The role of local development and low-income housing programs as tools for reducing urban poverty and social exclusion in Central America.
Alfredo Stein (Project Leader)
In 2003, Central America had a population of about 38.6 million, of which 52% lived in urban areas. About 42% of this urban population lived in slums and other informal settlements. The region‘s income distribution is one of the most unequal in the entire world. Natural disasters have contributed to rural to urban migrations and loss of economic activity. More recently, spread urban violence has created a sense of citizen insecurity and fear. The result of these factors has been raising urban poverty levels and social disintegration, with growing demand for urban land, housing and services, and migration of hundreds of thousands of people to the USA, Canada and Costa Rica.
As in world regions more than 85% of low-income housing improvements and new housing construction in Central America are made by the poor households themselves in the majority of the cases, without any technical or financial assistance by formal private or public institutions. Commercial private financial and banking institutions usually avoid involvement in housing finance for the poor because the lack of solid collateral and stable income and the low profit margins these sectors represent. Public sector finance also has also failed to reach the poor as subsides usually get to upper income groups. Thus, low-income households, most working in the informal economy, have with few exceptions been excluded from accessing capital from formal private or public financial institutions.
In recent years, an increased number of non-traditional financial institutions are servicing low-income families with innovative financial schemes. Some of these organizations are supported by the Swedish International Development Cooperation Agency (Sida). Diverse instruments have been developed to strengthen national and local capacities in the provision of secure land tenure; the introduction and maintenance of basic services and infrastructure through partnerships between local governments and poor urban communities; and financial schemes, including micro-lending for housing improvements and income-generating activities. A common characteristic is the strong involvement of the targeted families and communities in the design and execution of works; cost recovery and the sustainability of the institutions that promote these processes. The programs seem to be tailored to local needs and conditions, and participation is seen as a vehicle for promoting social and democratic development.
By the end 2004, the five programs had benefited more than 90,000 low-income families of the main urban areas of the region, (about 450,000 people) in the improvement of their habitat conditions. This is a significant number but still small compared to the overall demand for habitat improvement. The majority of clients of the micro credit programs are women. Although the majority of the participant families have the capacity of repaying a loan, some households are too poor to participate in the lending schemes and are assisted by other means, mainly through the provision of infrastructure services. The experiences show that the housing needs of the poor can be financed in a way that is both economically viable for the institutions and also affordable by the poor.
Scope of the research
In spite of their relevance, a systematic effort to study the social impact of these programs is still incipient. Sida and the institutions responsible for the programs have dedicated important resources in the last decade to set up and ensure that the initiatives can continue after Swedish resources diminish. External and internal monitoring has clear operative goals so that lessons learned can be translated into actions to strengthen the institutions. Less attention has been given to an in-depth evaluation of the social impact of the programs. The study therefore tries to determine if and how these alternative financial mechanisms (including micro lending for housing improvements) can transform poor communities in the cities of the developing world. It also aims to demonstrate that there are forms of local planning and social action accompanied by financial interventions in low-income housing, the provision of basic services and technical assistance that can mark a difference between social exclusion and inclusion. The study will analyze how factors such as access to land, finance and housing are linked with participation and local democracy. Emphasis will be given to the limits and potentialities of micro financing for housing improvement to promote social inclusion.
During the last ten years, important efforts have been done by the donor community to assess the direct and indirect impact of microfinance programs. The majority of the literature however concentrates on the impact of micro-lending for micro-enterprise activities and to a lesser extent on housing improvement. The reason for this is that housing microfinance is just beginning to emerge from the shadows of micro enterprise lending and mortgage-based housing (Daphnis and Faulhaber, 2004). Yet, even studies on micro enterprise activities have as their focal point the understanding of the institutional performance of lending institutions in their quest to achieve self-sufficiency and financial sustainability rather than measuring the ‘outreach’ of their work.
A frequent question asked is whether or not the microfinance institutions are reaching the poorest of the urban and rural poor. Donors now acknowledge that they have learned more about the best ways to support the emergence of inclusive financial systems than on improving indicators to measure and monitor social performance (CGAP, 2004).
Some elements seem easier to measure and are regularly reported by the micro lending institutions (e.g., the geographic location of the target population; the number and gender of clients served and their level of income; the loan amounts given per client, per economic activity or per type of housing improvement, the interest rates used, the commissions charged, repayment periods, the securities and collateral requested, the eligibility criteria per income strata, and the processing time per loan).
Meyer, Nagarajan and Dunn (2000) affirm that the conceptualization and measurement of ‘outreach’ is still not well developed by micro lending institutions as they cannot address the question of how their criteria of targeting the poor relates to existing national poverty measures (including poverty lines). They propose a series of proxies and benchmarks to overcome this limitation including household income and the level of per capita consumption expenditures; the characteristics of household demographic (age, gender, education and size), the characteristics of the housing conditions of the poor (roofs, walls, floors and land tenure) and their access to public infrastructure and services.
Recent studies however show the limitations of working with national poverty measures. Satterthwaite (2004) contends that poverty lines based on assumptions such as the US$ 1 per capita per day tend to underestimate the realities of the urban poor. One of the main characteristics of the urban poor is their dependency on a periodic income cash flow for their survival that in many cases is not only inadequate, but also unstable and uneven. Food, cooking fuel and water, as well as transport and other vital services are generally purchased with money. Land and housing, even a cheap shack built of scrap materials, are expensive goods in the majority of urban settings of the developing world. Thus, the monetary cost of living is therefore higher for urban than for rural households (ibid).
Thus, poverty as conceived by the poor themselves cannot be defined exclusively in terms of money-metric poverty lines or low incomes. It requires using broader concepts of deprivation and insecurity and analyzing how the poverty situation of a household changes during a period of time: from impoverishment to increased levels of welfare or from exclusion to social inclusion (Rakodi and Lloyd-Jones, 2002). Any attempt to place monetary values on aspects of personal, household and social deprivation involves so many arbitrary assumptions that it is likely to be meaningless (ibid).
The widening of poverty definitions both in terms of the way it is measured and how poor people understand their current and future situation has implications to development cooperation aid. If poor people are seen not as objects of aid but as citizens with rights and legitimate demands, who have resources, capabilities and rational economical strategies of survival that can contribute to more effective poverty reduction it will have significant consequences on the way policies and programs are designed and implemented (Satterthwaite, 2004). And this will also have considerable connotations on the methods used to assess and evaluate the impact of these programs.
According to Wright and Copestake (2004) assessment methods for micro-lending institutions should enable both proving that programs have social impacts while also improving the organizational development that allows generating better impacts. Thus, micro lending projects should be able to assess on the one hand, the direct impact on the material conditions of the poor, while on the other, the ‘non material’ impacts that micro lending projects usually generate (e.g., more understanding of acquired techniques, skills and abilities by the poor; changes of perceptions and attitudes in relation with their personal and household situation and in their relationships with other local power structures, including grass root organizations, local governments and NGOs, development of safety networks and enhanced strategies and capacities to face risk situations, etc.).
Microfinance for housing improvement is at the end of the day an arrangement between means and ends aimed to reduce poverty. To measure its social impact requires however, the construction of a social model that looks beyond its rationality and to understand its limits (Serrano, 2004). This is the main problem the research aims to address.
The study will be carried out between September 2004 and August 2009 by HDM Lund University with support from Sida. During the first part of 2005, literature review on the subject has been done. The research methodology for the field work will be developed in collaboration with practitioners from the Sida supported programs during the end of 2005, including definition of countries, cities and sites and aspects to be studied. Field work and data analysis will take place in 2006 and 2007. During 2008 and 2009 the main findings of the research will be systematized and disseminated.
a) Theoretical contributions to the debate on social exclusion and the role of micro-finance in urban poverty reduction processes, including the construction of a model to assess the potentialities and limits of similar programs;
b) Advice to housing ministries, city planners and politicians, bilateral and multilateral agencies, especially Sida, and funding institutions on how to increase access and participation of the urban poor to low-income housing and local development programs;
c) lecturing at different Master's and Short Courses organized by HDM and PROMESHA
d) International seminars organized together with reknowned universities and research centres, and articles in specialized journals to disseminate the results of the study.
Publications and contributions of the research to date:
‘Social inclusion through housing micro lending: lessons from Central America’ paper to be presented at 6th N-AERUS Conference, Lund, Sweden 15-16 of September 2005.
Alfredo Stein with Luis Castillo, 'Innovative financing for low-income housing improvement: lessons from programmes in Central America' in Environment and Urbanization Vol 17 No 1 2005.
Contribution to Chapter 8 'Investing in the target to improve the lives of slum dwellers' in the UN Millennnium Project Task Force Report on Improving the Lives of Slum Dwellers, "A home in the city" (2005), Earthscan, London. Lead authors, Pietro Garau, Elliot D. Sclar and Gabriella Y. Carolini.
The research is funded by Sida within the framework of the fifth phase of the capacity building program PROMESHA (Improving low-income housing and reducing urban poverty in Latin America) executed by HDM in collaboration with partner organizations in Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Bolivia, Ecuador and Peru.
F. C .Q. Cacnio, 2001, Microfinance Approach to Housing: The Community Mortgage Program, Philippine Institute for Development Studies, Discussion Paper Series No. 2001-28
Center for Urban Development Studies, 2000, Housing Micro-Finance programs: a synthesis, Mimeo, Harvard University Graduate School of Design, Boston.
CHF, 2005, Practical guide for housing microfinance in Morocco, CHF, Silver Spring.
Cities Alliance, 2002, FUNHAVI’s Housing Microfinance Program in Mexico, Cities Alliance Shelter Finance for the Poor Series, Washington.
Consultative Group to Assist the Poor (CGAP), 2004, Building inclusive financial systems: donor guidelines on good practice in microfinance, CGAP/The World Bank, Washington.
F. Daphnis and I. Faulhaber, 2004, Housing Microfinance: Policy Recommendations for Sida’s programs Sida, Stockholm.
F. Daphnis and B. Ferguson, 2004, Housing Microfinance: A guide to practice, Kumarian press, Bloomfield.
B. Ferguson, 1999, “Micro-finance of housing: a key to housing the low- or moderate-income majority?”, Environment and Urbanization, Vol. 11, No 1.
Homeless International, 2000, Bridging the finance gap in housing and infrastructure: Bolivia: Fundación Pro-Habitat-a case study, Homeless International.
S. Loughhead and C. Rakodi, 2002, Reducing Urban Poverty in India – Lessons from Projects Supported by DFID in C. Rakodi with T. Lloyd-Jones (editors), Urban Livelihoods: A People-centred Approach to Reducing Poverty, Earthscan Publications, London.
M. Matul and C. Tsilikounas, 2004, Role of Microfinance in the Household Reconstruction Process in Bosnia and Herzegovina, Imp-Act, Microfinance Center for Central and Eastern Europe and the New Independent States, MFC Spotlight Note No. 6.
R.L. Meyer, G. Nagarajan and E. Dunn, 2000, Measuring Depth of Outreach: Tools for Microfinance, Bangladesh Development Studies, Special Edition on Poverty, Ed. Shahidur Khandker.
D. Mitlin, 1997, Reaching Low-income Groups with Housing Finance, IIED Paper Series on Poverty Reduction in Urban Areas, IIED, London.
D. Mittlin and D. Satterthwaite (eds.), 2004, Empowering Squatter Citizen: Local Government, Civils Society and Urban Poverty Reduction, Earthscan, London.
J. Morduch, 2004, Micro-insurance: the next revolution in A. Banerjee, et al, What have we learned about Poverty? Oxford University Press (forthcoming).
PRODEL, 2004 Informe de cierre segunda fase período 1998-2003, PRODEL, Managua.
D. Satterthwaite, 2004, The under-estimation of urban poverty in low and middle-income nations, IIED Working Paper 14 on Poverty Reduction in Urban Areas, IIED, London.
Sida, 1995, Towards an Urban World: Urbanization and Development Assistance, Sida, Stockholm.
A. Serrano, 2004, Ideas para una crítica de la razón científica, class lecture notes, Universidad Complutense, Madrid.
A. Stein, 2001, Participation and sustainability in social projects; The experience of the Local Development Programme (PRODEL) in Nicaragua, IIED Poverty Reduction in Urban Areas Series Working Paper 3, London.
UN-HABITAT, 2003, Slums of the World: The face of urban poverty in the new millennium UN-HABITAT, Nairobi.
K. Wright and J. Copestake, 2004, “Impact assessment of microfinance using qualitative data: communicating between social scientists and practitioners using the QUIP” in Journal of International Development 16, 355-367.
Resources from Sida are channelled through the Housing Promotion Foundation (FUPROVI) in Costa Rica; the Urban and Rural Social Housing Development Foundation (FUNDEVI) in Honduras; the Foundation for Local Development (PRODEL) in Nicaragua; the Salvadoran Integral Assistance Foundation (FUSAI) in El Salvador, and; the Local Development Trust Fund (FDLG) in Guatemala.
For more details on these studies see: http://www.cgap.org/publications.html
On recent applied studies for credits for housing improvement see for example Cacnio (2001); Centre for Urban Development Studies (2000); CHF (2005); Cities Alliance (2002); Daphnis and Faulhaber (2004); Daphnis and Ferguson (2004); Homeless International (2000); Mitlin (1997); and Stein and Castillo (2004).
An assessment of urban poverty reduction cases, some including savings, micro-credit, and self-help schemes for housing improvement as means to empower local communities can be found in Mitlin and Satterthwaite (2004). For the assessment of new micro-finance instruments such as micro-insurance and its possible impact on reducing the vulnerability of the poor see Morduch (2004).
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Last updated: 2010-10-25