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Microcredit is now widely accepted as a strategy for helping to finance commercial enterprises in very low-income settings. But could it also be used to help the poor build homes? The question is worth asking in Latin America, where traditional mortgage financing (10- to 30-year loans at market rates) is still not available to the vast majority of people. In fact, most middle- to lower-income families in Latin America build their homes in small increments, over the course of 5 to 15 years, with no credit assistance. In a recent paper entitled "Microfinance of housing: a key to housing the low- or moderate-income majority?," IDB housing expert Bruce Ferguson examines the experience of PROA, a Bolivian non-governmental organization that has been tailoring loans to the needs of low-income people in El Alto, a sprawling suburb of La Paz. PROA's loans average $3,750, paid back over 5 to 10 years at annual interest rates between 13.5 and 15 percent. Some 90 percent of the loans have gone to people who work in the informal sector. The loans are usually not used to build new structures. Rather, they help to finance "home improvements" or modest expansions of existing structures. PROA does not actually issue the loans; it "packages" or prepares credits offered by Mutual La Paz, a large mutual savings association. This intermediary process includes reviewing loan applications, collecting documentation from borrowers to prove land ownership (a form of collateral), and helping borrowers to plan and price construction work. Demand for the loans far exceeds the current availability of credit available through Mutual La Paz, but more lenders might soon take notice: only 1.09 percent of the PROA loans are in default, a figure substantially below that of Mutual La Paz's middle- to upper-income mortgage portfolio (4.1 percent).
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