Housing sector stymied by costly formal procedures

As a result there are many squatters in the country because it is way too expensive for most people to follow formal channels.

Instead, informal channels have become the dominant housing delivery system across the country, known to contribute around 70 percent of the total housing stock.

Julius Mwenda, a student at Ardhi University, says the rapid urban population growth is making matters worse as the country already faces a limited housing supply and that the said percentage of informal housing are substandard and in dire need of repair which, of course, poor people can’t manage to refurbish.

“Since many people migrate to urban areas in search of a better life and future but it is unfortunate that most, if not all, cannot afford formal urban housing.

Thus at low costs, peripheral urban areas attract them, in other words, the informal delivery of housing as a less expensive alternative has been the norm in Tanzania while formality is the exception,” he observed.

In addition to the scale of the problem, the development of an adequate and affordable shelter delivery system has also been hindered by other factors including lack of a coherent housing policy, the absence of housing credit facilities and outdated building standards.

Last year’s shelter report, Habitat for Humanity International, non-governmental and not for profit organisation, recognises the need for greater access to housing finance among low-income people.

This is why Habitat has been working hard to spark innovation and scale housing microfinance.

The report quotes Jonathan Reckford, CEO Habitat for Humanity International as saying: “When microfinance emerged as a means of alleviating poverty by increasing access to capital for low-income populations, many saw it as the new frontier in international development.

Traditional banks refused to lend such small amounts for the simple reason that it was far less profitable.”

According to him, banks would have to spend the same amount of time and money to process a tiny loan as a large loan (sometimes more, especially if the borrower has informal income) and would receive far less in return.

Therefore, said he: “Microfinance provided an alternative financing avenue for millions of people who lacked access to traditional banking, giving them a chance to invest in their small business or income-generating project. Microfinance worked because it responded to the needs of those in the informal economy.”

The organisation stresses that microfinance movement has led many low-income people gaining access to previously unavailable financial services.

And with innovations, such services are now reached beyond just small-business credit to include savings, remittances, insurance and education finance.

As the need for housing swells and urban migration accelerates, the lessons of microfinance nonmortgage-backed microfinance loans may be helpful.

Housing microfinance emerged organically out of the realization that microloans could be a useful tool for helping people in the country’s informal settlement to improve their conditions.

Anthea Houston urge the need for housing microfinance in his study titled ‘Housing Support Services for Housing Microfinance Lending in East and Southern Africa:

A case study of WAT Human Settlements Trust (WAT-HST) / WAT Savings and Credit Cooperative Society (WAT-SACCOS).

Houston is of the view that large commercial banks are generally disinterested in providing housing microfinance and do not have housing loan products for the low-income market.

Many households are investing in their housing using savings and income earned from formal or informal economic activities thus illustrating the high demand for housing microfinance.

For Hussein Songola, an architect student told the Property Watch the country’s major cities have been experiencing rapid growth of informal settlements, particularly in Dar es Salaam, Mwanza and Arusha.
“Off course,” Songola said, “The settlements are highly irregular, built without planning, infrastructure, or basic services. And most of the structures in the informal settlements do not have legal title. “

He adds: “Therefore, the challenge for policy makers is to improve housing delivery value chains in a way that allows people to steadily transition toward more formal housing conditions. At the same time, improvements to formal sector value chains can reduce the cost of construction and broaden access to finance for consumers and developers.”

Studies shows that Tanzania is fortunate to have a broad network of different types of micro lenders, including commercial banks, regulated financial NGOs, SACCOS, and so forth.

Given the income distribution in Tanzania, it is expected that a very large number of households would benefit from micro loans for housing, which are compatible with starter dwellings, incremental building, and upgrading.

These are not formal mortgage loans, and the methods for underwriting and servicing are more compatible with the manner in which low income households develop their housing.

The micro lenders who focus on group loans will need to develop a household-based loan product, as group lending has not been particularly successful for housing loans.

Furthermore, Microfinance Institutions (MFIs) for housing seems to be the only option that suits the characteristics of the urban poor who develop their houses incrementally.

It is said that such MFIs are capable of mobilizing financial resources, disbursing and recovering the loans through capacity building and setting a reducing balance type of interest rate.

Although the loans are small, the contributions of MFIs for housing are remarkable and prove a success in improving the living conditions of the urban poor.