Urban myths: assumptions about credit and tenure

It is commonly assumed that granting clear land titles leads to increased investment by the urban poor in permanent housing and increased access to credit and therefore is a good strategy for improving their livelihoods (see article on de Soto).

Research carried out by Homeless International and its partner organisations in Asia and Africa suggests, however, that:

• The poor invest in permanent housing when they regard their tenure to be secure in practice and not necessarily under formal law.
• The costs of obtaining clear land title can equal or exceed the costs of housing construction, making the approach unaffordable for the poor.
• Banks frequently continue to refuse credit to households, even those with clear land title, if they depend on uncertified incomes generated in the informal economy.
• Credit applications from households in settlements considered ‘no-go’ areas by banks are refused, even where they have clear land title, because it is thought either politically impossible or legally tortuous and expensive to seize the property if the applicant defaults on payments.

Where it exists at all, most bank lending for low-income housing in developing countries is not asset but income or revenue-based, even where reserve banks stipulate clear title as a requirement. To feel confident about granting loans, the lender relies on accurate information about the security of household income or project revenues and the support available to ensure repayment. From the bank’s perspective, the imbalance of information needs to be minimised - bankers want to know as much as the borrower does about the chances of repayment so they feel reassured about lending - and security needs to be maximised through organised support systems.

How can institutions that lend to the poor for housing minimise information imbalance and maximise security? The short answer is knowledge. That is, knowledge from the urban poor about their individual and collective situations and contexts, shared systematically in a form that borrowers and lenders can see as useful, reliable and legitimate. With respect to credit extension there are two important factors.

The first relates to household economics as reflected in daily savings patterns. Savings records can be an excellent means of determining how much money families have spare for housing. Understanding the savings process and procedures can also provide evidence of the organisational safety nets by which community-based savings and loan systems provide a means of covering crises that may delay and prevent repayment. Good examples of these systems are found among the federations of slum and shack dwellers belonging to Shack Dwellers International. These large informal organisations of the urban poor are usually structured on the basis of land tenure and work together systematically, sharing information and strategies within and between cities and countries.

The second factor is linked to wholesale lending to organisations that then either lend to individual households or use the funds to facilitate collective investment by the poor in large-scale projects such as sanitation or slum upgrading, which may also entail re-financing by the state. In these circumstances it is the track record and credibility of the intermediary organisations that becomes important. SPARC in India is an example of a non-governmental organisation, working in alliance with a large federation of the urban poor, that has been able to negotiate significant guarantees and credit from both public and commercial institutions for federation-led urban development initiatives. The federations were able to take control of their own resettlement and ultimately gain secure tenure for the participating families thanks to the availability of bridging finance. The tenure obtained was secure collective leasehold, rather than clear land title, chosen to help ensure that the housing obtained by the poor would be retained by them, rather than sold on to relieve short-term economic pressure.

The researchers advise caution when assuming that clear land title leads to greater access to credit. In many situations the dynamic works quite the other way around and the knowledge poor people have about what funds and income they have at their disposal is far more critical in ensuring ‘comfort’ for the lender. Also, clear land title may not be the best option to provide the livelihood security that poor households need in the longer term as they may become more vulnerable to the pressure to sell on to better-off households and move back to the slums.

Ruth McLeod
Homeless International
Queens House
16 Queens Road
Coventry CV1 3DF
UK

T +44 (0)247 663 2802
F +44 (0)247 663 2911

ruth@homeless-international.org
www.homeless-international.org

See also

Research on bridging the finance gap in housing and infrastructure and the development of the Community Led Infrastructure Finance Facility (CLIFF) at www.theinclusivecity.org/cliff

'The Impact of Regulations and Procedures on the Livelihoods and Asset Base of the Urban Poor - a Finanical Perspective', R. McLeod, 2001. Available from www.theinclusivecity.org

'Housing by People in Asia' No. 14, February 2002, Special Issue on Community Funds

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