At the Skoll World Forum in Oxford in March, the main subject of debate was how to make more resources accessible for development. The general view was that neither government money nor philanthropy alone could provide the necessary resources to address poverty. Many philanthropists and social business leaders – mainly from the North, with some of us from the South – debated how to expand these possibilities. Caroline Hartnell and I had dinner together on one of those two days and shared our reflections.
About six years ago, I said, we at SPARC (Society for the Promotion of Area Resource Centres) realized that as we began to be successful in obtaining land, communities wanted to be directly involved in the construction of housing and other infrastructure for themselves. Since SPARC is a trust and could not manage property or borrow money under charity law without the permission of the Charity Commissioner, we formed a separate Section 25 non-profit company called Nirman (SSNS).
Before we set up Nirman (SSNS), we had experience in constructing our first two housing projects and we realized then that we needed to borrow money from the banks. In the first instance, since we had no demonstrable experience of borrowing, we had to get a 100 per cent guarantee from a European NGO called Selavip to back up the loan. Then, in 1998, Citibank approved a loan of $2 million with a guarantee of 20 per cent from Homeless International, a grantmaker that has supported the work of SPARC since 1987. As we began to move into seeking loans, they began to develop resources that could provide sterling guarantees to assist their southern partners. Today they support many others to get local currency loans apart from SPARC – and Nirman (SSNS).
Bridging the finance gap
In 1999-2001 Shack Dwellers International (SDI) and Homeless International undertook a research project called Bridging the Finance Gap which examined the practices of federations from various countries in Asia and Africa that were seeking to undertake construction. Among the various very interesting findings, the study showed that guarantees alone could not provide the resources that were needed, because in fact the money was lent only after 20 per cent of the construction was done. In other words, there had to be some capital to start with for construction to begin.
Out of this came the concept of CLIFF (Community Led Infrastructure Financing Facility), into which the UK Department for International Development (DfID) put £6.8 million and SIDA put 20 million Swedish Krona. This was channelled through Cities Alliance, a World Bank trust fund based in Washington DC that seeks to explore scalable city-wide solutions for slums, and managed by Homeless International. Nirman (SSNS) became the first southern institution to be given a large capital grant.
Bigger players needed
Until last year, 2005-06, Homeless International continued to provide guarantees to Nirman (SSNS) to complement the CLIFF initiative. But as the number of construction projects undertaken by Nirman (SSNS) began to grow, and project volumes increased, it became increasingly clear that unless we began to involve bigger players – for example bilateral donors that are working on banking policies and sector-linked finance issues and leading local banks – this process of construction by community-led organizations would not be able to go to any great scale. Besides, by getting more banks and more agencies giving guarantees, other organizations could hopefully be drawn into this process.
To begin with, we went to ICICI Bank and asked them to give us a loan. We also asked USAID, which is one of the bilateral agencies involved in Cities Alliance, to provide us with the necessary 25 per cent guarantee. ICICI warned us that USAID, like all large organizations, has a due diligence process it must go through to provide a loan guarantee, which on average takes three to four months. Homeless International therefore agreed to step in temporarily if the USAID guarantee was delayed.
The longer term
So as I write this account of how we have now got loans from five Indian banks for projects that range from $1.5 million to $20 million, my thoughts return to the Skoll World Forum.
In the longer term, the idea is that SPARC/National Slum Dwellers Federation (NSDF)/Mahila Milan will demonstrate that they are perfectly able to handle a loan and the banks will get used to the idea of lending to community organizations and the guarantees will no longer be necessary. As access to funds increases, more organizations will enter the field of housing for the poor – an urgently needed development since there is presently very little housing being built for the poor in cities in India, and probably elsewhere. Hardly any NGOs are working in this area in urban India, no loans are available to those who work in the informal sector, and slum upgrading does not get done by the city or the private developers. What is really needed is for the communities of the poor to take this on, but to kick-start the process we need NGOs to activate and systematize it and banks to finance it.
It has become clear to us that unless we draw institutions like USAID and financial intermediaries, and the financial institutions themselves, into a working relationship with the poor to find large-scale solutions for the financing needs of community and housing improvements, all the tangles that restrict access to resources will never actually become visible.
For me, the important point here is that the demand is coming from the South and SPARC/NSDF/Mahila Milan, as always, are asking for exactly what they need in the way they need it. Very few community organizations get to make such demands, and even fewer have any takers for them.
One possible danger with the various schemes presented at the Skoll Forum seems to me to be that they are led by the suppliers of finance, largely based in the North, and that the southern demand side is not at the table discussing how things need to be structured.
Being new to forums like the Skoll event, I see many things to explore, but I am still unclear about how we can engage those with resources to further broaden what we have begun to do, and to explore the real challenge of what we all have to do to get more institutions like ours to make demands.
1 See Alliance Online (June articles) for a report on the Skoll World Forum.
Sheela Patel is Director of SPARC. Email email@example.com
USAID and loan guarantees
USAID is not a lender but shares risk through partial guarantees (through a mechanism called the Development Credit Authority, or DCA guarantee) to a private financial institution. The aim is to break down market barriers that prevent access to finance for underserved sectors that are inaccurately assessed by financial institutions as being too risky or not profitable.
DCA guarantees have been used in over 100 different initiatives, from small enterprise loans to microfinance for poor communities, to housing and services for low-income people. USAID country missions work with partners to identify and design transactions that serve development needs; an office staffed with financial experts in Washington undertakes the credit assessment of the financial institution and the borrower.