Central America has one of the world’s most unequal patterns of income distribution and high rates of urbanisation. In 2002 42 percent of urban residents lived in slums. Governments have responded by promoting the building of new houses rather than improving existing informal settlements. Private building companies, rather than poor people, have mainly benefited from these schemes.

Most conventional housing programmes in Central America have failed due to lack of institutional capacity, lack of investment and unwillingness of the formal banking systems to lend to people in poor neighbourhoods. A paper from the Housing and Management Department of Lund University, Sweden and the Salvadoran Integral Assistance Foundation analyses low-income housing and urban development programmes supported by the Swedish International Development Cooperation Agency (Sida).

Through a series of institutions in the region Sida has helped to improve the living conditions of around 400,000 people in poor urban neighbourhoods in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Lessons learned could assist in the achievement of the Millennium Development Goal’s target to improve the living conditions of slum dwellers.

The Sida model strengthens institutions that support poor people’s ability to access social, technical and financial solutions and resources. Households are given loans through non-conventional financial intermediary organisations. Loans are given in increments based on the capacity of households to save, repay and contribute money, labour and building materials. Credits to build or improve existing housing are, wherever possible, linked to existing government subsidy schemes. In some programmes municipalities receive funds to provide basic services with strong community involvement.

Other key features are:

• Recognition that interest rates are not the main obstacles to low-income families accessing housing finance – repayment periods, loan amounts and the kind of guarantees accepted as collateral can be more important for accessing credit effectively.
• Loans are given to low-income households even if they do not have a full land title of the plot on which they live.
• Once credits are repaid, resources are reinvested into new loans: revolving and rotating funds are established to maintain and reinvest the original capital.
• Sida-supported programmes do not run entirely in parallel with government schemes but co-operate with them to influence state housing policies.

Sida’s supported programmes have demonstrated that poor borrowers generally repay housing loans. Where national urban housing policies remain poorly defined external agencies can contribute to building an environment through clearly identified local organisations. Housing improvement schemes through non-formal financing groups committed to the participation of clients should become part of housing policies that target poor people.

The authors also recommend that:

• Loans should be small and match what families can afford to repay.
• Repayment periods for housing improvements should be between two and four years and good repayment performance should speedily generate further loans.
• The faster funds rotate, the greater the possibility for recovering funds and achieving financial sustainability.
• Micro-lending institutions must screen clients carefully, observe their attitudes to repayment and train staff to understand the importance of cost-recovery and of monitoring how efficiently loans are handled.
• Donors must give intermediary organisations ongoing technical and financial support to build their capacity.

Source(s):
‘Innovative financing for low-income housing improvement: lessons from programmes in Central America’, International Institute for Environment and Development, Environment and Urbanization, vol. 17, no. 1, pp. 47-66, by Alfredo Stein and Luis Castillo, April 2005
‘How international cooperation can make a change: the Swedish response to urban poverty’, Swedish International Development Cooperation Agency, by Alfredo Stein, 2004 Full document.

Funded by: Swedish International Development Cooperation Agency (Sida)

id21 Research Highlight: 27 July 2005

Further Information:
Alfredo Stein
Housing Development & Management Department
Lund University
PO Box 118
SE-221 00 Lund
Sweden

Tel:  +46-46 222 3678
Fax: +46-46 222 8181
Contact the contributor: alfredo.stein@hdm.lth.se

Lund University, Sweden

Luis Castillo
Salvodoran Integral Assistance Foundation (FUSAI)
Col. Escalón, Calle Nueva No. 1
Casa No. 3733
San Salvador
El Salvador

Tel: +503 22452611
Fax: +503 2223-7130
Contact the contributor: luis.castillo@fusai.org.sv

Salvadoran Integral Assistance Foundation, El Salvador

Other related links:
'Can urban housing regulations be pro-poor?'

'Can squatters be developers?'

'Relocation or upgrading? Improving the welfare of slum dwellers'

'Financing housing for the urban poor: opportunities for civil society-state-private sector collaboration'

'Pro-poor housing loans in the Philippines'