Food, housing, education and healthcare are crucial for an adequate standard of living, but protecting the right to these necessities is different from protecting the right to free speech. In most instances, the courts and other legal mechanisms are simply not up to the job.
Market-based solutions are a proven and financially sustainable alternative. Although they are no panacea, they should be part of the broader portfolio of solutions, along with government programs, international aid, and domestic philanthropy.
Market-based solutions give low-income people better access to socially beneficial products and services that improve quality of life and livelihoods. In India, such solutions provide or enable clean drinking water; private education in urban slums; safe, doctor-attended births; and more.
The most successful of these market-based solutions pass two tests: they are self-funding, and they operate at sufficient scale to make a difference to a large number of people.
Flickr/Didi (Some rights reserved)
Decrepit apartments in Mumbai, India. Decent low-income urban housing is not available in urban India, nor is the necessary credit to access them.
Consider India, the example we know best. Like other emerging economies, India has grown economically since the 1990s while moving away from the welfare state model. The fruits of economic growth, however, are not distributed equally. As a result, India today has a thriving market for the upper and middle classes, but much less for the poor. Although the poor may have mobile phones, they are typically unable to access the goods and services that produce long-term improvements in their quality of life, such as education, health, and housing. The government operates a plethora of welfare schemes, but these are neither effective nor sufficient.
Since 2006, our group, Monitor Inclusive Markets (MIM), has promoted low-income housing in urban India. Our target audience is families earning between 10,000 and 25,000 rupees per month, or 165 to 420 USD. Most rent housing in low-income neighborhoods that are overcrowded, have poor sanitation, and lack many basic services.
And yet, most of these families aspire to live in - and can often afford to pay market rates for – homes of 250-400 square feet in the suburbs. The problem is that decent, low-income urban housing is not available, nor is the necessary credit to access them. Real estate developers don’t have incentives to build such housing, and financiers don’t have incentives to support construction and mortgages.
Supported by the World Bank, the Michael & Susan Dell Foundation, and the United Kingdom’s Department for International Development (DFID), MIM developed an innovative and commercially attractive business model to satisfy this demand. Our initial analysis revealed a strong business opportunity to build and sell high-quality, purpose-built apartments to low-income households. But there was no interest from large developers, since the return from serving the rich were much higher.
We kept promoting the idea, spoke to over 600 developers, and worked with an architect to plan and construct a show flat in Mumbai. When a smaller developer in the city of Ahmedabad finally showed interest in 2008, we helped them to select a site, refine their plans and pricing, and even sign up customers in local factories. Then, by working with established Indian developers such as Foliage and Mahindra, as well as new players such as Jerry Rao of VBHC, we encouraged more developers to get involved.
Since many of our target customers were in the informal sector with no formal proof of income, banks and traditional housing finance companies would not serve them. In 2009, we started promoting a new housing finance model that assesses applicants’ creditworthiness through in-home visits. Our agents meet with applicants and their families to ask about informal income flows, spending patterns, and existing assets.
We incubated a new company led by former senior banking executives, Micro Housing Finance Company, to pioneer this new model. We also helped an established player, the Muthoot Pappachan Group, start a mortgage company for our target customers.
Today, over 10 mortgage companies serve customers from the informal labor market, making a typical return on investment of 1-2%. Prior to our innovation, these had access only to short term credit at rates of 18-24%, which they could not use to buy a home. The new finance companies we helped create provide long term credit over roughly 15 years, at about 14%, which is only slightly higher than the 11% banks offer to formal sector customers.
By 2011, we were working with a number of large Indian industrial conglomerates to set up low-income housing businesses. We grew increasingly concerned, however, about the regulatory obstacles facing these developers, including cumbersome approval processes that mire new projects in bureaucracy for years. With rising land prices, these delays made it difficult to achieve commercial returns while remaining focused on low-income customers. We thus began working with government at all levels, helping to develop effective guidelines and cut the red tape.
The most successful market-based solutions pass two tests: they are self-funding, and they operate at sufficient scale to make a difference to a large number of people. We also kept in touch with customers to see if their new houses, and the credit they received, were working for them. We were keen to identify unintended consequences and feed lessons learned back to the industry, so that major problems could be averted.
As of 2013, more than 80,000 low-cost housing units had been sold by various developers across 23 cities in India, and over INR ~1000 crore [$167 million USD] had been issued in loans to low-income, informal sector customers through 10 housing finance companies.
We realize, however, that most market-based solutions to poverty are still operating at small scale. MIM’s analysis of over 439 social enterprises in Africa, for example, showed that only 13% were commercially viable and had reached, or were on their way to reaching, significant scale.
To accelerate and scale up these market-based solutions, we must understand, and figure out how to remove, the barriers. Some firms, for example, want to deliver new pharmaceutical products to rural areas at low cost, but cannot do so because there are no cost-effective logistics providers, or insufficient numbers of doctors and pharmacists. Other firms, to take another example, want to supply clean cookstoves to low-income customers, but the latter don’t fully realize the health hazards of indoor cooking smoke. These barriers can and should be overcome, but it will take time, thought, and energy.
Market-based solutions must be part of the global conversation on social justice. They are not the only solution, but they can – and already do – provide crucial services to the developing world’s underserved billions.
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