Affordable Housing Finance
Affordable Housing Finance
Business Model Description
Provide affordable incremental housing finance for essential workers and civil servants and professionals with limited credit history, at conditional repayment rates. The incremental housing microfinance products' incremental aspect has the effect of breaking the overall cost of building a house into smaller more manageable chucks which in turn reduces the total interest paid, relative to a conventional mortgage (13). The revenue model is based on payroll-facilitated lending for housing and home improvements. Monthly loan payments are deducted from state employees salaries. The revenue model involves the extension of multiple and successive micro loans to customers who intend building or renovating their houses, with each loan amount granted on the basis of the customer’s affordability – a further loan is granted as the loan preceding it is repaid or the customer’s affordability improves. This creates an opportunity for lower level income earners to “self-build” their homes incrementally, and in line with their affordability (22.1).
Expected Impact
Increases access to finance for housing and provide civil servants and essential workers the opportunity to access decent shelter.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Malawi: Countrywide
Sector Classification
Financials
Development need
There is a growing demand for improved basic social services, housing and general urban infrastructure, including roads and digital infrastructure, due to rapid urbanization (6). The Africa SDG Index and Dashboards Report 2019, on SDG 9 regarding Industry, Innovation and Infrastructure, indicates that Malawi has “significant or major challenges” in achieving this SDG (7). Major challenges in the financial sector include: a shallow financial market; limited competition; limited financial safety nets; under- developed capital market; slow enactment of some laws; continued low levels of access to financial services; low financial literacy; lack of consumer protection; absence of effective consumer activism; and limited financial management skills; among others (14).
Policy priority
MW2063 and it's first 10-year implementation plan (MIP-1) under pillar 2 relating to industrialisation state the aim to increase access to affordable finance by "addressing the major hindrance of identification of credit worthy SMEs to enable them access affordable and reliable capital" (1). A high level outcome indicator includes the proportion of the population using financial products and services which aims to reach 95% by 2063 from the baseline of 74% recorded in 2019 (1).
Investment opportunities introduction
A number of Investment opportunities exist in the financial sector, mainly in micro-finance and fintech focusing on increasing access to finance for the unbanked adult population (15).
Key bottlenecks introduction
Interest rates remain high in Malawi, and the country’s major commercial financial institutions lend relatively little to the private sector (11).
Corporate and Retail Banking
Development need
Malawi's financial landscape is marked by limited access to formal financial services for nearly two-thirds of the country’s population, creating a challenge for poverty reduction and economic growth initiatives (9). Financial exclusion levels are high at 60% of adults lacking access to formal financial services, and 14% of adults actively using formal financial services. Although the private sector is involved in building houses, this is at a minimal rate, with the Government taking the lead. Access to bank loans for mortgages are further inhibited by extremely high interest rates charged by commercial banks (16). According to Malawi's 5th Integrated Household Survey (IHS5), 23.1% of the households had interaction with the credit market. Out of these, 17.7% of households successfully obtained a loan (32).
Policy Priority
MIP-1 for MW2063 Vision aims to decrease the proportion of the urban population living in informal settlements or inadequate housing from 60% in 2020 to 50% by 2030 (2).
Gender Inequalities and marginalisation issues
Women are significantly less likely to have access to finance than men in Malawi. Only 27% of women versus 37% of men have bank accounts (10).
Investment opportunities introduction
Malawi's MIP-1 states that the country aims to improve access to finance for businesses and entrepreneurship, through establishing special purpose vehicles (SPVs) to major partnerships projects with private sector(2). Lending to the private sector has been risky and less profitable for commercial banks, keeping banking penetration and intermediation low, and leaving opportunities for innovative micro-finance opportunities to the gap in targeted ways (11).
Key bottlenecks introduction
Poor provider access to consumer credit information is blocking financial inclusion via formal borrowing. The imposition of interest rate caps on Micro-Finance Institutions (MFIs) in 2019 caused one MFI to raise its minimum loan value significantly – in the process automatically rendering more than a third of its typical customer base ineligible for borrowing (12).
Consumer Finance
Pipeline Opportunity
Affordable Housing Finance
Provide affordable incremental housing finance for essential workers and civil servants and professionals with limited credit history, at conditional repayment rates. The incremental housing microfinance products' incremental aspect has the effect of breaking the overall cost of building a house into smaller more manageable chucks which in turn reduces the total interest paid, relative to a conventional mortgage (13). The revenue model is based on payroll-facilitated lending for housing and home improvements. Monthly loan payments are deducted from state employees salaries. The revenue model involves the extension of multiple and successive micro loans to customers who intend building or renovating their houses, with each loan amount granted on the basis of the customer’s affordability – a further loan is granted as the loan preceding it is repaid or the customer’s affordability improves. This creates an opportunity for lower level income earners to “self-build” their homes incrementally, and in line with their affordability (22.1).
Business Case
Market Size and Environment
Malawi faces a housing deficit of 21,000 units per year
According to Habitat for Humanity, at least 21,000 housing units are needed every year for the next 10 years to meet the Malawi's demand (21). According to USAID, there were approximately 138,000 civil servants under payroll in Malawi (35). Estimates show that the number of civil servants grew at an average annual growth rate of 8% from 2009 to 2015 (35).
Statistics indicate that over 100,000 people are on the waiting list for homes from the Malawi Housing Corporation suggesting a failure to meet the large demand (17).
Indicative Return
> 25%
Select Malawi - a local financial service provider, providing incremental housing finance - indicated expected IRRs for incremental housing loans to be 28% (25).
Investment Timeframe
Short Term (0–5 years)
Loan terms for incremental housing are usually between 18 and 48 months for loan recipients (25). Breakeven for microfinance lenders globally is 4 years (18).
Ticket Size
< USD 500,000
Market Risks & Scale Obstacles
Market - Volatile
Market - Volatile
Impact Case
Sustainable Development Need
Current housing supplied in the formal sector is too expensive for nearly 80% of the urban population. The median household consumption of about MWK 195,111 (USD 1,400) per year leads to a need for most housing to cost around MWK 976,000 (USD 6,970), including plot and servicing. Malawi’s minimum wage is MWK 50,000 (USD 48.4) per month (36). The cost of the cheapest 40m2 newly built permanent house in an urban area recently valued by the Ministry of Lands is MWK 10 million (USD 5,941). Monthly rentals range between MWK 50,000 (USD 29.71) and MWK 60,000 (USD 35.65) and construction labour costs are MWK 2 million (USD 1,903) for a house measuring an average of 40m2 (16).
Malawi has about 4.8 million housing units of which 58.9% are sub-standards homes (21). There are currently more than 100,000 applicants for Malawi Housing Corporation (MHC) houses. However, by March 2022, MHC had only completed the construction of an additional 240 houses and flats across the country (36).
Banks’ reliance on short-term deposits for liquidity and difficulty assessing the creditworthiness of borrowers generates a risk-averse approach to private sector lending with high interest rates, short tenors, and steep collateral demands (11). Finance from the formal sector is accessible to fewer than 35% of the urban population (16).
Low real levels of income severely impacts the ability of applicants to borrow sufficient sums to purchase or build houses (13).
Gender & Marginalisation
In Malawi, gender, income and location have significant implications for the vulnerability of people. The majority of those living in informal settlements in the urban areas are female-headed households for example.(2).
Failure of the urban land market is pushing low-income groups into locations that are prone to disasters, and recent studies have shown that 4 out of every 10 non-permanent houses in Lilongwe are now located in areas threatened by floods and other natural hazards. Women, as often primary caregivers in the family, are more likely than men to miss work, due to shocks or stresses. Missed workload to income loss, which can affect women’s ability to provide for themselves and their families (19).
Expected Development Outcome
Affordable housing finance, particularly for those in the civil service and essential workers, broadens access to financial services to more Malawians for the purpose of constructing decent housing.
The incremental aspect of the financing has the effect of breaking the overall cost of building a house into smaller more manageable chucks which in turn increases affordability.
Gender & Marginalisation
Research suggests women have engaged less in the period 2015–2020 with financial services than men have. There is some evidence women might not wish to engage with traditional formal Financial Service Providers due to the cumbersome requirements (12). Microfinance embraces the idea of women as prime agents of change in households internationally (20), which is expected to result in greater access to finance though housing finance too.
Primary SDGs addressed
11.1.1 Proportion of urban population living in informal, informal settlements or inadequate housing
67% as of 2020 (37).
33.4% by 2030 (37).
1.4.1 Proportion of population living in households with access to basic services
Malawi has about 4.8 million housing units of which 58.9% are sub-standards homes (21).
N/A
10.1.1 Growth rates of household expenditure or income per capita among the bottom 40 per cent of the population and the total population
N/A
10% by 2030 (37).
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Corporates
Public sector
Indirectly impacted stakeholders
People
Corporates
Public sector
Outcome Risks
Poor quality construction, which is often the case in Malawi, could negatively affect the quality and lives of people (13). Increased credit could increase the indebtedness of civil servants.
Impact Risks
Economic stagnation and the devaluation of the Kwacha have negatively affected the affordability of housing severely. Between January 2023 and August 2023, cement prices increased by 20% from about MWK 12,500 (USD 7.43) at the beginning of the year to MWK 15,000 – MWK 20,000 (USD 8.91 - 11.88). Due to the scarcity of foreign exchange that enables international trade in the country, the prices of most construction materials that are imported are likely to remain unstable despite the government's interventions (16). The macro-economic condition of the country could make housing and consequently housing finance inaccessible to the majority of the population.
Impact Classification
What
Affordable incremental housing finance increases access to finance for housing and provides civil servants and essential workers the opportunity to access decent shelter.
Who
Civil servants and essential workers can access housing and additionally construction of activity will benefit the local industry and increase employment.
Risk
This business model is proven but requires considerations around the current price of construction inputs in Malawi due to economic factors that could make even small additions to housing very expensive.
Contribution
In contrast to incremental housing micro-finance, the Malawi government would need to increase its efforts into housing supply through MHC and increase coverage of the Public Service Home Ownership Scheme.
How Much
Financial exclusion levels are high as 60% of adults lack access to formal financial services, and only 14% of adults actively using formal financial services. This gap could be addressed partially through the intervention (16).
Impact Thesis
Increases access to finance for housing and provide civil servants and essential workers the opportunity to access decent shelter.
Enabling Environment
Policy Environment
The Malawi Micro-Finance Policy and Action Plan aims to promote the development of a sustainable microfinance industry which provides credit, savings opportunities and other financial services to low-income people, which will create wealth and employment in Malawi (25).
The Malawi National Housing Policy (revised in 2019) seeks to address gaps in the housing delivery sector influenced by rapid urbanisation and current status of some houses in both urban and rural areas (5).
The Land Policy influences the price of and access to land, and on the other hand aims at providing an enabling environment for investing (5).
Financial Environment
Financial incentives: The World Bank supports the Financial Sector Technical Assistance Project (FSTAP) in Malawi, which aims to expand and improve financial access in the country (4).
Financial incentives: Opportunity International is a network of organisations that provide support to microfinance institutions around the world. In Malawi, it is working alongside a range of financial service providers (FSPs), including commercial banks, deposit-taking microfinance organisations and credit facilities, to increase their outreach to rural populations, especially women, youth and persons with disabilities (21.1).
Regulatory Environment
Micro-finance institutions and financial cooperatives operating in Malawi are regulated and supervised by the Microfinance and Capital Markets Supervision Department of the Reserve Bank of Malawi (RBM) (40).
The financial Services Act of 2010 makes provision for the supervision and regulation of financial institutions in the country (41).
The Microfinance Act of 2010 provides with respect to the registration and licensing of microfinance providers in Malawi and provides rules for the governance and operations of such businesses (27).
The Government of Malawi's Safe House Construction Guidelines promote local practices, low-cost technologies and identify strategies for multi-hazard risk reduction by proposing both affordable and appropriate solutions trough a user-friendly manual (23).
Marketplace Participants
Private Sector
Select Malawi, Chuma Changa Limited, Citizen Microfinance Limited, Financerite Limited, ACADES Finance Limited, AIC Financials Limited, Awili Microfinance Limited, Binisons Credit Agency, BL Financial Services Limited, Nyasa Capital Finance Company, FINCA Limited, Microloan Foundation Limited, Malawi Microfinance Network (MAMN), Malawi Housing Corporation.
Government
Reserve Bank of Malawi, Microfinance and Capital Markets Supervision Department of the Reserve Bank of Malawi (RBM), Ministry of Housing, Urban Planning Unit, Registrar of Financial Institutions Malawi, National Construction Industry Council (NCIC), Malawi Housing Corporation (MHC).
Multilaterals
World Bank Group, USAID, Opportunity International.
Non-Profit
Habitat Humanity Malawi, Malawi Union of Savings and Credit Cooperatives (MUSCCO), ADC Microfinance, MicroLoan Foundation, VisionFund, Centre for Community Organisation and Development (CCODE).
Target Locations
Malawi: Countrywide
References
- (1) National Planning Commission, 2021. Malawi's Vision 2063 (MW2063), https://npc.mw/wp-content/uploads/2021/02/MW2063-VISION-FINAL.pdf
- (2) National Planning Commission, 2021. MW2063 MIP-1, First 10-year Implementation Plan, https://npc.mw/wp-content/uploads/2021/11/MIP-1-WEb-Version-8-November-2021-Fast-view.pdf
- (3) National Planning Commission, 2021. Annual Report 2020, https://npc.mw/wp-content/uploads/2020/10/NPC-2020-ANNUAL-REPORT.pdf
- (4) World Bank Group, 2021. Innovation and Digital Transformation in the Financial Sector in Malawi. https://www.worldbank.org/en/results/2021/01/14/innovation-and-digital-transformation-in-the-financial-sector-in-malawi
- (5) Government of Malawi, 2018. Malawi National Energy Policy, https://rise.esmap.org/data/files/library/malawi/Renewable%20Energy/Supporting%20Documentation/Malawi_National%20Energy%20Policy%202018.pdf
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- (7) SDG Centre for Africa and Sustainable Development Solutions Network, 2019. Africa SDG Index and Dashboards Report 2019, https://www.sdgindex.org/reports/2019-africa-sdg-index-and-dashboards-report/
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