Financing Housing in Developing Countries: A Review of the Pitfalls and Potentials in the Development of Formal Housing Finance Systems

Abstract

Effectively addressing the existing and continuously growing enormous demands and needs for shelter depends critically on the availability of long-term housing finance on a fairly large and sustainable scale. Policy approaches to realise this situation are still issues of continuing debate in professional circles. The central issues of focus are sustainable availability, affordability and accessibility of housing finance to households. Evidence currently indicates that a dominant proportion of housing in developing countries is accounted for by informal non-institutional sources but it has been increasingly strongly argued that development of a formal institutional housing finance system is indispensable for effectively addressing the quantitative and qualitative housing inadequacy problem. One of the most strongly canvassed strategies is for housing finance to be integrated into the larger national financial system and for its operation to be based on pure market pricing mechanisms, free of government interference. This paper attempts to identify, review and synthesise from available experiences and literature, the issues involved in this debate, having regard to the general state of institutional development and the prevailing macroeconomic (including financial) climate in most developing countries. Inferences from the review indicate that, all things considered, an informal housing financing system will remain a viable option and that, in the circumstances of developing countries, the long-term development of sustainable institutional housing finance systems requires continued discrete and prudent roles for government to establish and to enforce an effective system of rules, regulations, safeguards and supervisory functions to monitor and to prevent abuses. Some degree of support (subsidy) and incentives, albeit indirect, may even be necessary and advisable. While integration of housing finance into the national financial system and market sourcing and pricing may be the desired goals, these will be very much in the long term.