S H E LT E R F I N A N C E S T R A T E G I E S F O R T H E P O O R : P H I L I P P I N E S

Shelter finance strategies for the poor:

Philippines

GILBERTO M LLANTO

Gilberto M Llanto holds ABSTRACT In the Philippines, rapid urbanization casts a serious challenge to
a PhD in Economics from providing the urban poor with access to decent shelter. The urban poor lack access
the School of Economics, not only to appropriate housing but also to affordable, tenured, serviced land,
University of the Philippines
(Diliman campus) and is shelter financing, targeted and sustainable subsidies and the means to provide their
currently a Senior Fellow own shelter. This paper focuses on shelter finance strategies for the poor because
at the Philippine Institute it is a key instrument for addressing their shelter problem. The paper critiques the
for Development Studies, current shelter finance innovations that have been developed in the Philippines to
the foremost think tank provide for poor households, especially those in the informal sector, and identifies
in the country. He has
written extensively on
possible areas of improvement in shelter finance for them.
banking and financial
markets, housing finance, KEYWORDS community mortgage programme / finance / informal sector /
local government finance innovations / market-oriented housing strategy / public–private participation /
and microfinance, and his
recent research interests
shelter
include governance
and institutions,
regulatory economics
and infrastructure. He
I. INTRODUCTION
is consultant to the
World Bank, the Asian In the Philippines, rapid urbanization has swelled the ranks of the urban
Development Bank, the poor and created tremendous demand for housing, social services and
Australian Agency for secure land tenure. This has remained unsatisfied. The Housing and
International Development
(AusAID) and various Urban Development Coordinating Council (HUDCC) estimates that
international organizations, the Philippine population will increase from 80 million in 2002 to 98.2
and is Vice-Chairman of million by 2015. The country has one of the highest urban growth rates in
the Board of Directors
of a CARD Bank, the first the world, averaging 5.1 per cent between 1960 and 1995. More than half
microfinance bank in the of the population is in urban areas and this is expected to reach 60 per
country. cent by 2010 if current trends continue. While official data indicate that
Address: Philippine
only about 20 per cent of the 7.5 million urban households fall below the
Institute for Development poverty income line, this indicator alone does not capture the numbers of
Studies, 106 Amorsolo informal settlers living in dire circumstances.
Street, Legaspi Village,
Makati City, Philippines;
Housing and land markets have not kept pace with rapid urban
e-mail: [email protected]. growth. The unmet housing need rose from 2.4 million to 3.6 million
housing units between 2000 and 2004.(1) Over the last decade, the private
1. Ballesteros, Marife (2005), sector provided an annual average of 50,000 housing units, mostly for
“Rethinking institutional
reforms in the Philippine non-poor families. The government-led shelter programme provided on
housing sector”, Philippine average only about 120,000 “units of housing assistance”, many of which
Institute for Development went to employed members of pension funds.(2) The shortfall is primarily
Studies, Makati City.
in low-income housing, where the population is least able to match rising
2. See reference 1. land and house construction costs and where the market has been unable
to provide affordable, conveniently located housing. As a consequence,
Environment & Urbanization Copyright © 2007 International Institute for Environment and Development (IIED). 409
Vol 19(2): 409–423. DOI: 10.1177/0956247807082821 www.sagepublications.com
E N V I R O N M E N T & U R B A N I Z AT I O N Vol 19 No 2 October 2007

informal housing areas and squatter settlements have proliferated in urban

areas. More than one-third of urban families live in makeshift dwellings,(3) 3. Llanto, Gilberto M (2005),
“Infrastructure development:
most in slum areas or informal settlements with no security of tenure, experience and policy options
facing daily risks from hazardous conditions. More than 50 per cent of for the future”, Philippine
households in urban areas lack access to community water systems and at Institute for Development
least 13 per cent lack potable water sources near their homes. One out of Studies, Makati City.

five poor urban households has no toilet facility.(4) Rental housing markets 4. See references 1 and 3.
are almost non-existent because of strict rent control laws; and lack of
access to land is a key impediment to house building for the urban poor.
In sum, shelter is simply not affordable for the poor. They lack access
not only to appropriate housing but also to affordable, tenured, serviced
land, shelter financing, targeted and sustainable subsidies and the means
to provide their own shelter.(5) 5. Asian Development
Access to shelter depends to a large extent on efficiencies in production, Bank (2003), Report and
Recommendation of the
finance and regulation. This paper focuses on shelter finance strategies President to the Board of
for the poor because this is a key instrument for addressing their shelter Directors on a Proposed
problem, including access to basic water and sanitation services. Shelter Loan and Technical Assistance
Grant to the Development
finance for middle- and high-income groups is not addressed here because Bank of the Philippines in the
they can easily access the formal financial markets for their housing Republic of the Philippines for
demand. The paper critiques the current shelter finance innovations that the Development of Poor
Urban Communities Sector
have been developed to provide for poor households, especially those
Project, RRP 32499,
in the informal sector, and identifies possible areas of improvement in November.
shelter finance for them.

II. SHELTER FINANCE STRATEGIES FOR THE POOR

Rapid urbanization due to continuing in-migration from the rural areas,
high population growth and a relatively inelastic housing supply, particu-
larly at the lower end of the housing market, have contributed to the
worsening situation in the Philippines. Labour productivity has been low
and recent economic growth has failed to create enough jobs for a rapidly
expanding labour force. The growth in joblessness has exacerbated the
already precarious situation of low-income households, driving them to
join the swelling ranks of the informal sector. The grim situation with
regard to housing, especially for those in the informal sector, has led
the government to adopt a comprehensive approach that enlists public–
private sector participation as a major vehicle to address the problems in
the sector.
The Medium Term Philippine Development Plan (2005–2010) states
that the government shall:
“. . . adopt a strategic framework on a multi-stakeholder/tripartite,
market-based, private sector and local government unit led reforms
and approaches to meet the goals of:
• job generation;
• shelter security of the different housing market segments; and
• the Millennium Development Goal of improving the lives of
slum dwellers.”(6) 6. National Economic and
Development Authority (2005),
The plan outlines the following strategies: Medium Term Philippine
Development Plan: 2005–2010,
• expand private sector participation in social housing finance and Pasig City.
construction;

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• continue to address the housing requirements of the formal and informal

sectors, particularly the social and low-cost housing categories;
• strengthen the institutional capacity of the housing agencies; and
• enhance the capacity of local government units.
Our interest lies in social housing finance and the informal sector.
By what concrete means does government hope to address this issue? In
general, the government wants to:
“. . . create a viable and sustainable source of housing finance through
the establishment of an active and liquid secondary mortgage mar-
ket, redesign the subsidy mechanism to increase transparency and
efficiency by phasing out interest rate subsidies, increase the role of
private financial institutions in financing housing through credit at
market-based interest rates, dispose assets and non-performing loans
to generate additional funds for housing, and pursue strategic link-
ages with client/sectoral groups, private developers for joint venture
7. See reference 6. arrangements and the private banking sector.”(7)
According to the plan:
“. . . the subsidy mechanism for socialized housing will be rationalized
from the current interest rate subsidy towards a more transparent,
upfront amortization-based subsidy on the principal payments for
socialized housing loans.”
For the middle class and the high-income groups, the plan announces
that:
“. . . private sector financing for housing will be pursued under a market-
oriented approach and lending tenor (e.g., market-based interest rates
and repayment schemes) to remove distortions in housing finance.”
The current approach to the provision of shelter relies broadly on market-
based housing finance, which means a greater role for private financial
institutions in financing the production of shelter, especially for the
informal sector. It distinguishes between social housing (presumably for
those in the informal sector) and low-cost or economic housing (for the
employed, middle class). Social housing is to be given “amortization-
based subsidies” while the latter will use market-based financing by the
private sector. It also uses a participatory approach in which the role of
different stakeholders, self-help housing and community housing has
been recognized as crucial.
Several lessons from the failure of past shelter programmes to address
the lack of housing have shaped these strategies. The shift to a market-
oriented housing strategy did not happen overnight. The government
had to learn a hard lesson from the mistakes of the old approach, which
provided credit subsidies and other subsidized interventions in the hous-
ing market. The old approach failed to address the housing crisis, as mil-
lions of poor households had to be content with makeshift dwellings and
poor, unsanitary living environments. An account of this past approach
taken by the government provides a useful context.
The old approach in the 1980s and early 1990s used pension funds,
that is, the social security system, the government service insurance sys-
tem and the Home Development Mutual Fund (HDMF) to finance the

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government’s major housing programme, the United Home Lending

Programme (UHLP). Under the so-called “formula lending”, private
developers or housing contractors originated the housing loans from
eligible borrowers and submitted the mortgage papers to the National
Home Mortgage Finance Corporation (NHMFC). This arrangement gave
private developers the liquidity to undertake more housing projects as
they were able to immediately swap their “mortgage investments” for
cash. It is obvious that conflicts of interest would be inherent to this
approach because the private developers acted both as house builders and
loan originators.
This strategy led to the government’s housing programme going
bankrupt because of the inability to collect loan repayments from bor-
rowers who were granted housing based on loans originated by private
developers. Llanto and Orbeta analyzed the government’s intervention in
the regulation, production and financing of housing units.(8) The National 8. Llanto, Gilberto M and
Shelter Programme (NSP), which had the UHLP as a major component, Aniceto Orbeta Jr (2001), “The
state of Philippine housing
implemented four largely subsidized programmes, all intended for home programmes: a critical look
production and ownership. These were: at how Philippine housing
subsidies work”, Philippine
• mortgage financing; Institute for Development
• direct housing production for low- and marginal-income families; Studies, Makati City.
• development loans; and
• community programmes. These programmes targeted households
as end beneficiaries and used private developers and banks to direct
housing finance assistance to those beneficiaries.
Llanto and Orbeta concluded that the subsidized shelter programmes
were unsustainable due to the following:
• the huge fiscal requirement of direct subsidies;
• the leakage of benefits to unintended beneficiaries; and
• distortions introduced into the credit markets, which prevented the
flow of private sector financing to the housing market.(9) 9. See reference 8.

The expectation was that government should and could pour an in-
determinate amount of funds into the housing sector, notwithstanding
competing public policy goals requiring funding support. The old ap-
proach failed to direct private sector financing to social housing because
of inappropriate incentives for private sector participation. Consequently,
low-cost and social housing became totally dependent on pension funds
and public sector resources, which unfortunately could not adequately meet
the huge demand–supply gap in the housing market. In addition, the
utilization of members’ pension fund contributions to meet a public policy
goal was shown to be detrimental to the interests of those members.
In the late 1990s, the government started to rethink its housing policy
and strategy. The housing finance market worked for middle- and high-
income groups because they were able to obtain mortgage loans from
private commercial banks and the government’s HDMF, more popularly
known as the Pag–IBIG Fund. The main concern was how to make the
housing market work for poor households, particularly the informal
sector, which makes up the majority of the population.
The major change was a strategy to tap the private mortgage market
to finance the housing demand of low-income households and to target
housing subsidies to those households as outlined in the Medium Term

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Philippine Development Plan. The government saw that its main role was
to provide the environment for private sector participation in the housing
market. Subsidies would only be targeted at poor households. The strategy
called for the integration of low-cost housing (for the employed low-
income households) and social housing (for the informal sector) into the
mainstream credit markets. Government realized that it would be unable
to finance all the requirements in the housing sector, especially given the
huge losses under the formula lending approach and the inappropriate
incentives that misdirected housing subsidies. While creating distortions
in the financial markets, subsidies have discouraged the participation of
private lenders who obviously cannot compete with the government’s
subsidized programmes. The social costs of subsidizing housing loans and
10. See reference 8; also misdirecting subsidies to non-poor borrowers had proven quite high.(10)
Llanto, Gilberto M (1999), What are the outcomes of the shift in housing finance strategy?
“Housing policy: developing a
market-based housing finance The HUDCC projects that demand for the plan period 2006–2010 will
system”, PIDS Policy Notes be around 3.76 million housing units:(11) 1.17 million units to address the
99–15, December, Philippine housing backlog and 2.59 million units for new households. Potential
Institute for Development
Studies, Makati City. average annual housing demand is between 751,000 and 805,000
housing units. Around 94,393 total housing units had been produced by
11. Figures in this paragraph June 2005, a slight improvement over the 86,407 housing units produced
are from a presentation by
Gonzalo Bongolan, President in the previous year. Thirty-five per cent of the housing units for 2005
of the Home Guaranty were for social housing, 16 per cent for low-cost housing and the rest for
Corporation. See Bongolan,
middle- and high-income groups, divided among medium-cost housing,
Gonzalo (2007), “Overview of
Philippine housing and housing condominiums and open market housing. The average annual supply
finance”, presentation to the of housing units (social, low-cost and for middle- and high-income
First Philippine Housing Forum,
15 March, Makati City.
groups) for the last 17 years (1990–2007) was 156,813 units; for the
last 10 years, the average has been 216,216 housing units. The primary
mortgage/contract receivables market from 2001 to 2006 indicates that
the government continued to provide the bulk of funds for housing (80
per cent). The private banking sector has remained conservative with a
share of 20 per cent (Table 1).
The actual production of housing units falls short of government
estimates of the housing demand for the plan period. This shows the
great challenge to the new approach for addressing the critical housing
backlog. The huge demand–supply gap will continue in the future unless

TA B L E 1
Primary mortgage/contract receivable market, 2001–2006
Fund contributors Estimated cumulative releases Percentage
(in million pesos) of total
Government home 64,720.51 (US$ 1,261.36 million) 63.1
development mutual fund
Social security system 85.87 (US$ 1.67 million) 0.1
Government service security 16,833.05 (US$ 328.06 million) 16.4
system
Sub-total 81,639.43 (US$ 1,591.10 million) 79.6
Private banks 20,952.00 (US$ 408.34 million) 20.4
Grand total 102,591.43 (US$1,999.43 million) 100.0

US$1 = Pesos 51.31 (exchange rate sourced from the National Economic and
Development Authority).

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the housing market strengthens to close the gap. Notwithstanding the

desire to bring in greater private sector financial resources to bear on the
shelter problem, the reality is that government has continued to rely
on pension funds to provide the bulk of funding for mortgage/contract
receivables in the housing market. The government has continued to
subsidize the other components of the NSP such as the Community Mort-
gage Programme (which will be discussed in greater detail in Section III),
the National Housing Authority’s (NHA) resettlement programmes, which
provide direct housing assistance to poor households, particularly those
displaced from sites earmarked for government infrastructure projects,
and guarantees provided by the Home Guaranty Corporation.
The desire to bring in private sector financing is there but the response
from that sector has not been vigorous. Private participation is crucial for
low-cost and social housing. Strengthening the housing market would
depend on having a market-based housing finance policy, having more
effective targeting of subsidies and market-based interest rates in credit mar-
kets, and on addressing several factors constraining the housing market.
Research(12) on land markets and property rights shows the lengthy 12. Llanto, Gilberto M and
and complex processes of land titling and securing land tenure, the limited Marife Ballesteros (2002),
“Integrating land issues in
government resources and the lack of technical skills by government poverty reduction strategies
agencies concerned with land administration, all of which weigh against and the development agenda:
housing markets. Supply side problems arise from problems in the land Philippines”, Paper presented
at the Regional Workshop on
market. The land administration infrastructure is poor, and information Land Issues in Asia, organized
about land ownership, location boundaries and actual use of the land and by the World Bank, Phnom
Penh, Cambodia, June 4–6;
land values cannot be provided systematically by concerned government
also, see reference 1.
agencies. Thus, the sale and transfer of property and the issuing of required
development permits and licenses are constrained by bureaucratic
inefficiencies and, worse, by corruption at the local level. These constraints
encourage the development of informal land markets, which undermine
the objective of mainstreaming poor households and the informal sector
into the formal credit markets. The weaknesses in the land markets in-
creases the cost of servicing land for urban development and results in
a high rate of increase in the price of urban land with proper title and
documentation, making such land prohibitively costly for the majority
of the population.
The high appreciation in housing prices has been attributed to the
high rate of increase in land prices.(13) Average annual housing price appre- 13. Ballesteros, Marife (2005)
ciation in Manila was computed at 32 per cent per year, the highest among (see reference 1) citing
Strassman, P and A Blunt
major cities in Asia over a five-year period (1986–1990). The purchase price (1993), “Land, income and
of developed land can be as high as five times the cost of development. mobility: the case of Metro
Because it is taking government a long time to address these con- Manila”, Journal of Philippine
Development Vol 20, No 1,
straints, and is requiring a huge effort, the private sector has been luke- pages 79–115.
warm, at best, in providing home financing loans to poor households,
especially to the informal sector. So, how can the informal sector have
access to adequate shelter? The next section critiques two shelter finance
schemes intended to address this problem, namely the Community Mort-
gage Programme (CMP) and the Development of Poor Urban Communities
Sector Project (DPUCSP). The CMP is a government-initiated and funded
shelter project for informal urban settlers while the DPUCSP is a govern-
ment shelter programme for the urban poor, with funding from the Asian
Development Bank.

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III. TOWARDS A SHELTER FINANCE SCHEME THAT WORKS FOR

THE URBAN POOR
14. This draws on studies on a. The Community Mortgage Programme(14)
the Community Mortgage
Programme by Llanto and
Orbeta (2001) (see reference 8), The shelter package. The shelter finance system benefits mostly formal
Cacnio, Faith (2001), sector employees, that is, active members of the social security system, the
“Microfinance approach to government service insurance system and the HDMF. The government de-
housing: the Community
Mortgage Programme”, PIDS signed the Community Mortgage Programme (CMP) to meet the need
Discussion Paper Series No for shelter financing for the poor.(15) The CMP(16) is a low-income home-
2001–28, Philippine Institute for financing programme that allows informal settlers to acquire an undivided
Development Studies, Makati
City, and Ballesteros, Marife
tract of land through a community mortgage. Usually, informal settlers
and Dam Vertido (2004), “Can occupying tracts of land have not necessarily obtained the owner’s permis-
group credit work for housing sion to do so, whether it is public or private land. The owners (government
loans? Some evidence from
or private) should be willing to put these properties up for sale.
CMP”, PIDS Policy Notes No
2004–05, Philippine Institute for The CMP has two kinds of project: on-site and off-site. On-site projects
Development Studies, Makati allow illegal settlers to formalize claim to the land they occupy by buying
City. The description of the CMP it from the owner through a community mortgage loan. Off-site projects
is from Cacnio (2001).
entail relocation to another area. The informal settlers have to organize
15. The other programmes are themselves into community associations in whose name the CMP loan is
the Group Land Acquisition
and Development (GLAD), the
made. The group loan is used mainly for the purchase of a piece of land
Community Land Acquisition and lasts 25 years. The size of the group (that is, the community association)
Support Programme (CLASP) can be between 9 and 300 households and a financial track record is not
and, recently, the Land Tenure
Acquisition Programme
necessary for each household; the main requirement is membership of a
(LTAP), but these are smaller community association, which will act as borrower, and the individual
programmes and have more member’s commitment to amortizing the loan.
or less the same objectives The main source of funding is government budgetary appropri-
and features as the CMP. Other
government programmes ation, which is given to the Social Housing Finance Corporation (SHFC) to
include: the Housing and Urban manage.(17) The originators of the mortgage loan are the NHA, the Home
Development Coordinating Guaranty Corporation, NGOs and local government units who provide the
Council’s (HUDCC) Asset
Reform Programme; the community association with the necessary technical and legal assistance
National Housing Authority’s as it goes through the stages of the CMP process. The community asso-
(NHA) programmes on slum ciation collects and remits their members’ monthly loan repayments to
upgrading, sites and services,
land tenure assistance,
the SHFC.
cooperative housing and The loan packages are not only for lot acquisition but also for home
resettlement; and other minor improvements and construction. The loan is amortized monthly over a
programmes.
25-year period. Members of the community association can borrow:
16. The CMP was established
and first managed by the • Pesos 30,000 per undeveloped lot at 6 per cent interest per annum;
National Home Mortgage • Pesos 45,000 per developed lot at 6 per cent interest per annum; and
Finance Corporation (NHMFC) • Pesos 80,000 per house and lot at 6 per cent per annum.
in August 1988. It is now under
the Social Housing Finance The CMP has three stages. The first stage involves land acquisition.
Corporation, a government
corporation that was organized In the second stage, loans can be made for site development, including
recently to manage the CMP upgrading water supply, drainage, sanitation and other infrastructure
and other programmes for services. In the third stage, members borrow for housing improvements
low-income households.
or construction. Loan applications for the second and third stages have
17. From 1988 until 1994, been insignificant to date. The association members’ foremost concerns
the CMP obtained its capital
funding from short-term
are land ownership and land tenure security, a preliminary step towards
loans from the pension funds. the development and ownership of a decent shelter for a poor urban
Starting in 1995, the CMP household. Poor households see land tenure security as a primary concern
received budgetary allocations before even thinking of home construction or site improvement.(18) Thus,
through the Comprehensive
and Integrated Shelter most loan applications are for the first stage. The informal settlers get land
Financing Act (CISFA). tenure security while the landowners get compensation from the sale

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of land that may have been illegally occupied. It is difficult for urban 18. Research in housing
markets shows the critical
poor households to go beyond the first stage loan unless land tenure or role played by secure tenure
ownership is secure. and title for those in the
Performance. It is primarily informal settlers wanting to access lots informal sector. See Jimenez,
and legal titles who have used the CMP. During the period 1993–1998, Emmanuel (1984), “Tenure
security and urban squatting”,
the CMP accounted for an estimated 60 per cent of “completed units Review of Economics and
of assistance” targeted by the NSP.(19) Karaos(20) observed that of all the Statistics Vol 66, pages
government housing programmes, the CMP had the lowest cost per unit 556–567; also Friedman,
Joseph, Emmanuel Jimenez
of assistance and had a higher repayment rate than the UHLP. and Stephen Mayo (1988), “The
The CMP seems to be a successful housing programme for urban poor demand for tenure security
households in terms of reach and affordability.(21) It has the potential to in developing countries”,
Journal of Development
provide informal settlers with land tenure security and decent housing Economics Vol 29, pages
sites. While there are cases of beneficiaries selling their lots to others, 185–198; and Follain, James
many more hold on to the lots awarded to them. Once awarded their lots, and Emmanuel Jimenez (1985),
“Estimating the demand for
they begin to save and slowly make improvements to their dwelling units. housing characteristics: a
Available data indicate that from 1989 to August 2001, the CMP helped survey and critique”, Regional
fund 883 community projects, benefiting 110,632 families, at a total cost Science and Urban Economics
Vol 15, pages 77–107.
of Pesos 3.14 billion.(22) The projects were distributed among 14 of the
country’s 15 regions. Compared to other government housing programmes, 19. See reference 5, Asian
the CMP assisted the greatest number of families in the shortest period Development Bank (2003).
of time with the smallest loan fund utilization. It is cost effective in that
20. Karaos, Anna Marie (2001),
a relatively small loan amount can provide urban poor households with “Decentralization, local
land tenure security and ownership of a small piece of land. According governance and urban poverty
to the NHMFC, the average loan amount under the CMP from 1989 to in four Philippine cities”, Ateneo
University Institute on Church
2000 was Pesos 28,039 per beneficiary, 15 per cent of the average loan and Social Issues, Quezon City.
per beneficiary in other government housing programmes. Moreover, the
CMP’s average monthly amortization of Pesos 185(23) makes it affordable 21. See reference 14, Cacnio
(2001); also see reference 14,
to poor households. Between 1993 and 1998, the CMP performed better Ballesteros and Vertido (2004);
than the UHLP and other government housing programmes in terms and see reference 8, Llanto and
of collection efficiency rate, computed as a cumulative percentage of Orbeta, Jr (2001).
total loan collections over total billing, excluding penalty charges. The
22. US$ 0.06 billion at
CMP’s average loan collection rate during the period stood at 77 per cent US$1 = Pesos 51.31 in 2006.
compared to a 63.3 per cent average for the UHLP.
However, despite its better than average collection rates, the CMP 23. US$ 3.60 per month at
US$1 = Pesos 51.31 in 2006.
faces a sustainability problem. Loan repayment rates are highly variable
across community associations. The most recent assessment of the CMP(24) 24. See reference 14,
showed that from 1989 to 2003, it financed 1,109 projects nationwide, Ballesteros and Vertido (2004);
also see reference 14, Cacnio
benefiting 138,871 households. The total loan released in mortgage (2001).
take-out amounted to Pesos 4.3 billion(25) and the average loan size per
household was about Pesos 30,000.(26) The overall collection efficiency 25. US$ 0.08 billion at
US$1 = Pesos 51.31 in 2006.
ratio was 80.2 per cent as of the end of 2002 and 78.2 per cent as of the
end of 2003, and the general trend shows repayments below 80 per cent 26. US$ 584.68 at US$1 = Pesos
in most years of the review period. The government, which has problems 51.31 in 2006.
with its huge fiscal deficit, would be hard pressed to continue allocating a
huge budgetary appropriation annually to the CMP. A viable CMP would
have to become more self-sustaining as a revolving fund, whereby the re-
flows coming from loan repayments could be used in other CMP sites.
Reasons for low repayment rates. There are several reasons for
these low repayment rates:
• in off-site projects, it was difficult to organize heterogeneous house-
holds. In on-site projects, problems were related to group size and
maintenance of cohesion and cooperation among group members;

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• weak monitoring systems, especially for loan repayments, which are

mostly operated by volunteer or part-time workers who have little
incentive to do a good job, constrain successful loan collection;
• there were cases where community association officers “temporarily
borrowed” the loan collections and these were never repaid;
• weak enforcement of the community associations’ internal rules, such
as the rule on substitution of a beneficiary household by another house-
hold also contributed to low repayment rates. Because of migration
and labour mobility, the composition of the community association
may change over time. If a household moves out of the community,
the CMP rules allow substitution by another household, but this has
to be approved by the NHMFC. Community associations allowed sub-
stitutions without waiting for this approval, which allegedly took a
long time. Illegal substitutions have also occurred when household
27. See reference 14, Cacnio beneficiaries sold their rights even without the approval of the com-
(2001). munity association;
• the suitability of the location of CMP projects for human habitation is
28. I must add that the
experience of Philippine also an important consideration. CMP projects have to seek environ-
microfinance institutions is mental clearance from the Department of Environment and Natural
that groups tend to break Resources and also sub-division development permits from the local
apart once members approach
a certain loan threshold. A government units. Failure to ensure the suitability of project sites can
large enough loan, the size of cause beneficiaries to neglect loan repayments. Beneficiaries whose
which may vary from group to lots were subject to water logging, flooding and other problems often
group, creates an incentive for
members to withdraw from
did not pay their monthly loan amortizations; and
group solidarity. Members’ • recalcitrant households are bound to emerge who refuse to repay
threshold of tolerance of credit the loans on various pretexts or excuses. Some community associ-
risk is associated with a given
ations questioned the identity of the declared owners of the land
loan size, due to concerns
about others defaulting on their and refused to repay their loans; still other households opted out of
loans. their community association, declaring the CMP to be a hoax, but
continued to occupy their lots without repaying their loans. Recal-
29. Low incomes are a common
excuse for not repaying a loan. citrant households claim (erroneously) that the government has the
However, it is noted that the obligation to provide them with free housing and thus, they do not
average monthly amortization want to pay their monthly amortization.
for an average Pesos 28,000
loan is only Pesos 185, surely It seems that the government has taken a soft stance regarding non-
an amount affordable by poor
households. Cacnio (2001) (see paying community association households and it has yet to foreclose
reference 14) computed the on an area despite very low collection rates and large arrears. There is
average monthly expenditure the risk of intervention by powerful politicians on behalf of recalcitrant
of households within four
community associations that
households.(27) It is indeed ironic that a reason for the failure of a
she studied at Pesos 8,440. government shelter programme could be the politicians or leaders who
Thus, on average, housing have sworn to uphold the welfare of the poor.
amortization accounts
for 1.9 per cent of their
An important lesson learned from the CMP experience concerns the
monthly total expenditure. duration of loans. Short-term group loans, for example 90 days, may be
Average expenditure on food administered easily and loan repayments collected more easily, as shown
accounts for 39 per cent of
by the experience of Philippine microfinance institutions.(28) However, a
the household’s total budget
and the second largest chunk group loan over a long period of time, that is 25 years, does not appear to be
of the household’s average tenable, as indicated by the very low collection efficiency of the CMP.(29)
expenditure is on clothing, Ballesteros and Vertido believe that establishing and strengthen-
medical, personal and hygienic
care, with other incidental ing collective action and joint liability in CMP community associations
expenses accounting for 16 will solve the problem described above.(30) While they make a number of
per cent. useful recommendations, they do not seem to strike at the problem of in-
30. See reference 14, centive incompatibility in group loans with a long maturity, the mobility
Ballesteros and Vertido (2004). of households and the difficulty in motivating households to have a

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long-term commitment to stay with the group. A solution may lie in

the individualization of land titles, but speedy and honest action on this
is required. As stated above, a glaring weakness in land markets is the
inefficiency in the land titling process and the weak land administration
and management system in the country.

b. The Development of Poor Urban Communities Sector Project

The shelter package. The Development of Poor Urban Communities
Sector Project (DPUCSP) is a decentralized shelter finance strategy for the
urban poor jointly developed by the government, the Development Bank
of the Philippines (DBP) and the Asian Development Bank.(31) The key 31. The description and details
design principles were as follows: of the project are taken from
the Asian Development Bank
(2003), see reference 5.
• provision of land security;
• an incremental or progressive-build approach to housing to address
the affordability problem;
• targeted subsidies to address specific market failures;
• the use of microfinance to provide the targeted poor households
access to shelter financing;
• a decentralized shelter delivery framework; and
• greater private sector participation.
Intended for implementation during the period 2003–2009, the
project has three components: site development, shelter finance and
capability building of agencies involved in the project. Under the site
development component, the DBP, a government-owned bank, lends to
local government units for site development. It is projected that around
20,000 urban poor households in informal settlements will gain access to
shelter finance for land tenure security, basic infrastructure and services,
and microenterprises. The DBP has also created a wholesale loan window
for incremental, or progressive-build, housing and microenterprise credit
financing. The main channels for retail loans to urban poor households
will be microfinance institutions such as microfinance rural banks, NGOs
and cooperatives, which will get funding from the DBP. A unique aspect is
the participation of communities in local planning. The project supports
the capacity building of participating communities, local government
units, the HUDCC and the NHA. The government expects to establish a
policy, institutional and regulatory environment conducive to meeting
the shelter needs of the urban poor households in informal settlements.
Impressions. Financing for progressive-build housing is a major
innovation because the government’s approach has always been to pro-
vide a complete house and lot package directly, at a highly subsidized rate.
However, the urban poor could simply not afford the shelter package. The
DPUCSP strategy provides urban poor households with loans for incre-
mental housing and microenterprise loans, which enables them to pay for
land, services and housing improvements. 32. Buckley, Robert and Jerry
Kalarickal (2004), “Shelter
There is private sector participation in shelter financing, a decentral- strategies for the urban poor:
ized shelter delivery framework with the help of local government units, idiosyncratic and successful
NGOs and other community-based organizations and a break away from but hardly mysterious”, World
Bank Policy Research Working
ill-targeted credit subsidies. Research shows the positive effect of a Paper 3247, World Bank,
community-based perspective in World Bank-supported projects.(32) NGOs Washington DC, October.

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and community-based organizations help address questions about the

provision of shared goods, such as water and sanitation, as well as helping
with shelter design and the targeting of assistance to those most in need.
Community participation is good social policy. It also improves project
performance based on a review of the World Bank’s experience with urban
projects that include community participation.
The government is used to providing development loans, mortgage
take-outs, guarantees and tax breaks to private developers and builders
who participate in the NSP. Development loans for social and economic
housing and CMP loans are given at subsidized rates of interest. Private
banks have not been motivated to develop innovative housing loan pro-
ducts and the end result is heavy dependence on limited public funds
33. Llanto, Gilberto M and for meeting the goals of the NSP.(33) The participation of microfinance
Leilanie Basilio (1999),
“Housing policy, strategy
institutions enables the DPUCSP to draw on their strengths in reaching
and recent developments in the intended beneficiaries and efficiently collecting loan repayments. To
market-based housing finance”, be successful, housing microfinance should use loan collection methods
PIDS Discussion Paper Series
No 99–20, Philippine Institute
understood and accepted by the local community. Local circumstances
for Development Studies, vary and successful microfinance institutions have learned to adapt their
Makati City. loan collection methods and other processes to local mores without risk-
34. Buckley, Robert and Robert ing their long-term viability.(34)
Vogel (1999), “The World Bank The DBP acts as a wholesale loan institution for private microfinance
and microenterprise finance: institutions, which in turn on-lend to targeted poor households at market-
from concept to practice”,
Report No 19895, World Bank, based interest rates. The HUDCC helps these households to adopt alternat-
Washington DC. ive arrangements, such as lease-to-own schemes, to address the problem
of land tenure security. It promotes the use of “sweat equity” to reduce
housing costs and encourages low-cost housing production techniques
that meet minimum safety and environmental standards to make the
shelter unit affordable.
The past three years have been devoted to project preparation, work-
shops and seminars for various stakeholders. Introducing a new paradigm
in shelter finance for the poor has its costs in terms of community
awareness and organization and buy-in by local government units and
microfinance institutions. A constraint is the situation in the land markets.
Access to affordable land with title and land tenure security remains a
basic problem faced by urban poor households, the same problem faced
by the CMP.

IV. MOVING FROM PILOT STAGE TO SCALE AND SUSTAINABILITY

The innovations discussed above should move towards scale and sustain-
ability to address the seemingly intractable shelter problems of urban poor
households. This section discusses specific issues that must be addressed
in taking shelter finance for the poor to scale.
State support and the role of the private sector. The govern-
ment has intervened heavily in the housing market. The NSP has three
broad components: production, regulation and shelter finance. The pro-
duction component entails the development of site or service home lots
and the construction of low- to middle-income housing. The regulatory
component involves the imposition of building standards and regulations
on housing construction and sub-division development, including real
estate trade. The shelter finance component operates under four major

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schemes – guarantees and tax incentives, development financing, end-user

financing and community-based financing. The CMP and the DPUCSP
are examples of the latter.
The cost of government intervention has been high. The total esti-
mated subsidies, excluding condoned penalties and non-payment of
housing loans but including the re-capitalization of the bankrupt NHMFC,
comprised around 2.7 per cent of GNP in 1995 (there are no more recent
estimates). The total fiscal cost consists of:
• direct subsidies provided through concessionary interest rates, tax
exemptions, condoned penalties and non-payment of housing loans,
loan amortization support given to low-income households, produc-
tion of low-cost houses and resettlement; and
• indirect subsidies provided through the re-capitalization of the
NHMC.
This excludes the fiscal costs associated with loan losses from non-
performing portfolios of public housing agencies because of the unavail-
ability of data or the lack of willingness of those agencies to share data.(35) 35. See reference 8.
Decades of government intervention and the billions of pesos spent
by the government to solve the problem have barely made a difference.
The huge housing backlog is increasing and many more urban poor house-
holds suffer insecurity of tenure, pitiable living conditions and degraded
environments. The bulk of government financing assistance has been for
the non-poor, notwithstanding such programmes as the CMP and the
DPUCSP. Worse, purely government-driven shelter programmes have
been of limited use and have mis-targeted the subsidies.
The key solution is to make housing markets, including shelter
finance, work efficiently.(36) Ball argues that housing markets are probably 36. It goes without saying that
the land markets should also
the most cost effective and efficient tool for delivering housing to the mass be made to work efficiently.
of the world’s population, and that the numerous experiments worldwide
that have attempted to address the housing shortage through other 37. Ball, Michael (2003),
“Improving housing markets”,
means have failed.(37) Buckley and Kalarickal’s review shows that policies RICS Leading Edge Series,
that restrictively regulate the housing market decrease housing supply accessible at http:// www.
elasticity and could lead to higher prices. Thus, housing policy reform is rics.org.
essential for improving housing outcomes for low-income groups.(38) From
38. See reference 32.
this perspective, the focus of government should be to develop market-
friendly housing policies – as Buckley and Kalarickal put it: “. . . a public
policy approach that augments and complements market processes rather than
substitutes for them.”(39) 39. See reference 32, page 2.
Government programmes have a pervasive but ineffective role in the
social housing market. Private commercial banks and the social security
funds service the middle- and high-income markets with fairly developed
mortgage finance. The CMP and the DPUCSP are innovative strategies
designed to provide urban poor households with access to shelter finance,
and the major innovation is the role given to microfinance institutions
to provide incremental housing finance to urban poor households. This
paves the way for mainstreaming those households into the formal finan-
cial markets, creating greater opportunities for progressive-build housing,
but complete shelter (house and lot) in the future.
Aware of the issues described in the paper, the government seemed to
be on the right track when it shifted to the enabling role described in the
Medium Term Philippine Development Plan of 2001–2004 and encouraged
greater private sector participation in the housing finance market in the
2005–2010 plan. The latter plan has announced a multi-stakeholder,
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market-based, private sector-driven and decentralized housing framework

in the social housing market.
Interest rate subsidies versus capital market subsidies. To
be effective, subsidies should be transparent, well targeted and supported
by a broad base of stakeholders in the housing sector. The Philippine experi-
ence with housing subsidies showed that credit subsidies were captured
by unintended beneficiaries and caused distortions in the credit markets.
The transfer of credit subsidies takes place through banks or lending
institutions that may have biases against the intended beneficiaries, i.e.
poor households. High transaction costs, information asymmetry and a
perception of high credit risks prevent the poor from accessing the formal
credit markets. Thus, the non-poor tend to capture the subsidies.
A case may be made in favour of well-targeted capital subsidies. A
one-time capital grant or housing voucher to well-targeted households
is transparent, avoids creating distortions in the credit markets and
creates an incentive for greater private sector participation in the housing
40. See reference 8. markets. Llanto and Orbeta(40) observed that of the government’s housing
programmes, it is only with the CMP and the resettlement of informal
settlers that there is a matching of intended and actual beneficiaries of the
subsidy. Combining the savings of poor households with bank resources
and the capital allowance or subsidy will help make shelter finance more
affordable to those households. In the DPUCSP, the capital subsidy comes
in the form of a reduction in land prices, that is, a capital subsidy to the
purchase price to be paid by the beneficiary, particularly where land costs
41. See reference 5. have become prohibitive because of inefficient urban land markets.(41)
Mortgage-backed loans are the traditional housing finance product.
This is conventional and easily accessed by middle- and high-income
groups but not by urban poor households. Housing microfinance under
the DPUCSP provides the urban poor with a more useful financing instru-
ment. These households can use both a capital subsidy, for instance a
reduction in land prices, and housing microfinance to make the social
housing market work for them.
Individual versus collective development. This is not an either/
or proposition. Demand for housing is expressed and made effective by
individual households. However, an individual household with a particu-
lar demand for housing, a piece of land and such housing-related services
as potable water, good drainage and sewerage, exists within a community.
There is a case for targeting not only the welfare of the individual house-
hold, for example through a subsidy instrument such as a capital subsidy,
but also the collective welfare of the community because of well-known
externality arguments. An environment, deteriorated through, for instance,
constant flooding or inadequate water and sanitation services, creates
co-variate risks that would endanger entire communities. In this light,
there is great merit in innovative approaches that consider individual and
collective welfare.
Who should drive the process? There are many stakeholders in
the housing markets, all with their own agendas and action plans that
may be consistent with or incongruent with, or partially consistent with
or diametrically opposed to the agendas and action plans of other stake-
holders. It is a naïve proposition that elected governments should be in
the driver’s seat of shelter strategies for the poor. Government’s major
role is to lay down the policy and regulatory environment for housing
markets to work efficiently. As shown in this paper, government-designed
shelter finance strategies and approaches may not necessarily work for

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the poor. Neither would housing markets, including shelter finance

markets guided by the “Invisible Hand”,(42) always work for the poor. The 42. Economist Adam Smith’s
literature makes it clear that governments and markets can both fail. In term for the workings of the
market.
the case of the Philippines, local political scientists suggest the likelihood
of the “capture” of the state and its instrumentalities by vested interests 43. De Dios, Emmanuel and
based on political clans.(43) Another strongly made observation is that the Hadi Salehi Esfahani (2001),
“Centralization, political
Philippine legislature does not mediate differing interests; its policies, turnover and investment in
laws and resource priorities are seen widely as directly favouring certain the Philippines”, in J Edgardo
powerful constituencies.(44) Campos (editor), The Boom and
Bust of East Asia Corruption,
In this context, poor households should be in an ideal position to drive Ateneo de Manila University
the reform process. However, although they can express their notional Press, Manila.
demand, this is not effective unless they can address factors constraining
44. Llanto, Gilberto M and
effective demand, for instance low incomes and the affordability problem.
Eduardo Gonzalez (2006),
There is a case for strengthening the voice of those households, to attract “Policy reforms and institutional
the attention of various stakeholders to the idiosyncratic and communal weaknesses: closing the
problems in shelter provision. Collective action, networking with other gap”, Paper presented at the
Conference on Advancing East
stakeholders, advocacy, systematic studies and the expression of their true Asian Economic Integration:
will through voting in political contests are some of actions that poor Microeconomic Foundations of
households can take to make shelter strategies, including shelter finance, Economic Performance in East
Asia, Philippine Plaza Hotel,
work for them. Manila, November 23–24.
Private sector risk capital and profit expectations. The private
sector would support shelter finance strategies for the poor if there were
profit-making opportunities. This is the nature, the measure of success,
of private risk capital. The amount of resources available in the private
sector is much greater than government is able to mobilize through such
instruments as taxation, levies and licenses. Thus, public sector efforts to
provide poor households with decent shelter should be supported or com-
plemented by private capital. The strategy is to make housing markets
work, that is, to allow private investors realize profits in servicing the
housing requirements of the poor. Legitimate profits realized by the lender
would make the shelter finance strategy sustainable and would motivate
the lender to expand his/her business horizons. This is the reasoning
behind a shelter finance strategy such as the DPUCSP. There is basically
nothing wrong with this approach, but it should be well understood by
all the stakeholders, especially the target clientele, to avoid creating the
mistaken expectation that private risk capital may be used to meet the
welfare objectives of the government.
A few microfinance institutions, at least in the Philippines, claim that
it is possible to lend at market rates and fulfill a social mission at the same
time. These microfinance institutions are wont to say that they are in it
both for the profit and the fulfillment of a social mission. Can profit taking
be imbued with a social mission? The jury, so to speak, is still out on this
issue, but some anecdotal evidence from a few microfinance institutions
seems to indicate that it is possible to conduct business and fulfill a social
mission at the same time.
An alternative may be non-market-mediated shelter finance systems
that may be provided by the government or civic societies. However, as
documented in several studies, the government has not acquitted itself
well with its intervention in production and shelter finance. On the other
hand, just how much impact would limited private volunteer efforts
in shelter provision, e.g. Habitat for Humanity, have? How many poor
households can these non-market systems effectively assist? Given the
magnitude of the resources required to address the shelter problems of

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poor households, and the inability of non-market-mediated systems to

solve them, it seems that the better alternative lies in efficient housing
markets, in financial market sustainability rather than in political or even
private volunteer interventions. This is not to demean the contribution
of private volunteer efforts, but the realization of significant impacts
through non-market-mediated systems remains to be demonstrated.

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