Case study 1: Securing commercial loans – the Sisal Saving scheme

In 2007, the leaders of Sisal Saving Scheme approached AMT and asked for assistance to purchase a 23-acre plot of land in Mukuru, at a price of KSh 81 million (US$ 777,600). The land had been used by its current owners as security for a loan issued by Eco Bank. Unfortunately, the corporation that owned the land had failed to repay its loan and was now attempting to forestall the bank’s sale by selling the land to settle its debts.

Given the high cost of the land, AMT challenged the leaders to mobilize at least 2,000 savers and to raise at least 20 per cent of the purchase price. Within three months, the group mobilized about 500 savers, who in turn saved about KSh 6 million (US$ 57,600). The Mukuru savings group leaders continued to actively recruit savers to the scheme, and eventually the group had 2,200 members with very robust savings.

Once the group saved the 20 per cent cash collateral, AMT sought to raise the remaining amount to purchase the land. As the trust did not have sufficient funds, AMT’s only viable option was to approach commercial banks for a loan. The banks proved very keen and were impressed by the excellent savings history of the Mukuru group savers. Each bank requested the group to transfer its savings account and to deposit the members’ savings with them. The banks also offered the savers micro loans to improve their businesses.

However, none of the banks was willing to issue a loan to AMT for the purchase of the land. This was because:

• Banks were wary of transacting business with a large group of slum dwellers, due to perceived organizational risks of dealing with such a large group. The banks proposed instead that the members be organized into small groups of five, which could then receive individual loans directly.
• The banks did not have products for large, middle- or long-term loans for low-income earners. The only loan product available for the poor was a short-term micro loan, for business or livelihoods purposes.
• The banks indicated that they could not use the Mukuru land as collateral, as the reputational risk was too high in the event of a default leading to a forced sale. Consequently, AMT as the borrower would have had to secure any loan issued with a cash guarantee and a charge over the land (additional pledged security). Despite these impediments, AMT eventually obtained a five-year loan for KSh 55 million (US$ 528,000) from Eco Bank, which already held the mortgage on the land in question. A condition of the loan was that AMT would secure the property with a charge, and further provide the bank with a cash collateral of KSh 24 million (US$ 230,400), which the bank would hold in lieu in an interest-earning account. The interest on the loan was agreed at the base rate plus 1.5 points. At the time, the bank base rate was 15 per cent a year.

About a year into the loan, the base rate had risen to a staggering 25 per cent. This created a real risk of default for the Sisal Saving Scheme. In response, AMT negotiated for the bank to use the cash guarantee as part of the loan repayment. This, together with the savings from the group, enabled AMT to complete
its loan repayment before the loan completion period. This experience underscored the importance of negotiating creative and mutually satisfactory strategies to reduce financial risk.

Case study 2: Greenfield housing development – the Nakuru West network

The Nakuru West Network was created in 2002 and has 612 members organized into eight large savings groups. About two-thirds of the members are female market traders who work in the same locality. Almost all the members are tenants who rent poor-quality, temporary houses in nearby informal settlements. On average, members from the networks earn monthly incomes of KSh 13,000 (US$ 124.80). The average rent for a single-room house was KSh 3,000 (US$ 28.80) per month as of 2016, which had increased from KSh 1,000 (US$ 9.60) only three years prior.

The savings groups had a strong credit history with AMT: over two years, they received KSh 4.5 million (US$ 45,000) in consolidated small livelihood loans. These small loans have helped the members of the Nakuru West Network to increase their earnings, strengthen their systems, and build their confidence to take on bigger projects such as the purchase of land and the construction of houses.

To date, the Nakuru West Network has used members’ savings to buy 8 acres of land for 230 members. When members of a group decide to purchase land, they inform their network. A committee is then selected to scout and identify suitable land. After a search of the title has been conducted, the interested members visit the land and decide whether they are comfortable relocating to the area. If the members are happy with the site, the network project committee is given the mandate to negotiate the purchase price and verify the authenticity of the title (with the help of the AMT officer serving the group). In order to ensure affordability, the groups ordinarily ensure that an individual plot will not cost more than KSh 62,400 (US$ 599).

The parcels of land bought by the network are acquired in phases due to the lack of sufficient capital to accommodate all the savers at the same time. Priority is ordinarily given to those members who have saved enough money to complete their portion of the purchase while the rest continue to save for the next phase. After purchase, the network hires a surveyor, who demarcates the land based on its acreage and the number of beneficiaries who have contributed to the purchase.

Once the network purchases land, plots of equal size are then carved from the original title. The groups work with various professionals to envisage their new neighbourhood and determine what type of house they can afford. These discussions determine the design of the houses. The members of the Nakuru
West Network opted for two-bedroom homes of 63.6 square metres. Procurement and construction are overseen by a project team elected by the network, which must source at least three quotations for each item. A separate team is responsible for auditing the project.

The Nakuru West Network has worked with Muungano to construct 52 houses for its members. The savers are required to raise 20 per cent as cash collateral, while the remainder is financed through low- interest loans from AMT. The houses are developed incrementally to reduce the amounts of individual loans. The minimum requirement is that the loan must cover the costs of a foundation and at least one room, so that the saver’s family can relocate to its own house, thus freeing it from paying rent.

This incremental approach means that housing loan repayments are relatively low, ranging from KSh 100,000 to KSh 250,000 (US$ 960 to US$ 2,400). The repayment for a KSh 100,000 loan is relatively low at KSh 1,413 per month. Repayment rates of the Nakuru Network housing loans are presently about 85 per cent. The construction of these initial houses has created great demand from other members working hard to save money for new houses.

Case study 3: Upgrading informal settlements – the Ghetto Housing and Land cooperative

The informal settlement of Ghetto is situated on public land in Huruma, in Nairobi County. It has a population of about 550 households. Most of the adult residents of Ghetto are low-income earners who own and operate small-scale businesses. Some of these residents are organized into the Ghetto Housing and Land Cooperative. Many joined the group in 2000 when Muungano was mobilizing residents of Huruma informal settlements who were faced with the threat of eviction. Muungano eventually succeeded in stopping the evictions.

As a response to poor living conditions and the constant threat of eviction, the residents of Ghetto decided to come together with their counterparts in other informal settlements to lobby the county government to upgrade their settlements. In 2003, Ghetto was one of six informal settlements that were set aside for upgrading by the city government. The county government entered into a memorandum of understanding with the residents, in which it consented to release the land to the residents free of charge. For their part, the residents agreed to redevelop the area with the assistance of professionals.

Construction began in 2011 and so far 34 units and 6 foundations have been constructed. The project will eventually benefit 500 households. Before they can secure a housing loan, the beneficiary must be an active participant of the savings group (i.e. attend meetings and save regularly), their household must have been enumerated, and they must have saved 20 per cent of the cost of the house. A major impediment
to housing provision has been the low savings rates (a function of low incomes), making it difficult for households to raise the 20 per cent cash collateral. A second impediment has been those whose housing arrangements differ from most residents: structure owners with lots of rooms for rent, who typically want more than one house during the upgrading process; people from outside Ghetto who buy structures in the settlement for the sole purpose of renting them out; and temporary residents such as short-term tenants. Persuasion and negotiation with these groups, encouraging them to adopt the housing arrangements envisioned under the MoU, is an ongoing activity.

Housing development in Ghetto is carried out in manageable phases of between 20 and 50 units. Like the savers of the Nakuru West Network, the residents of Ghetto work closely with a team of professionals to develop their house design and settlement layout. The typical house design chosen by Ghetto residents is ordinarily incrementally built in three phases. The first phase of construction is normally a starter unit that comprises a ground floor with a shower and toilet on the upper floor. The ground floor space has a footprint of 19.36 square metres and is commonly used as a kitchenette and living area. The total floor space of the starter house is 22.5 square metres. In order to accelerate housing provision, the project teams have moved from constructing starter houses that cost KSh 250,000 (US$ 2,400) to building foundations only, which cost KSh 60,000 (US$ 576). The 20 per cent deposits for foundations are accordingly lower and more achievable.

Ghetto will also benefit from the Kenya Informal Settlements Improvement Programme (KISIP), which will develop secondary infrastructure that will enable the residents to install lane services and then connect their newly constructed homes to the water and sewerage mains. Electricity connections will also be supplied by the government through a World Bank-financed project. These organizations are still determining how the initial upgrading plans and the new KISIP developments will fit together.