every month.