2 Shelter Policy and Finance: Retrospective Overview – Financing Urban Shelter




Housing finance is both the servant and the master of the housing process. The finance available fits into the general policy framework in that it enables the construction of housing within the wider supply context current at the time. It also drives the process: reductions in finance affect the scale of supply and allocation among groups supplying and demanding housing. In times when centralized control is politically dominant, finance is likely to be directed at governments and their agencies. Decentralization directs finance to smaller units, concentrating more on local authorities than on central governments. In times when nongovernmental organizations (NGOs) are trusted above governments, shelter finance will be channelled through them. The same occurs when citizen groups gain power and respect.

There have been major shifts in housing policy at the international level during the last six decades or so, and these have tended to drive the agenda, especially when countries rely upon international institutions to support their endeavours. However, at the same time, some countries have been following old agendas, while others have been driving forward innovative ideas.

This chapter discusses the general trends in housing and urban development policy since the end of World War II and highlights the paradigm shifts that have occurred during the last 60 years, and particularly during the last 30 years. From a time when colonial governments, especially in France and the UK, drove policy to supply urgently needed urban improvements and ‘homes for heroes’, there have been major changes. The recognition that ordinary people could participate in the housing and urban development process gave rise, first, to self-help projects in which people with little income were expected to provide goods and services for themselves that those with high incomes were provided with, often free of charge. This has now developed into community-led urban programmes in which ordinary people drive the process.

The context in which housing is provided has progressed from welfare provision, through an understanding that better conditions result in healthier and more productive people, to housing as a basic human right. In parallel, financing has moved from subsidizing the cost of a few highquality dwellings in well-serviced neighbourhoods, through enabling the finance markets to provide for most, to the beginnings of a recognition that some subsidized housing is required for households too poor to be catered for by the free market. Table 2.1 depicts the evolution of policies since 1945.


During the early post-World War II years, house building was regarded as a social overhead cost to economic development. This focused on several issues: economic development; the construction industry and construction quality; development of human capital; social development; and subsidies for workers.2

It was assumed that good housing assisted economic development; therefore, investments in housing were worth making

It was assumed that good housing assisted economic development; therefore, investments in housing were worth making. As such, it became a suitable case for treatment by international aid organizations and lenders. During the 1960s, the US Agency for International Development (USAID) began loaning substantial sums for housing development in Latin America as a direct contribution to economic development within the context of thrift institutions to finance housing.3

During the 1950s and 1960s, the modern movement in architecture generated a branch of interest in tropical architecture.4 Its concern with climatic comfort and the use of local materials was set within the context of the view that good design and construction were key elements in creating affordable and appropriate towns. At the same time, building research establishments set up in the colonies – such as Central Building Research Institute (CBRI) in Roorkee, India, Housing Research Development Unit (HRDU, now known as Housing and Building Research Institute (HABRI)) in Nairobi and Building and Road Research Institute (BRRI) in Kumasi, Ghana – were at the centre of the housing effort, including experimentation and testing of materials, techniques and designs.

However, the nature of the construction industry, especially the part of it that constructs housing, is so diffuse, uncontrolled, fluid and complex that many have despaired of its being part of development programmes. Indeed, some even denied that a building industry existed in most developing countries.5 During the 1950s, there had been several attempts to industrialize building, with success levels varying from reasonable in parts of Europe and America to disastrous in Africa.6 Their replacement of cheap and abundant labour inputs with expensive and scarce industrial and imported resources was illogical and ran counter to development. However, it is undeniable that there was a lack of trust between governments and local builders, even though they were mutually dependent; the former needed the contracts to be fulfilled, the latter needed the work from a volatile group of politicians and officials. This mistrust was not helped by sometimes poor standards of delivery on the part of the builders, and favouritism, non-transparent and corrupt tendering procedures, and poor payment records on the part of government agencies. Thus, international agencies often favoured large contractors based in the industrialized countries over their local counterparts when they offered contracts to implement aid projects.

Table 2.1

Milestones of housing policy development

Phase and approximate dates Focus of attention Major instruments used Key documents
Modernization and urban growth:
1945 to early 1970s
Physical planning and production of
shelter by public agencies
Blueprint planning: direct construction
(apartment blocks, core houses); eradication of informal settlements
Redistribution with growth/basic needs:
mid 1970s to mid 1980s
State support to self-help ownership
on a project-by-project basis
Recognition of informal sector;
squatter upgrading and sites-and-services
projects; subsidies to land and housing
Vancouver Declaration (UNCHS, 1976);
Shelter, Poverty and Basic Needs (World Bank, 1980);
World Bank evaluations of sites-and-services (1981–1983) (e.g. Bamberger et al, 1982; Keare and Parris, 1982; Mayo and Gross, 1987)
The enabling approach/urban
management: late 1980s to early 1990s
Securing an enabling framework for
action by people, the private sector
and markets
Public–private partnership;
community participation; land assembly
and housing finance; capacity-building
The Global Shelter Strategy for Shelter to the
Year 2000
(UNCHS, 1990a);
Global Report on Human Settlements 1986
(UNCHS, 1987);
Urban Policy and Economic Development
(World Bank, 1991);
Cities, Poverty and People (UNDP, 1991);
Agenda 21 (UNCED, 1992);
Housing: Enabling Markets to Work
(World Bank, 1993)
Sustainable urban development: mid
1990s onwards
Holistic planning to balance efficiency,
equity and sustainability
As above, with more emphasis on
environmental management and
poverty alleviation
Sustainable Human Settlements Development:
Implementing Agenda 21
(UNCHS, 1994)
Habitat II: 1996 ‘Adequate shelter for all’ and
‘sustainable human settlements
Culmination and integration of all
previous policy improvements
The Habitat Agenda (UNCHS, 1996a);
An Urbanising World: Global Report on
Human Settlements 1996 (UNCHS, 1996b)
Istanbul+5 2001/the Millennium
Declaration and the Millennium
Development Goals (MDGs)
Review of the Habitat Agenda process Renew Habitat Agenda commitments
and seek/devise more effective
Declaration on Cities and other Human Settlements
in the New Millennium (UN, 2001b);
Cities in a Globalising World: Global Report on Human Settlements, 2001 (UNCHS, 2001);

However, by the early 1970s, the concept of intermediate technology had been developed and became popular, with the recognition that different technologies were appropriate in different contexts.7 In the developing world, compromises and hybrid technologies were seen as, perhaps, more suitable than imported ‘Western’ industrial methods. This coincided with a new interest in the panoply of tiny businesses which were so obvious in developing cities but hardly considered in official documentation. Pioneering work during the early 1970s recognized the presence and contribution of the informal sector in all manner of industrial and commercial sectors, not least construction.8

The informality of the construction industry presented a challenge that could only be dealt with positively by the kind of paradigm shift exercised in the acceptance of non-Western technologies. In the same way, informality in land markets and housing credit pointed to the need for lateral thinking about appropriate approaches to assessing urban and shelter development which could embrace their positive aspects while protecting against the negative.

Human capital development has been a concern of economists from the pioneering ideas of Adam Smith, through to the development economists of the 1950s and 1960s, such as Arthur Lewis and Theodore Schultz. Schultz argued that, although housing may have little effect on productivity in affluent countries, better housing may be crucial where health conditions are poor. Thus, investments which improve human capital should be top priorities in development planning.9

During the late 1960s and early 1970s, John Turner's writings arising from his experiences in Peru, where squatter invasions were leading housing development, established the important place self-help housing could have in social development.10 His theories extrapolated an ongoing process of founding and consolidation of neighbourhoods out of observing different settlements in various conditions of development. While this has been criticized, his argument that housing did something for its occupants’ welfare and social and economic progress were highly influential and timely, coming as they did when city administrations were being swamped by a pace of development which they had little capacity to control.11 The ideas that informal suburbs could be the solution rather than the problem, and that improving what was there was the way forward rather than bulldozing it away and starting again, became conventional wisdom in international circles, if not in country policies.12

In the formal sector, during the 1950s and 1960s, subsidies were an important part of housing policy. Both before and after the war, housing for urban workers tended to be rented out at less than economic rents, usually related to income. Occasionally, this would be a direct relationship by being a certain percentage of wages extracted at source by employers (typically large manufacturing and extractive industries) who provided housing for their workers. For others, rents were fixed at what was thought to be a realistic amount for the average household to afford. In parallel, during World War II, many countries had sought to control the effect of wartime inflation on urban rents by imposing controls. These were often continued into peacetime and became a feature of many cities’ housing. They constitute a subsidy offered (reluctantly) by landlords to tenants.

There was, therefore, little link made between the need to finance housing and its supply. As an example, in the Gold Coast/Ghana, although it was acknowledged in successive development plans during the 1950s and 1960s that the private-sector landlords provided most housing, rents were consistently controlled to levels that affected the profitability of such supply, and rental income was taxed at higher levels than ‘earned’ income.13 The costs of such practices, represented by the poor condition of the stock and the lack of new supply, are well known.14

DEVELOPMENT: 1972–2004

Between 1972 and 1982: Habitat I

The World Bank began lending for urban development projects during the 1970s. It made an explicit effort to demonstrate that it was financially and economically feasible to provide services and shelter for the lowest income segments of society.15 However, the focus of financing at that time, as outlined in the report of the first United Nations Conference on Human Settlements, was on lowinterest loans, loan guarantees and subsidies as a means of making housing affordable to low-income people.16 In addition, the active use of pricing policies was seen as the means to enhance equity in service and infrastructure delivery to all. The sources of funding and the implications of under-pricing the services were not discussed.17

The project approach

Interventions during this period concentrated on demonstration projects of limited size with respect to a city or region, and usually confined to a particular neighbourhood or group of neighbourhoods. The idea of the projects was to demonstrate the feasibility of providing low-cost housing and services in particular ways thought to be suited to lowincome people and capable of replication at a large scale elsewhere in the city/country and in other countries. Replication demanded full-cost recovery as a basic premise. Only in this way could the project benefits be rolled out to the general population living in poor housing conditions through follow-up projects. Unless costs could be recovered, the financing would be used up and the self-perpetuating and limitless growth of subsidies would have to continue.18 In practice, there was little success in collecting repayments. Project beneficiaries were not pursued when they defaulted and it was politically unacceptable to evict them. Thus, they received further subsidies in forgiven payments and tolerated arrears at the expense of others who could benefit from the replication of the projects. In the event, replication rates were very poor.

During the 1950s and 1960s, subsidies were an important part of housing policy

Projects tended to be outside of municipal control, and to have different standards from elsewhere, different means of implementation (for example, materials procurement through project depots at subsidized prices and soft loans) and little effect ‘outside the fence’.


Projects during the first period of international financing for urban development focused upon self-help, providing a context in which the spare time and energy of low-income people could be devoted to house construction or infrastructure provision. They were broadly of two types: sites-and-services projects for new housing provision and settlement upgrading for bringing squatter and other informal settlements up to an acceptable standard of servicing and public space provision. Some of the classic projects during the early to mid 1970s, including the World Bank urban development projects in Botswana, El Salvador, Senegal and Tanzania, focused upon new development through sites and services – providing a minimal core house and infrastructure on ‘greenfield’ sites. This approach was much more cost effective than direct provision of housing. Other classic projects – notably, World Bank projects in Indonesia, Burkina Faso and Zambia – focused upon slum upgrading through improving conditions in un-serviced settlements and providing some serviced sites for overspill. This was more socially and politically acceptable than the alternative of wholesale clearance and relocation. They often ran together, as residents were displaced from the squatter settlements during the rationalization process required to retrofit roads and open up the most congested parts, would be given a serviced plot as recompense for their removal. Both types of development intended to provide occupants with ‘acceptable’ environments, though they often did not conform to the contemporary legal standards.

Residents of each would be involved in the project through their own physical work, either building the dwellings in sites-and-services schemes, or fitting infrastructure in upgrading. This concept of adding value through physical work, referred to as ‘sweat equity’, was strongly ingrained in the projects of the 1970s. For a household to engage artisanal help, by employing a builder to construct their home, was felt to be not playing the game by the rules. There was an assumption that, in a reflection of the Protestant ethic, hard work was morally good and, if it was expended building a home or improving the neighbourhood, the occupants would value the dwelling so much that they would look after it well and care for the neighbourhood and its services. In this, the project designers were supported by a then developing literature on the importance of making home as a process, not least by the highly influential work of John Turner.19 Intuitively, it can be accepted that if someone has been part of constructing a dwelling or a sewer, they will be vigilant with respect to its maintenance and will also be capable of repairing it.

Participants in sites-and-services schemes were helped in their construction efforts by project staff who provided a range of services. They might provide plans of standard dwellings (in first phase and complete forms) including block-by-block guides to construction, help with setting out and laying foundation slabs, and constant encouragement to persevere until the construction was complete. Participants were meant to repay loans taken out to build the dwellings and also to repay the cost of infrastructure and the ongoing services provided. In slum upgrading projects, less repayment was expected; but users were expected to contribute in cash or labour in fitting infrastructure, as well as to pay for the water and other services as they used them. Recipients of upgrading benefits were expected to be among the poorest households in the city.20

One analysis of World Bank projects demonstrated that the projects generated greater than expected private investment in housing – in Senegal about eight times as much as the project cost – in addition to considerable benefits in the informal construction industry.21

Although land, infrastructure, services and administration were financed from loans, sweat equity became a major housing finance mode; the opportunity cost of leisure time or other economic activity replaced money to pay contractors, just as in pre-industrial societies. Selfhelp assumed that the opportunity cost of participants’ time was near zero when, in fact, most low-income people are not really idle when they are not at their formal work (if they have any). Instead, they work hard as parents or make business to increase their household livelihood portfolio. It was, therefore, difficult for them to fit the sweat equity mould, and many employed artisans to carry out construction tasks.22 Indeed, evaluations have shown how many participants used professional building workers23 Only one fifth of households in a Philippines scheme had relied upon their own labour.24 In Matero, Lusaka, 92 per cent of participants in the World Bank-financed sites-and-services scheme employed construction labour.25 In the El Salvador World Bank projects, about 72 per cent of labour inputs (by value) were hired – a total of 6.5 work months hired labour per dwelling.26 As might be expected, households with higher incomes and greater employment opportunities were more likely to contract out their ‘sweat equity’ contribution to artisans than those with lower incomes.27

In addition to finance by sweat equity, there were many subsidies. Some were declared in the project (onbudget) and others were hidden (off-budget). For example, project administrative costs were rarely passed on to the recipients, being absorbed, instead, as a hidden subsidy. Offbudget subsidies were usually many times larger than on-budget.28

The participants in sites-and-services schemes tended to have rather higher incomes than the rhetoric and intention implied. As they usually had to apply in writing, often in an international language or an urban lingua franca, most successful participants were literate in their second language and, therefore, able to earn more than the minimum wage. It was in the interests of project administrators to allocate plots and the consequent subsidized benefits to households who could well afford to keep up the repayments. Thus, the financial requirements, with respect to upfront payments and ongoing repayments, rendered the projects self-selecting to people who had a likelihood (and some evidence) of long-term stable income. Of course, this undermined the poverty alleviation goal of such projects. It is, therefore, not surprising that, in many projects, low-income households showed themselves able and willing to pay for housing and services in a way that undercut the basic premise of subsidies.29 In others, poor repayment by occupants undermined any hope of replication. Only in a few countries (notably, Indonesia, Jordan and Tunisia) was substantial replication successful.

Dwelling owners in upgrading schemes, on the other hand, tended to be among the low-income groups and their tenants were probably in even lower income echelons (although their per capita income was probably similar or higher).30

Who took part in and benefited from
the projects?

The successful project beneficiaries ‘won the lottery’ by having access to benefits unavailable to the mass population. They undoubtedly benefited with respect to long-term improvements in their housing conditions, the improved security of tenure which went with the schemes, and in terms of the consequent increase in the value of their property. However, they had to accept what was on offer and it may not have been what they had bargained for or what they required the most. Many found themselves unsuited to the project and bought their way out by selling to richer households, ignored some of the project requirements to better suit it to their needs, or defaulted on payments to make it affordable. Tenants tended not to benefit much as their rents would rise to cover any repayments required, often above their willingness to pay. Thus, they tended to move out to another non-upgraded settlement where rents were still affordable. In the process, however, their social and economic networks would probably be seriously dislocated.

Many owners took advantage of demand for the greatly improved housing and sold out to higher income households, who had not enjoyed such secure tenure, and then moved into another un-serviced area. Indeed, it was not uncommon for site-and-service owners to remain in the squatter settlement and rent out the newly built dwelling to another, better-off, household. Where those who sold or rented out achieved a good price for their dwelling, they might be said to have exercised a reasonable market choice to convert housing capital gains into more flexible forms in order to diversify the benefits into other parts of their household livelihoods portfolios.31 However, anecdotal evidence suggests that few gained a full market price as even a relatively small capital sum represented more money than most had ever contemplated possessing, and they were easily wooed into selling themselves short and moving back into un-serviced squatter areas. This ‘raiding’, or ‘poaching’, by middle-income households has been a feature of many such interventions through the decades and is still an issue in South Africa's housing subsidy developments.32

Many participants benefited from learning new skills and gaining confidence in, and understanding of, construction and the installation of services, as well as in dealing with authority figures. Some went on to make a living with their new skills. However, it has been argued that the process of teaching lay-people to build their own dwellings is inefficient in that they only really master the process when they have almost finished.33 The newly learned skills are then usually neglected and forgotten. This is counterproductive as it is more important to have a wellfunctioning cadre of small-scale contractors than to teach individuals skills that they will only use once.

There was an obvious problem about how far the recipients were being involved in planning and decisionmaking. Projects tended to include a bundle of services and components chosen by distant decision-makers and imposed upon the recipients, with their involvement sought only in a token participation exercise to gain their cooperation and acquiescence. Thus, in the World Bank's early Lusaka Project in Zambia, residents of squatter settlements went on collective walks to guide the detailed route of roads that had already been roughly marked out in thick felt pen on a diagram of the project.34 They were not involved in the decisions about how much investment should be devoted to roads and what the general layout should be; their participation was restricted to details of routing and which buildings should be demolished to implement their construction.

The construction industry benefited in contrasting ways. Large formal (sometimes international) contractors had the opportunity to tender for the large contracts and the successful firms undoubtedly benefited. Their workers would also receive regular income and experience. However, much of the construction industry consists of independent artisans who tackle jobs alone or in informal gatherings of tradespeople and labourers. They were often disqualified from tendering because of the conditions about previous experience and the bonds to be deposited. Many, however, benefited from small contracts to provide skilled inputs into so-called self-help housing. However, they were unlikely to have garnered as much work as if the housing had been developed in a manner designed to value the role of local construction firms. The effect of the subsidy element in these self-help projects on small contractors was often conflicting. On the one hand, the reduction in land and other costs allowed clients to spend more on the structure, improving the opportunities for small contractors. On the other hand, the same contractors might also suffer a reduction in the value of their work as subsidized alternative housing goods became available.

The municipalities and utilities agencies took part and benefited in a limited way. The projects were often too complex for the municipal authority to implement. Municipalities provided the land for the projects at subsidized prices. The improvement in the housing stock and the upgrading of some of the worst housing undoubtedly took away some problems and generated potential for improved property tax and utility charges. However, they inherited servicing and maintenance burdens from the new infrastructure and often found that the clients had no intention of repaying the cost of fitting or the ongoing service charges. In addition, collection of taxes and charges is often very poor, so such benefits are minimized. Defaulting behaviour is likely to be particularly serious where some allocations have been made to return political or other favours, or where defaulting has been tolerated in the past or used as a political weapon – for example, apartheid South Africa. More importantly, perhaps, these early projects had almost no positive effect on the ability of the municipalities to manage urban programmes as their staff had been bypassed in the planning, financing and implementation, which were conducted by a specially recruited team only tangentially attached to the municipal councils. However, the negative effect on municipalities was often felt through the ‘diversion of scarce talent to a small enclave of public programmes’ that were not managed by the municipality in which they took place.35

The great majority of citizens – those outside the project ‘fence’ in the cities affected, those not finding work in the project, and those living elsewhere in the country (including the rural areas) – benefited hardly at all. Indeed, it is likely that they experienced poorer conditions than they could have done if the resources had been used differently, rather than being concentrated on the projects. Most people in the countries affected could, therefore, be excused for feeling it was all a waste of money that could have been better spent helping each qualifying household a little, instead of giving a windfall to a few. Furthermore, large amounts of subsidized dwellings in particular neighbourhoods may well have had a depressing effect on general housing values.36 The inescapable reality is that most people living in poverty did not benefit from the projectbased approach at all. Indeed, its poverty alleviation focus was probably subsumed, in implementation, by the impetus to complete the project on time within budget, and to demonstrate that the approaches worked and could be replicated, even though they did not reach those in the lowest income groups.

The 1980s saw ‘step-by-step moves towards a more comprehensive whole-housing sector approach’

Towards financial sustainability: the 1980s

The 1980s were a period of change. The projects of the 1970s were subject to detailed analysis, both within international funding institutions37 and from outside,38 and lessons had been learned. For example, for all the efforts aimed at improving housing, the existence of un-serviced informal settlements appeared to be continuing; indeed, they appeared to be expanding rather than in decline. The limitations found in the project approach included the following: that they had a low impact on overall urban economic development; that they encouraged institutional reforms only in those organizations implementing the projects; and that the funder's funds were restricted to ‘retail’ rather than ‘wholesale’ roles.39 The 1980s saw ‘step-by-step moves towards a more comprehensive whole-housing sector approach’ in which evaluating existing projects was as influential as general changes in policy towards housing and urban development.40

There was a perceived need to incorporate housing within the wider economic environment, rather than dealing with it as a special sector requiring attention out of welfare considerations. It was recognized that the individual sites-and-services and slum upgrading projects alone could not affect the growing housing need – a well-functioning finance system for housing for the majority was necessary.

This generated a paradigm shift from multi-sectoral, but quite localized, projects, affecting a fortunate few, to an emphasis on creating a sustainable capability for housing supply and urban development affecting most residents and congruent with the overall policy and economic environment. The locus of borrowing changed from almost exclusively public-sector institutions to financial intermediaries. In parallel, attention shifted from the physical asset financed to the institutional structure of the implementing agency and its ability to mobilize the development required.41

It was recognized that a well functioning housing finance system for the majority was necessary

Quite early in this period, as a way of countering the obvious problem that the components planned were not necessarily the priorities for the recipients, the World Bank developed programmatic projects in which the local municipalities and other institutions could propose side projects within an agreed range. The prototype for these was Brazil's Parana Market Towns Improvement Project, implemented between 1983 and 1988, in which a large number of municipalities could compete for investments according to local priorities. This project demonstrated early success in proliferating urban projects and targeting them to the sectors in which there was local need.

Structural adjustment: towards
macroeconomic orthodoxy

During the early 1980s, World Bank loan financing was made available to enable governments to recover from years of decline through structural adjustment programmes (SAPs). Indeed, for many countries, the SAP was imposed as a condition on other loan finance. It consisted of, among other things, a reduction in government and quasi-government agencies, a reduction in public spending, and the introduction of markets in the supply side of housing and urban development. The purpose of SAPs was to:

  •      introduce economic reforms and reduce balance of payments deficits;
  •      reduce public expenditure to more manageable levels; and
  •      carry out medium-term reforms to improve exports and growth.

SAPs were intended to integrate local economies within the international trade and finance systems and to establish balance between state and market roles.42 The advocates of this approach saw the free market as the means of improving efficiency and injecting dynamism into the economy. The state's role was that of enablement: securing private property rights; reducing regulations in inhibited markets; achieving macroeconomic stability; developing finance capital markets; and providing sector policies and institutional frameworks for effective development.43

There was a perceived need to be involved in the promotion of sound financial institutions in the borrowing countries, in which housing finance was seen to be a part.44 Public institutions were the target provider. At the same time, there was a change in attitudes towards subsidies. It was believed that they should be reduced, effectively targeted and changed from financial (money up front) to fiscal (tax breaks or credits). This occurred in parallel with structural adjustment in the wider economic and financial context.

Structural adjustment has often been seen as ultimately unhelpful to the countries upon which it was imposed. It frequently resulted in a reduction of formalsector employment without enough alternative employment opportunities, and the social welfare protection introduced in mitigation programmes was often insufficient. It focused upon exports; but Organisation for Economic Co-operation and Development (OECD) countries did not lift tariff and quota restrictions to allow the exports to compete on equal terms in the world market.

Externally supported projects at the time channelled housing and urban loans into housing finance institutions and municipal development funds, where they would be disbursed more widely and quickly than could geographically delineated inputs.45 A key objective of projects promoted by the World Bank was financial sustainability – creating housing finance systems that fitted into a generally sound and sustainable financial sector.

In the housing sector, the direct results of SAPs were often some or all of the following:

  •      development of housing finance capital markets, including intermediaries capable of offering mortgages to middle- and low-income households;
  •      deregulation of interest rates on loans;
  •      collapse of uncompetitive housing finance institutions;
  •      curbing of public expenditure, which often cut infrastructure programmes and maintenance;
  •      taking direct provision away from the state in favour of private developers and NGOs; and
  •      diversion of investment from construction into other, so-called ‘more productive’, export-orientated sectors.46

The shift from project-orientated lending to lending for housing finance brought about a major shift in the scale of loans. World Bank project averages rose from US$19 million during 1972–1975 to US$211 million during 1985–1990. At the same time, there was an increasing number of loans and a larger share of lending to housing and municipal financing. From 1986–1991, housing and related residential infrastructure (about 70 per cent of urban lending) ranged from 3 to 7 per cent of World Bank lending and averaged US$900 million annually.47 However, at the same time, the countries assisted by the financial-sector loans tended to be better off than those assisted in the project-based phase.48

The birth of the enabling strategy:
the mid 1980s

One significant review of housing policy transition argues that there was a fulcrum of policy change during 1985 to 1987, a mid point between the two major United Nations conferences.49 It was a time when the in-depth reflection on the accumulated experience in the shelter sector was bringing improved understanding and there was discussion of the way forward in several influential documents. There was also advocacy arising out of the 1987 International Year of Shelter for the Homeless.50 Self-help was then seen as provisional, evolving from sweat equity to contracting of construction professionals.51 Furthermore, by the end of this short period, the enabling approach had been put together and launched on the international agenda. As mentioned earlier, the 1980s saw ‘step-by-step moves towards a more comprehensive whole-housing sector approach’ in which evaluating existing projects was as influential as general changes in policy towards housing and urban development.52

The Global Report on Human Settlements 1986 introduced the enabling approach as a development from the project-based approach towards settlement-wide, participatory action aimed at reducing the ring-fenced effects of the earlier projects and allowing all to enjoy better housing conditions.53 It was clear that there was an inescapable need to scale up activities to meet the needs of the very large numbers of people living in poverty. It was also becoming obvious that whole housing sector development depended upon how well the economic, financial, legal and institutional environment supported it.54

The enabling approach treats housing and urban development as a multi-sectoral issue, affected just as much by efficiencies and inefficiencies in finance as in the construction industry or land-tenure systems, or the regulatory framework. The task of the state is to create the legal, institutional and economic framework for economic productivity and social effectiveness, in which efficient settlement development can then flourish.

The enabling approach calls for a housing policy environment that oversees and regulates the sector, with the government not supplying housing directly, but leaving actual production and delivery of housing to the housing market, in which all ‘actors’, ranging from large formal-sector developers through artisans and individual households, to voluntary community organizations, involve themselves at their most effective level in the production process. The enabling approach replaces the interventionist provision of public housing by the state, which presupposes that the government and its agencies are the best actors to supply the kind of housing that society should have.

In the World Bank's 1993 housing sector paper, which reflected many aspects of its urban policy document of 1991, the enabling approach was introduced in some detail in the context of overall financial markets.55 Both sector papers emphasized enablement approaches, the sectors’ contributions to general macroeconomic development, and the acceptance of pro-poor policies, including targeted subsidies.56 There was also a recognition that most housing and infrastructure loan programmes required a mix of market, state, voluntary sector and household roles, especially in recognizing that each may be most effective at a particular level.

The enabling approach treats housing and urban development as a multi-sectoral issue

In order to enable housing provision, the six inputs (five markets and one intervention) in the housing supply system should be freed up to operate effectively. The six inputs are: land; finance; construction industry/labour; building materials; infrastructure; and the regulatory framework. The argument is that removing bottlenecks from each of these will enable housing supply at the requisite scale and variety for urban development to effectively accommodate the people. For example, if finance is easily available but construction materials are in short supply, extra financial inputs to end-users might only raise the price of materials. What may be needed more is investment in building materials supply.

It is vital for the enabling approach to shelter that a wide range of non-state actors are willing and able to produce and market housing, and to undertake essential support roles in the housing process, such as facilitating the flow of housing inputs, organizing communities and operating services. These non-state actors include the commercial private sector (such as developers/real estate agents and banking/finance institutions) and, more importantly for the urban poor, NGOs, community-based and other socio-civic organizations, as well as small-scale producers in the informal sector. Since each of these actors has distinct comparative advantages in housing, the goal of policy is to develop partnerships that complement their strengths and weaknesses. This will maximize their contributions and minimize costs to particular groups or to the city as a whole. Partnerships are thus fundamental to the enabling approach and to achieving adequate shelter for all.57

Sustainability and the brown agenda

The mid 1980s also saw the birth of sustainability as an overarching rubric for development activity. Following the founding of the World Commission for Environment and Development (WCED) in 1983, the Brundtland Report devised the now classic definition of sustainable development as meeting ‘the needs of the present without compromising the ability of future generations to meet their own needs’.58 From that time on, no agency could ignore the need to consider environmental impact alongside the social and economic benefits of its projects. Shortly after, the 1992 United Nations Conference on Environment and Development (UNCED, or the Earth Summit) in Rio de Janeiro agreed on Agenda 21. Its Chapter 7 dealt with human settlements, emphasizing the significance of urban environments and community-based environmental planning and management. Housing, infrastructure and urban governance were firmly rooted into the sustainability agenda. An essential component of sustainability in human settlements is equity in distribution, with particular emphasis on the low-income groups.

The most immediate and critical problems confronting developing country cities are the health hazards deriving from inadequate water, sanitation, drainage and solid waste services; poor urban and industrial waste management; air pollution; accidents linked to congestion and crowding; occupation and degradation of marginal and sensitive lands; and the interrelationships between these problems. This aggregation of problems, which collectively constitute the ‘brown agenda’, disproportionately affects the urban poor, who are most affected by ill health, lower productivity, reduced incomes and lowered quality of life.

Chapter 7 reiterates the overall objective of improving the social, economic and environmental quality of human settlements and the living and working environments of all people, particularly the poor. Such improvement should be based on technical cooperation activities, partnerships among the public, private and community sectors, and participatory decision-making by community and special interest groups.

At the same time, there was a realignment of emphasis from the ‘ability to pay’ to ‘willingness to pay’ as a result of economic analysis which found that the latter produced much more accurate estimates in cost-recovery calculations.59 Ability to pay depends particularly upon the economic conditions of the potential users and tends to be expressed as a percentage of household income (for example, 20 per cent for housing and 3–5 per cent for water), although this can vary considerably depending upon the nature of the local economy. Willingness to pay, on the other hand, represents perceived utility and benefit of a service. Factors that are likely to affect willingness to pay include household income; the potential of additional income or savings owing to the improved service; the level and value of time saved; and the perceived convenience, reliability and quality of the improved service compared to the old service.

Box 2.1 Seven-point conceptualization of whole-sector development

Sustainable development requires approaches that are integrated, reaching across sectors and touching physical, economic and social activities and institutions. Such integrated approaches have been promoted by major international organizations such as the United Nations system and the European Union (EU).

In its 1993 housing sector paper, Housing: Enabling Markets to Work, the World Bank conceptualized whole-sector housing development as comprising seven components, three on the demand side, three on the supply side and one appertaining to managing the sector:

Demand side

  1. 1    the development of property rights – for example, in regularizing tenure in squatter settlements and in removing rent controls;
  2. 2    the development of housing finance systems, especially mortgage finance;
  3. 3    the targeting of subsidies;

Supply side

  1. 4    infrastructure provision for residential land development;
  2. 5    the regulation of land and housing development, including introducing regulatory audits to remove barriers to development;
  3. 6    improved organization and competition in the building industry;

Managing the sector

  1. 7    appropriate institutionally loaded reform.

Source: World Bank, 1993; Pugh, 2001.

Whole-sector development: 1987 onwards

The 1990s saw a consolidation of the sector-wide approach that had emerged in the early 1980s in which major donors started giving support in an agreed sector to be coordinated by governments at local or national level (see Box 2.1) This shifted donor interventions from direct programmes, which suited the donor's priorities, to supporting governments to implement their own priorities.

Approaches range from a set of coordinated projects, to simply supporting a sector budget. This often occurred within a context in which governments agreed on core poverty reduction strategy (PRS) principles within which to disburse funding. Assistance was then given to achieve:

  •      greater government ownership of reform and development programmes;
  •      increased government accountability;
  •      development of sustainable capacity;
  •      transparency and predictability of resource flows; and maximum value for money and minimum transaction costs.60

The focus moved from physical targets to broad institutional development, including financially sustainable operation of upgrading programmes. In parallel, the lending agencies moved away from a ‘retailing role’, involved in every detail of the project, to that of a ‘wholesaler’, with local municipalities or other institutions planning and implementing the details within broad programme parameters and demonstration of administrative capability.61 As in the Parana Market Towns Improvement Project, finance was awarded to an institution or consortium which then disbursed its components to others. This represented a ‘wholesaler’ to ‘retailer’ relationship that promised greater efficiency. Loan conditions required ‘sustainable finance’, represented in cost recovery, and in the skilled management of receipts and expenditures within a context of operational effectiveness. Members of the consortium (in the Parana case, local governments and their communities) selected their type of sub-projects, costed them, and rationalized community participation in the selection of priorities.62

The Global Strategy for Shelter

By 1990, the United Nations Centre for Human Settlements (UNCHS, now UN-Habitat) had formulated its comprehensive ideas of housing reform and released the Global Strategy for Shelter to the year 2000.63 This had a laudable, but what is now recognized as an over-optimistic, objective of ‘decent housing’ for all by 2000.64 Later in the decade, this term was replaced by ‘adequate housing’; but this was also defined in some detail in the Habitat Agenda to include the physical conditions of the dwelling, its services, tenure security, location and many other characteristics.65 The need for adequate housing has also been included in many United Nations summit recommendations and closing declarations, including UNCED in Rio de Janiero,66 the Social Development Summit in Copenhagen,67 the Fourth World Conference on Women in Beijing,68 the United Nations Conference on Human Settlements in Istanbul,69 as well as the Durban Declaration on Racism, Racial Discrimination, Xenophobia and Related Intolerance.70

The 1992 UNCED Earth Summit in Rio de Janeiro influenced both UNCHS (Habitat) and the World Bank. As mentioned earlier, it included housing and urban policies within Chapter 7 of Agenda 21, its strategy for the 21st century. Sustainability is seen as a three-pronged approach, joining environmental, social and economic development in housing and urban programmes. Agenda 21 called upon local governments to mobilize their communities for policy formulation and action plans for environmental improvement in Local Agenda 21s.

The Global Strategy for Shelter to the Year 2000 (GSS) recognized that governments have an obligation to ensure that an appropriate environment is created for the mobilization of finance for housing. The objectives of such an effort are to promote and mobilize savings, reduce costs, improve the efficiency of financial intermediation, and assist the free movement of capital through the national economy. Housing finance reform, which is a key component of a shelter strategy, should be seen as part of a broad effort to reform and develop the financial sector.71

The GSS encouraged providers to reduce the cost of housing finance to the lowest possible level, but urged that the days of housing subsidies, artificially low interest rates and political interventions to forgive defaults be left behind. Instead, government interventions should be consistent with sound financial and economic principles through prudent interventions in the deposit rate, servicing costs, cost of risk, risks of default, fluctuations in interest rates, liquidity and repayment. Personal savings should still be the cornerstone of housing finance for lower income groups and these had to be mobilized as fully as possible.72

The GSS accepted that subsidies were necessary for some groups, but called for ensuring that they provided the greatest benefit to those most in need and treated equally those in equal need. They should be targeted to deliver the greatest possible benefit to their intended beneficiaries at the lowest possible administration cost. In addition, they should not impose unacceptable costs on others, including institutions.73 Whatever else subsidies are, they should fit into an overall approach to social welfare for people living in poverty.74

Focus on building institutional capacity
to develop housing and urban services

The new paradigm encouraged institutional reform and development. In contrast to the 1970s approach of bypassing local institutions, sending signals that they were untrustworthy and less than competent, the new approach was to uplift local institutions, affirming their trustworthiness and challenging them to be effective. This coincided with the spread of decentralization of power from the centre to regions and municipalities, and the growth of a local sense of responsibility for urban conditions. It also gave local authorities a financial resource to draw upon in a context where bond and financial securities markets were often undeveloped.77

Box 2.2 Urban Management Programme

The Urban Management Programme (UMP) was set up to strengthen the contribution that towns and cities make towards economic growth, social development, reduction of poverty and the improvement of environmental quality. In its first few years, it was mainly notable for the development of policy frameworks and discussion papers, especially on land and urban environmental management. From 1992 onwards, it focused upon technical cooperation on a demand-driven basis from developing countries, managed through regional offices.75 It has emphasized participatory urban governance, urban poverty alleviation, urban environmental management and, more recently, the shelter effects of HIV/AIDS, with gender as a cross-cutting issue. Participatory decision-making processes have been institutionalized in participating cities through 120 city consultations. The UMP's way of working directly with cities, both in the city consultations and in its seven city development strategies,76 is in line with the climate of directly funding existing local institutions.

Efforts to improve municipal government led to the setting up of the Urban Management Programme (UMP) as a partnership between UNCHS (Habitat), now UN-Habitat (the executing agency), the World Bank (the associate agency), and the United Nations Development Programme (UNDP) (providing core funding, with various bilateral donors, and monitoring) in 1986 (see Box 2.2)

GSS recognized that governments have an obligation to ensure that an appropriate environment is created for the mobilization of finance for housing

The focus of the UMP echoes the more holistic, interagency approach which grew through the 1980s and the recognition that the future success of development might rest in the cities of the world. The emphasis on assisting municipalities to carry out their functions effectively illustrates the shift from early project-based assistance to addressing the core capabilities of public authorities and their citizens to improve service delivery and sustainability.

In 1999, the Cities Alliance was established as a global alliance of cities and their development partners committed to improving the conditions of the urban poor through city development strategies and slum upgrading. Like the Urban Management Programme, it is a partnership between the World Bank and UN-Habitat, with several countries and other agencies involved in funding. It works in partnership with local authorities and national governments to, among other things, scale up solutions promoted by local authorities to address the shelter needs of the urban poor, who are treated as partners, not problems. With respect to finance, it engages potential investment partners to expand the resources available to local authorities and the urban poor, enabling them to build their assets and income.78

A holistic approach to settlement upgrading, sometimes called ‘the Orangi model’ after a successfully upgraded area in Karachi, Pakistan, has been replicated in several countries.79 The process adopted involves making know-how available to an organized community which has its own leadership for negotiating policy and for mobilizing local people to take part in self-help activities. Choices are made about the selection of affordable technology and resource allocation in water and sanitation services to bring health and economic benefits, including generating investment in housing improvement. Sometimes a community will manage the infrastructure system or contract with private or public sectors.80 Of course, the model is implemented differently, and has different outcomes, depending upon political, cultural and professional factors in each place. In some projects, for example, the communities expressed their rights and needs in a unified way, and this facilitated better results per unit invested than in cases where political disputes arose among residents when deciding priorities for environmental improvements. Clearly, the ‘political’ realm can influence the effectiveness of upgrading investments.

It is clear that this is fundamentally different from the 1970s model used in Lusaka and elsewhere, where the only choices offered to the residents were the detailed routes of the already planned service lines, even though they were expected to expend time and energy in fitting the services.

Economic development depends on efficacy of financial systems

The development of mortgage finance became a major focus for the World Bank's interventions and influenced other international lenders. It was recognized that less than 10 to 20 per cent of annual housing investment in developing countries was covered by mortgage finance. Over several decades, national banks and building societies had to cope not only with the age-old problem of mortgage financing (lending over the long term while borrowing over the short term – through deposit and current account balances), but many also had to endure political interference in their business dealings. They were, typically, coerced into lending at fixed rates (often at negative real interest rates) and forgiving loans; as a result, they could not maintain liquidity. Thus, numbers of mortgages were very small and institutions were extremely risk averse, lending only to the most financially secure or politically favoured clients.

Reflecting the globalization beginning during the early 1990s, the World Bank pointed out the need for housing finance institutions to be able to compete for deposits and investments on equal terms with other financial institutions. Thus, lending must be at positive, real interest rates and deposits should be of sufficient term to support long-term lending. Characteristics of lending should include:

  •      mortgage lending at variable rates and appropriate indexation;
  •      secure land tenure and property rights; and
  •      enforceable foreclosure procedures.81

All of these are necessary to protect the lenders and to enable them to lend with some confidence.82

Finance capital in development

The World Development Report of 1989 was devoted to the role of finance capital in development.83 Its key message was that effective growth and economic development depended upon having financial systems that were effective in linking markets and government agencies with the range of financial institutions and instruments. Gone were the days when it was efficient to have low interest rates in some sectors. It had become clear from research that the formal-sector financial institutions were fragmented, had liquidity problems, could not effectively manage credit and interest rate risks and could not make their capital profitable.84 Moreover, and probably most importantly, they were involved in only 20 per cent of housing. There was urgent need for reform to generate confidence in finance institutions both among potential customers and among the donor agencies who would channel money through them.

During the 1990s, some developing countries developed proactive and well-integrated housing finance policies and institutions. In this, they responded to the unprecedented rate of urban growth and changes in global finance markets. In addition, there was a recognition that purely government-managed finance institutions had failed in their laudable aims and had become bureaucratic, inefficient and prey to exploitation by insiders.

A 1999 study suggested that there were six broad categories of housing finance systems in place, many of which needed a range of reforms in order to make them more effective (see Box 2.3).85

Countries with well-developed housing finance sectors, primarily among middle-income developing countries and some Asian countries, benefited from the international concentration on housing finance. Between 1982 and 1992, the World Bank invested US$715 million in housing finance institutions in Mexico, the Republic of Korea and India. This included a US$250 million loan to the private-sector Housing Development and Finance Corporation (HDFC) of India, with which it was able to take housing credit lower down the distribution of household income. The new policy was an effort to improve the performance of financial institutions by providing guarantees to international investors similar to those of the Housing Loan Guaranty Scheme used by USAID, the US government's bilateral aid agency.86 Sri Lanka also received significant funds, which were then on-lent to local cooperative societies to boost its 2.5 million small loans programme.

However, some housing finance systems moved from boom to bust, with serious local consequences. One example was the Mexican housing finance system. Despite no lack of interest by private builders, speculative house building was severely limited in scope in Mexico until the end of the 1980s. However, liberalization of mortgage funds from commercial banks and privatization of some investments related to payroll funds boosted the housing development industry so that private developers became active all across the country. During the early 1990s, an influx of investment capital fuelled the mortgage market and increased the impetus of the building boom, especially in condominiums, driving up land prices. This all crashed in December 1994, leaving mortgagees with un-payable debts and negative equity in their homes. A special programme was launched in 1996 to bail out the banks, which continue to loan to middle-income homeowners while the low-income group is left to make its way in the informal sector.87

Box 2.3 Housing finance institutions during the 1990s

Housing finance institutions during the 1990s were based on the following systems:

  • •     Undeveloped housing finance systems: common in sub-Saharan Africa, with weak financial systems and commercial banks. Priority should be given to improving urban laws, policies and practices affecting housing, beginning with clarifying traditional property rights. Public efforts should concentrate on infrastructure development, the supply of serviced land and titling, all within realistic affordability parameters.
  • •     Missing housing finance systems in formerly centrally planned economies: one of the many problems in the former Soviet bloc, China and Viet Nam. Coordinated improvements are needed to establish primary mortgage lenders and secondary market facilities.
  • •     Fragmented and unstable housing finance systems: fairly common in Latin America, where housing finance systems are very small with respect to the economy because of macroeconomic mismanagement and/or external shocks, and inflation has been high. In highly unequal societies, most cannot afford mortgage finance, so subsidy distortions are built in, which can help the general economy to implode. It is essential to separate subsidy from finance and to target subsidies at social housing.
  • •     Segregated but stable housing finance systems: in the Middle East and East Asia, where a seemingly (but actually not) very stable group of institutions provide housing finance within restrictions and special advantages. They provide poorly targeted subsidies and finance at preferential rates in a context in which numbers of units are important determinants of success. The informal sector has a major role in finance for those missing out, leading to a high implicit cost of capital for housing.
  • •     Sound and integrated housing finance systems: some countries in Southeast Asia have developed sound and well-supervised housing finance systems with secondary mortgage markets that manage to reach well down in the income scales. Because the bankers can choose what to fund, building contractors produce better-quality work. In addition, investors seek out innovative technologies from around the world to improve their investments.
  • •     Advanced housing finance systems: found in Organisation for Economic Co-operation and Development (OECD) countries, these have grown out of the UK building society tradition and the savings and loans societies in the US. The continental European market tends to use bond market funding; but all of these special mortgage institutions are shrinking as globalized banking provides specialized financing services to take over the mortgaging business.

Source: Renaud, 1999.


Globalization of finance has the following theoretical implications with respect to housing finance:

  •      It appears to force financial institutions to develop to the point where they are integrated within the financial and capital markets of the world. As a result, their capacities to interact locally with communities are eroded.
  •      It integrates the financial markets of the world so that the homebuyer in the poorest country is competing for finance in the same pool as the richest countries and corporations.88

In this way, globalization makes it much more difficult to have special housing loans in which a lending institution lends at below real market rates.89 Such loans are usually supported by cross-subsidies from other lending activities; but it is very difficult in the globalized financial context as the high-value business simply transfers to any bank in the world to find cheaper rates.90 Thus, lower income groups miss out on the opportunities to borrow more cheaply and, in turn, become more difficult to reach.91 The effect of this is lost on most low-income households, however, as very few have access to such loans. Reasons of financial inadequacy are often cited for sluggish housing markets; but in the context of the housing market within South African townships, blame has been placed firmly at the door of legal, institutional and procedural constraints.92 Householders cannot gain loans from the formal sector because their tenure is inadequate, transactions costs are very high, there is little market information, and loans are not available for the amount they want to borrow over periods that they regard as manageable. Nevertheless, many governments still have privileged circuits for housing finance through direct funding. This is common in Southeast Asia where governments have traditionally funded housing from direct budgets. In addition, regulatory and tax systems vary so much that households are quite removed from the effects of globalization on the funding at the core of their housing finance.

It is worth asking the question: ‘Why should a financial institution lend money to low-income people?’ This question encapsulates the following problems facing lenders:

  •      The essential nature of such housing loans, vis-à-vis other commercial lending, is their small size. Loans suitable for households with incomes of US$10 per day (and there are hundreds of millions such households) would be in the region of US$5000–$10,000. They require a similar amount of administration to set up and run as loans of 100 times as much or more, but the fees (charged as a percentage of the loan amount) are miniscule.
  •      Liquidity can be a problem for the lender. If the lender wishes to sell on the mortgages to another financial institution in order to boost its liquidity, its portfolio of low-income borrowers with doubtful collateral and poor security is unattractive in financial markets.

It is partly because of these problems that shelter microfinance and community funding solutions have emerged, especially in developing countries (see Chapters 6 and 7).


The new millennium started with a very different climate of shelter and urban finance from that which appertained 20 years ago. During the early 1980s, large formal financial institutions were the main partners for international funders and lending was banker led; secondary mortgage markets were also seen to be the way forward and were thought to be able to reach as far down the income scale as bankers could countenance. Lending to low-income households was too risky a proposition for most banks.

The low-income worker's role in housing finance was often only to contribute to a compulsory savings scheme. However, all but a lucky few of the poor were untouched by the efforts of international and bilateral finance for housing and urban development. Municipalities were beginning to be trusted; but there was little effort to involve elected representatives who actually voted on resource allocation.

In the new millennium, formal bank financing is only one of several players in the field. Mortgage finance is available in most countries, but its limitations are obviously militating against its being the solution for most low-income households. Microfinancing has progressed from being only enterprise focused to being an important feature of the housing finance system. The savings and loans system, which contains within it the tradition of regular meetings of savers, establishing social links, is an important community builder as well as financial resource. Community grassroots activities are now centre stage in at least some countries in setting the agenda and disbursing the funding. They are reaching people at such low-income levels and in such large numbers that other systems can only dream of.

Mortgage finance is available in most countries, but its limitations are obviously militating against its being the solution for low-income households

The Habitat Agenda

Just before the turn of the millennium, the Global Strategy for Shelter to the Year 2000 and Agenda 21, Chapter 7, were consolidated into the Habitat Agenda at the Istanbul Summit in 1996. It reflects the essence of both previous documents and provides a basis for international and national housing and urban development policy for the 21st century (see Box 2.4).

Reaching the lowest income groups:
community-based finance

There is no hiding from the unpalatable truth that formal housing finance institutions cannot address the needs of hundreds of millions of households whose incomes are low. Their assets are just too small and too insecurely held for the formal sector to bother with them or to feel secure in handing out funds to them. Even when formal housing financing is deepening and widening, a majority of households still do not meet the assets and collateral conditions of formal-sector lenders. Formally constituted microfinance organizations have been successful in funding many low-income households, especially through group loans; but even they are by no means universally distributed.

Only the most flexible housing finance organizations will directly help some of the poorest people in society, and even they will not reach the many millions of households who find any expense above actual survival difficult. The rise of community-based organizations (CBOs) involved in providing loans to people living in poverty has been an important feature of the last decade. Perhaps equally important has been the setting up of national and international umbrella organizations to enable and assist their operations, such as Shack/Slum Dwellers International (SDI) and the Society for the Promotion of Area Resource Centres (SPARC) in India. These can negotiate directly with the World Bank and bilateral agencies to borrow large amounts of money at favourable rates for onward lending to their member organizations, who can then use it in partnership with their clients, the households living in poorly serviced and ill-constructed housing and places with little security. They can also have access at the highest level to policy-makers in the United Nations system and national governments.93 Because of the scale of their groups, and the links with major funders and policy-makers, international grassroots networks have become major forces at the international level on behalf of people living in poverty and are changing the way in which funding is offered and how it is disbursed.

This grassroots movement has introduced a new dimension to the financing of housing and urban development. Probably for the first time, the people who are the ultimate beneficiaries of major international loans are in the driving seat, determining how the money should be spent and organizing others to do the same. These more recent shelter financing approaches are discussed in detail in Part II of this Global Report, alongside reviews of the current status of mortgage finance and social housing approaches.

The right to housing

During the 1990s, the need to ensure adequate housing became the right to adequate housing. This had already been on the agenda since it was included in Article 25 of the 1948 Universal Declaration of Human Rights.94 During the late 1980s, it appeared again in the United Nations General Assembly, which reiterated:

… the need to take (at national and international levels) measures to promote the right of all persons to an adequate standard of living for themselves and their families (including adequate housing) (Resolution 42/146).95

It was also reaffirmed in the Vienna Declaration on Human Rights, which emphasizes:96

… the rights of everyone to a standard of living adequate for their health and well-being, including food and medical care, housing and the necessary social services.

The Istanbul Human Settlements Summit further reinforced the:

… commitment to the full and progressive realization of the right to adequate housing as provided for in international instruments. To that end, we shall seek the active participation of our public, private and non-governmental partners at all levels to ensure legal security of tenure, protection from discrimination and equal access to affordable, adequate housing for all persons and their families.97

The ‘progressive legal obligation’ stance is enshrined in the cornerstone of the International Covenant on Economic, Social and Cultural Rights, which urges all states to make every effort towards ‘achieving progressively the full realization’ of the rights in the covenant.98 However, this does not mean that states can wait until economic or financial conditions make fulfilment of housing rights more straightforward. Indeed, all states are expected to provide for at least a minimum essential level of each right such that a state in which ‘any significant number of individuals is deprived of basic shelter is prima facie failing to perform its obligations under the covenant’.99

Any retrogressive measures, such as forced evictions, are violations of the right to housing. Indeed, states have a duty to respect, protect and fulfill housing rights. Respecting obligates the state not to do anything that violates rights; protecting obligates the state to prevent any other agency from violating people's right to housing; and fulfilling incorporates obligations both to facilitate (or enable) through national housing policies and to provide for those for whom housing is impossible within their own resources.100 The latter is important to the financing of urban shelter development.

None of this embodies a state obligation to provide everyone with free housing, but rather to set up the legal, social and economic environment in which households have an adequate chance to fulfil their needs. An example of the outworking of this can be found in South Africa, where the new state constitution was being drafted at this time.101 In it, the state must take ‘reasonable legislative and other measures, within the available resources, to achieve the progressive realization of the rights’.102 This has been tested through the legal campaign of displaced people in the celebrated Grootboom versus Oostenberg Municipality case (see Box 2.5).103

Box 2.4 Commitments on shelter finance, Habitat Agenda, 1996

On finance, paragraph 47 of the Habitat Agenda commits member states to:

… strengthening existing financial mechanisms and, where appropriate, developing innovative approaches for financing the implementation of the Habitat Agenda, which will mobilize additional resources from various sources of finance – public, private, multilateral and bilateral – at the international, regional, national and local levels, and which will promote the efficient, effective and accountable allocation and management of resources, recognizing that local institutions involved in microcredit may hold the most potential for housing the poor.

Paragraph 48 also commits member states to:

(a) [Stimulating] national and local economies through promoting economic development, social development and environmental protection that will attract domestic and international financial resources and private investment, generate employment and increase revenues, providing a stronger financial base to support adequate shelter and sustainable human settlements development.

(b) [Strengthening] fiscal and financial management capacity at all levels, so as to fully develop the sources of revenue.

(c) [Enhancing] public revenue through the use, as appropriate, of fiscal instruments that are conducive to environmentally sound practices in order to promote direct support for sustainable human settlements development.

(d) [Strengthening] regulatory and legal frameworks to enable markets to work, overcome market failure and facilitate independent initiative and creativity, as well as to promote socially and environmentally responsible corporate investment and reinvestment in, and in partnership with, local communities and to encourage a wide range of other partnerships to finance shelter and human settlements development.

(e) [Promoting] equal access to credit for all people.

(f) [Adopting], where appropriate, transparent, timely, predictable and performancebased mechanisms for the allocation of resources among different levels of government and various actors.

(g) [Fostering] the accessibility of the market for those who are less organized and informed or otherwise excluded from participation by providing subsidies, where appropriate, and promoting appropriate credit mechanisms and other instruments to address their needs.

Source: United Nations, 1996b.


Despite many changes in emphasis, international and national efforts in housing finance have failed to reach the majority of households. Housing finance from international institutions began by encouraging projects aimed at improving housing in selected areas and for particular groups, primarily to discourage the growth of poor conditions in low-income neighbourhoods. Such finance was narrowly focused but had a catalytic purpose: to spread to other areas and groups until all were assisted. However, replicability turned out to be a chimera; projects did not generally provide a way forward for everyone, nor did they change the way in which housing was provided. Indeed, the pace of informal urbanization quickened and was patently untouched by international financing.

Box 2.5 Housing rights in South Africa

In the final hearing of the Grootboom versus Oostenberg Municipality case, the South African Constitutional Court ruled that it was not for the judiciary to enquire whether better measures could have been adopted to provide adequate housing, but rather to determine whether or not the state had violated the right of access to housing of the people concerned. In determining the ‘reasonableness’ of the measures taken by the state, it is right to take into account the resources it has at its disposal. The constitution does not expect more than the state can afford and felt that its housing programme was, so far, a major achievement and represented a systematic response to a pressing social need. The overall programme was, indeed, aimed at realizing access to housing for all in the long and medium term. However, the court found that the state had neglected the short-term aspect. It was clear that no real policy existed which could be applied to people in need of housing in crisis situations. Apart from the normal channel of applying for low-cost housing, which normally takes years, there was no relief for Mrs Grootboom, her children and her neighbours. There was no provision in any policy, whether national, provincial or local, that applied to her desperate situation. Thus, they ordered that ‘second-best’ facilities, falling short of acceptable housing standards, but nevertheless a basic form of shelter, should be provided for the displaced people. However, this was not to be seen as a licence for people to jump the housing queue by squatting and then litigating for their rights.

Source: UN-Habitat, 2002

Multi-sectoral approaches followed, out of recognition that housing is only one of a group of interlinked sectors affecting the lives of city dwellers. In addition, the importance of the market as a context and a driver of urban development and housing dominated international and many national interventions through the final decade of the 20th century. However, only a few million households have benefited; the majority still have to provide their own housing without assistance from market lenders.

The growth of monitoring tools is probably one of the most important developments in housing finance since it has changed the way in which proposals are viewed. Once, to assist 250 households was sufficient cause for action, no matter what effect it might have on the ability of others to be assisted. With initiatives such as poverty reduction strategy papers (PRSPs) and the Millennium Development Goals (MDGs), targets are visible and can be monitored. Interventions can, therefore, be judged against the larger context, diluting the impressiveness of tightly drawn projects and promoting programmes that are available to a wide spectra of the population.

Similarly, there has been a long-term switch from topdown, imposed projects, in which participation was minimal, to community-led programmes in which people decide how housing finance institutions can help them and lobby for that assistance. This change has been facilitated by the growth of NGOs, through whom large quantities of finance were channelled during the last few years of the 20th century. However, there has also been a recent revival of channelling finance through governments, including local authorities, as an encouragement of, and response to, improvements in transparency and democracy. Chapter 3 turns to a review of recent financing developments at the urban local authority level.


  1   This chapter is based on a draft prepared by Graham Tipple, University of Newcastle upon Tyne, UK.

  2   Harris and Arku, 2004.

  3   Harris and Arku, 2004.

  4   Fry and Drew, 1964; Koenigsberger, 1973.

  5   Abrams, 1964, p60.

  6   The Schokbeton scheme in 1950s Gold Coast stands as a farcical waste of resources abandoned following United Nations advice (Abrams, 1964), although the dwellings built still stand.

  7   Schumacher, 1973.

  8   Hart, 1973; ILO, 1972.

  9   Harris and Arku, 2004.

10   Turner, 1968, 1972, 1976.

11   Burgess, 1982;Ward, 1982; Burgess, 1985.

12   For a discussion of the way in which central and local government in Zambia moved from being in the forefront of positive attitudes towards squatter settlements and their upgrading to having a negative view of the informal-sector built environment only a decade later, see Kasongo and Tipple, 1990.

13   Tipple, 1988.

14   Malpezzi et al, 1990; Malpezzi and Ball, 1991.

15   Kessides, 1997.

16   UN, 1976.

17   Kim, 1997.

18   Pugh, 1995.

19   Turner, 1967, 1972.

20   Kessides, 1997.

21   Kessides, 1997.

22   As observed by Martin (1983), one of the main reasons for employing skilled workers was to improve the quality of construction and, therefore, the status of its owner.

23   Keare, 1983.

24   Keare, 1983.

25   Laquian, 1983b.

26   Laquian, 1983b.

27   Jiminez, 1982.

28   Buckley and Mayo, 1989.

29   Kessides, 1997.

30   This is a reasonably consistent finding in work in Ghana over 20 years, and in work on userinitiated extension activities in several countries. See Tipple et al, 1999;Tipple, 2000.

31   Rakodi and Lloyd-Jones, 2002.

32   Gilbert, 2000; Napier et al, 2003.

33   Tipple, 1994.

34   Martin, 1983.

35   Renaud, 1999, p759.

36   This, however, might have much less effect in developing countries where few homeowners consider selling (Gilbert, 1999) than it would have in an industrialized country with a lively market in housing.

37   For example, Keare and Parris (1982), World Bank (1983) and numerous papers and reports emanating from the research team in the Infrastructure and Urban Department – for example, see Malpezzi and Ball, 1991.

38   For example, Laquian, 1983a; Skinner and Roddell, 1983; Rodwin and Sanyal, 1987.

39   Pugh, 2001, p409.

40   Pugh, 2001, p410.

41   Buckley, 1999.

42   Pugh, 1995.

43   Pugh, 1995.

44   World Bank, 1993.

45   Pugh, 2001.

46   The argument that housing construction is economically productive has been well made in earlier United Nations documents, especially UNCHS and the International Labour Organization (ILO) (UNCHS/ILO, 1995), and in other literature (for example, Tipple, 1995).

47   World Bank, 1993.

48   World Bank, 1993.

49   Pugh, 1997.

50   Including the first Global Report on Human Settlements 1986 (UNCHS, 1987).

51   Pugh, 1997.

52   Pugh, 2001, p410.

53   UNCHS, 1987.

54   Pugh, 2001.

55   World Bank, 1993, 1991.

56   Pugh, 2001.

57   UNCHS, 1993, 1997, 1998; Porio, 1998

58   WCED, 1987.

59   For example, by Whittington et al, 1990.

60   DFID, 2004a.

61   Pugh, 2001.

62   Pugh, 2001.

63   UNCHS, 1990a.

64   Pugh, 2001.

65   UNCHS, 1996a.

66   UN, 1992.

67   UN, 1995b.

68   UN, 1995a.

69   UN, 1996b.

70   UN, 2001a.

71   UNCHS, 1990b, pp18–19.

72   UNCHS, 1990b.

73   Too many institutions who have given subsidies have been fatally damaged by this largesse, often imposed upon them by government.

74   UNCHS, 1990b.

75   McAuslan, 1997.

76   In Bamako, Mali; Cuenca, Ecuador; Colombo, Sri Lanka; Johannesburg, South Africa; Santo Andre, Brazil; Shenyang, China; and Tunis, Tunisia.

77   Pugh, 2001.

78   Cities Alliance, 2000.

79   Pugh, 2001.

80   These may require group guarantees where foreclosure procedures are weak.

81   World Bank, 1993.

82   World Bank, 1989.

83   World Bank, 1993, 1991.

84   Renaud, 1984.

85   Renaud, 1999.

86   Pugh, 2001.

87   Connolly, cited in UNCHS, 2001.

88   Tucker and Tomlinson, 2000.

89   Kim, 1997.

90   Especially those specializing in high-value niche markets.

91   Tucker and Tomlinson, 2000.

92   Nell et al, 2004.

93   Indeed, SDI was one of the most influential voices in organizing and hosting the Meeting of the World Urban Forum in Nairobi in 2002 and in Barcelona in 2004.

94   UN, 1948.

95   UN, 1987.

96   UN, 1993, para 31.

97   UN, 1996b, para 8.

98   UN, 1966, Article 2 (1).

99   UN-Habitat, 2002, p21.

100   UN-Habitat, 2002.

101   Kabir, 2002.

102   Republic of South Africa, 1996, Article 26.

103   Grootboom versus Oostenberg Municipality, which became Government of South Africa versus Grootboom 2000 (11) BCLR 1169 (CC).