International Institute for Environment and Development

Report Part Title: Approaches to housing provision in Malawi

Report Title: Understanding pro-poor housing finance in Malawi
Report Author(s): Mtafu A.Z. Manda, Siku Nkhoma and Diana Mitlin
International Institute for Environment and Development (2011)

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Federation process seeks to go beyond micro-finance to establish community-led financial
institutions, as well as addressing the shelter needs of members.

This paper assesses the experience of lending for housing and the performance of housing
finance mechanisms applied by MHPF. The authors begin by exploring the approach of
savings schemes or groups, sometimes initially considered a panacea for inadequate
housing finance among the urban poor in Malawi. The discussion seeks to understand the
challenges emerging from the first set of housing loans and in particular the problem of
defaults on loan repayment. Default is defined here to include both missing instalment
repayments at any one point and total reneging, deliberate or otherwise. The main concern
is that this creates the risk of all member borrowers choosing not to repay, thereby
threatening the sustainability of the scheme. In the MHPF, there was a default rate of 83 per
cent by September 2009 in Lilongwe‟s Area 49, the first project undertaken by MHPF.

The study reported here involved discussions with leaders and members of MHPF, CCODE
staff, stakeholders in the housing sector and lawyers working to resolve problems related to
non-repayment of house loans. Four focus-group discussions formed the main methodology
for information gathering from Federation members, and a semi-structured questionnaire
was used with three key officials. Eight interviews with Federation leaders from the three
cities of Mzuzu, Lilongwe and Blantyre were undertaken, with a particular concentration on
Area 49 in Lilongwe. This gave an in-depth understanding of the core issues behind loan
defaults. House-loan default is complex, and is affected by weaknesses in loan design,
history of defaults in housing development projects, interventions by local and national
politicians, affordability and the mismatch between informal incomes and repayment
requirements, gendered decisions in the household, and capacity constraints in fund
management. As in other Federations, this first project was a learning exercise enabling the
MHPF to identify dysfunctional approaches and to fine-tune its loan-management skills to
contribute to the development of strong financial institutions.

The rest of this paper is structured as follows. Section 2 provides more information on the
development of housing options and shelter finance in Malawi, and on the emergence of the
Mchenga Fund that is the particular focus of this paper. Section 3 places these approaches
within the broader context of housing initiatives in the global South, discussing the failure of
many approaches to housing, and subsequent attempts to shift from supply- to demand-led
modalities including shelter micro-finance and community savings. Section 4 describes the
history of the Mchenga Fund and provides a prelude to Section 5, which focuses on the
difficulties facing the initiative. Section 6 presents solutions identified and tested in recent
years, and Section 7 concludes.

2. Approaches to housing provision in Malawi

This section summarises the history of the Malawi Homeless People‟s Federation (Manda
2007a), and the prevailing forces leading to its formation. This section also explains how the
Federation, as a social movement of the urban poor, seeks to improve economic and social
systems and make them more responsive to the needs of low-income households.

Malawi has a high rate of urbanisation, estimated at 4.3 per cent annually, and faces a
considerable challenge in enabling the urban poor to access land and finance for housing. In
recent years, the Malawi government has developed and approved a national land policy.
One of the main implementation mechanisms is the promotion of secure tenure and
upgrading, and government policy is to ensure that the housing delivery system enables all
income groups to access housing. There are four strategies of housing delivery for both
urban and rural communities.

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1. Creation of Traditional Housing Areas (THAs)4 under local authorities: a planned
framework within which migrants can build their own houses according to their own
tastes and financial standing. By 1962, 2415 residential plots had been demarcated, with
some allocated to low-income residents. The building of houses in these THAs fully
complies with minimum building standards and regulations. The allocation process is
based on „first come, first served‟, and the biggest problem is that demand exceeds
supply. By 1981, there were 35,000 applicants on the waiting list nationwide, with the
rate of THA plot delivery being 600 plots per annum. Further, most low-income people
find it difficult to pay ground rent to the City Assembly, although the rent is only MK100.
As a result, low-income people sell their plots to rich speculators and move to informal
settlements.
2. Construction by Malawi Housing Corporation (MHC) of complete structures for
high-income groups. By 1981, 5274 permanent houses had been built, principally for
civil servants. In the 1980s, the housing situation had started worsening as MHC stopped
housing development when government failed to continue subventions. The policy of
„build and sell‟ was introduced in the mid-1980s, but the houses sold did not successfully
finance the development of new ones.
3. Provision of surveyed plots with title deeds for construction of houses on
mortgage loan through the New Building Society. In the 45 years following its
establishment on 7 February 1964, this scheme provided only 1300 loans. The loans
were largely shunned because of high interest rates and experiences of seizure of
houses from loan defaulters.
4. Upgrading of informal settlements. The government has announced its intention to
launch a national programme of slum upgrading. It is not clear yet when this will start and
there has been no commitment in the national budget.

The Lilongwe City Assembly has, since the 1990s, received under transfer from MHC and
the Lands Department, 5000 hectares of land. Nearly 90 per cent of this land has been used
to deliver 23,000 plots for THA development in four categories: 3,000 THA Normal, 1,500
THA Basic and 12,000 THA Layout, with 6,000 plots in upgraded areas.5 An additional 500
plots were supplied for shops, maize mills and churches.

For many years, the only NGO working in the housing sector in Malawi was Habitat for
Humanity (HFH), with a longstanding programme including initiatives around shelter micro-
finance. This NGO has been active since 1986 and works in partnership with local
communities and local governments to build simple but legal houses for the urban poor. HFH
provides loans (with interest) in the form of materials (e.g. cement), and repayments from the
completed houses go into a revolving fund that stays in the community to build more houses
and latrines. Land for housing development is acquired from local governments as a block
lease. HFH also collaborates with service providers for water, power supply and roads. HFH
is achieving an 82 per cent repayment rate and urban residents are proving better at
meeting repayments than rural ones. Defaulting households risk having doors and windows
removed from their houses until repayments are made. Although this ensures commitment
from beneficiaries, it also scares away others. Interviewees suggested that an inability to pay
4
THAs are site-and-service schemes. „Traditional‟ does not necessarily mean opposed to modern or
European-type houses, but allows for any type of materials and minimum sanitation such as pit
latrines.
5
„THA Normal‟ refers to plots with existing planning standards of THAs averaging 400 square metres
and with high levels of service infrastructure provision. „THA Basic‟ refers to smaller plots averaging
225–350 square metres with basic services like pit latrines and communal water points. „THA Layout‟
involves the provision of non-serviced plots in anticipation that services will be provided when funds
became available. The main principle was the provision of title to plot holders to ensure security and
enhance investment. As with the basic scheme, people with low and irregular incomes were targeted.
This was implemented in areas where community-development committees had been elected and
were encouraged to work with NGOs for infrastructure development.

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the MK2000 application fees reduces interest from other residents. A further major problem
faced by Habitat for Humanity is delays in accessing land from local governments. By 2010,
HFH had built over 5500 houses in both urban and rural areas and also embarked on
development of 650 low-income plots in Mzuzu City.

In 1985, the Malawi government set up a programme, funded by KfW, the development bank
owned by the German government, to implement a decentralised urbanisation policy by
supporting the growth of small and medium-sized towns and promoting rural–urban linkages.
The programme provided for the upgrading of unplanned traditional housing areas.
Infrastructure investments were followed by formalising land ownership with prepared plans
and demarcated and surveyed plots. More than 10,000 plots have been developed in eight
towns.

The World Bank has been involved in providing loans and grants to MHC and local
governments for various housing projects. In 1987, the first Bank-financed Urban Housing
Project aimed to produce a suitable housing system and introduce a wide range of
affordable housing designs including mortgage finance from the New Building Society. The
project was based on full cost-recovery principles. In time, it was supposed to be replaced
with a site-and-services programme in order to allow housing solutions for a wider range of
income groups, and the incorporation of a squatter upgrading programme in Blantyre. The
project in Blantyre was implemented in the settlements of Chimwankhunda and Kameza. At
Kameza, the houses were later demolished and the plots consolidated by presidential order.
Other projects have included providing conventional housing by financing house structures
and services such as roads, water and schools. The most recent World Bank project has
involved a change in target group by Blantyre City from low-income to middle-/high-income
residents to improve the speed of loan repayments.

As these examples demonstrate, government efforts have been constrained by their

inadequate scale. Millions remain in need, unable to access the limited opportunities either
because of the formality of the political and social contracts required and/or because of their
lack of income and the demands of the programmes for a financial contribution.

In Malawi, as elsewhere, commercial bank policies generally exclude those with low incomes
and hence prevent private investment financed by loans from being a source of monies for
housing improvement. Banks do not locate in informal settlements, and generally have
branches only in the central areas of cities. Banks also demand collateral to guarantee
loans, and often require formal employment, with its opportunities for payroll deductions,
creating further obstacles to those without these resources. Mortgage rates depend on the
purpose of the loan. For an owner-occupied house, the rate is currently 17.5 per cent; for
rent, it is 20.5 per cent; and loans for commercial premises are charged at 22.5 per cent.
Other loans for personal or business purposes have an interest rate of 24.5 per cent but also
require the borrower to be a salaried employee able to produce a pay slip as evidence. To
get a loan easily, it may be necessary to have a fixed deposit or investment account, when
the bank will loan 85 per cent of the deposit.

In responding to the needs of the urban poor, especially women, it is appropriate to establish
structures relevant to their needs and untapped energies. Such an exercise calls for
awareness creation for the poor to discover their potential to transform their general
perception of their „economic predicament‟. The effectiveness of organising communities into
savings groups through which they can learn from each other and build confidence levels
has been recognised for nearly two decades through the work of Shack/Slum Dwellers
International (SDI) and local NGOs in India and Thailand (Boonyabancha 2001).

The community-savings approach to credit has been used in Malawi since 2003 when the
first group of 50 women savers was formed in Mtandire informal settlement in Lilongwe City.

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Thereafter, savings groups were established in several locations within the city and these
groups were networked together in the Malawi Homeless People‟s Federation. Capacity
development took place through exchange visits with the Zimbabwe Homeless People‟s
Federation and their support NGO, Dialogue on Shelter.6

The formation of a support NGO in Malawi, the Centre for Community Organisation and
Development (CCODE), and the further consolidation of the Malawi Homeless People‟s
Federation was encouraged by two main factors. First was the success of federations in
other countries such as South Africa, India and Thailand, which saw the improvement of
lives and living conditions of the urban poor including through access to secure tenure and
positive relationships with government institutions. Second was the difficult economic
situation being experienced by the urban poor in Malawi. Federation members felt that
without a people-driven approach prioritising the needs of the poorest, greater polarisation
would emerge. The formation of a Federation would, it was hoped, enable partnerships with
local authorities – first to gather information and later to implement strategies to help the
authorities understand and appreciate the plight of the poor. The Federation, through the
growing presence of savings schemes and their ability to negotiate with the state, would
further assist with revenue to improve the situation.

Community savings schemes within SDI consist of women and men who save daily,
accumulating whatever money they can afford. The act of saving is a powerful mobilisation
tool for the Federation. Each group in Malawi generally involves between 30 and 70 people
in a neighbourhood; one settlement might have 10 or 20 saving schemes depending on its
size. From 2005, the Federation has re-organised management of the savings schemes to
operate by neighbourhood, to increase local participation and capital consolidation. Savings
groups initially were mainly composed of women. Men started joining after seeing early
progress on housing development and income-generating loans.

To date, there are saving groups in almost all low-income informal urban communities in the
main cities and medium-sized towns of Malawi. The groups have grown spontaneously and
exponentially, and the Federation has also extended to rural areas. The Federation now has
a total of over 15,000 registered members who are actively saving, in both urban and rural
areas.

The Mchenga7 Fund is a capital fund established following demand from members who
found that the capital in their local savings funds was inadequate to support business
activities and housing requirements. It was agreed that members should contribute MK20
per month towards Mchenga and that it should operate as a revolving fund. The main
objective of the Fund is to provide group loans to finance housing construction for Federation
members, and it has provided leverage for support from external sources. In the case of
other SDI affiliates, such external resources have come from central and local governments,
international organisations and NGOs who consider the savings as evidence of commitment
from the poor to support their own cause. In this way, savings schemes operate as a
significant mechanism for mobilising resources for housing.

Since 2003, land has been acquired by local Federation groups from government and city
assemblies. Lilongwe City provided land on which 222 plots were demarcated; the
government gave land for 465 demarcated plots through Blantyre City; land for 80 plots was
given in Mzuzu. More land has been earmarked in Lilongwe and other urban centres. The
Federation agreed to a target of more than 3600 plots able to house over 18,000 low-income

6
One author of this paper, Siku Nkhoma, has worked as an intern at Dialogue on Shelter.
7
Mchenga means „sand‟ in local languages. The small individual savings of MK20 are like sand
grains which when put together are difficult to count. For the urban poor, small savings applied in
combination can achieve great impact. Mchenga therefore emphasises the importance of unity.

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people currently living in deplorable situations. Most Federation members are women – and
the Federation is clear that women should own the houses with which they assist.

CCODE and the Federation have managed to negotiate with the Department of Physical
Planning for plots of 150–200 square meters, smaller than the regulation size. Smaller plots
reduce the likelihood of subletting tenements to other people. Further, the tendency of higher
income earners to buy off the poor is reduced, as investment interest declines on small plots.
Road sizes have also been negotiated down from the standard 12-metre access roads to 9
metres. Thus, the city by-laws and standards were changed to suit beneficiary needs.

The Federation supports savings schemes across Malawi and is the key representative
agency for members of the savings schemes. CCODE, as the professional support NGO,
has a number of specific functions, to:
help create and support savings groups, for advocacy and lobbying for their rights
undertake training to strengthen the collective leadership and capabilities of the
savings groups
ensure that women and men have an equal right to participate in decision-making
create an information base through participatory research, on the poor and their
problems to create a basis for dialogue, planning and action for change.
facilitate access to affordable, adequate, hygienic and secure shelter for the urban
poor
strengthen the capacity of the urban poor to participate at all levels of development.

3. Financing low-cost shelter in low-income countries8

Finance for housing remains a daunting challenge in low-income countries. Conditions

attached to commercial lending are unaffordable for many. Problems for mortgage lenders
include the long period required for repayments, and lack of affordability particularly in an era
of uncertain real interest rates. The introduction of micro-financing in the housing sector has
appeared to offer a potential solution for both housing and infrastructure development in low-
income areas (Mitlin 2008). However, as elaborated in this section, shelter micro-finance is
making an important contribution to shelter improvements but inherent limitations to the
design of shelter limit the value of this approach.

To understand the significance of this innovation, it is helpful to differentiate between micro-

financing for housing, in which the main interest is to support house improvement or
extension (Ferguson 1999, 2008), and a hybrid approach combining small loans and savings
for construction of the superstructure itself (as well as for maintenance and improvements).
The three sections below summarise these developments. Section 3.1 outlines the major
deficiencies of conventional housing finance for low-income groups. Section 3.2 discusses
the development of shelter micro-finance. Section 3.3 elaborates on the innovations in
collective small-loan finance with a particular emphasis on the contribution of Shack/Slum
Dwellers International (SDI), the international network to which CCODE and the Malawi
Federation are affiliated.

3.1 The difficulties of financing low-income shelter

In the 1960s, governments emphasised the provision of complete homes, either through
support for mortgage finance, and/or through the direct construction of dwellings for rent or
purchase (Hardoy and Satterthwaite 1989). Buyers often benefited from subsidised
mortgage finance provided by state housing agencies (UN-HABITAT 2005). As described in
Section 2 above in the case of Malawi, many governments in the global South provided

8
This section draws on Mitlin (2011).

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