Background Paper on Shelter Finance

UN-Habitat suggests that one in every three people in the world will live in “slums” within 30 years. This paper analyses innovations in shelter finance that may help to avoid this situation. The urban poor, both as individual households and in terms of their organized collective capacity, face two very serious constraints. The first is their income poverty and their limited ability to invest in shelter. The second is an inability of state agencies to provide adequate land with access to basic services within a regulatory system that does not penalise the poor for this limited ability. This paper describes how lack of affordability is a critical problem with only a minority of residents in most Southern towns and cities able to afford complete houses and hence be considered for mortgage finance. The remaining residents build incrementally, securing shelter by small repeat investments in land, infrastructure and services, and the dwelling. A critical component of the development of these incremental settlements is collective action, both to install services directly, and to lobby the political system for neighbourhood investments. The paper discusses how four shelter finance sectors have developed to address shelter needs: mortgage finance, social housing or public shelter finance, micro-finance and community funds. Recent state programmes may assist low-income households to purchase complete housing units and/or help with the upgrading of low-income neighbourhoods. The option of completed housing units may still be limited due to the scale of poverty. The spread of small-scale loan finance has been considerable with the growth of micro-finance for shelter and community funds that offer collective finance for residents seeking land security and service investments. The paper discusses, in Section IV, four innovative approaches, the first of which is the attempt to make mortgage finance more relevant to the lower income households, and those working in the informal sector. The other three approaches offer alternative strategies for supporting the process of incremental development; and each is a strategy that has reached scale within a national context. Section V looks forward to what might next be done. Considerable progress in developing new and effective strategies has been made but these strategies are often challenged because of limited acceptance of incremental improvements, and many selfinterested actions by higher income and more powerful groups. The concluding section considers what is needed to catalyse programmes that may operate at the scale of those considered in Section IV, and what may help these programmes grow further.