Microfinance for water and sanitation: lofty dream or wave of the future?
water and microfinance

By Katya Jenkins,

Microfinance Focus, May 30, 2011: The microfinance sector is certainly not short of innovative thinkers, who should be applauded for their determination to use microfinance as a diverse tool that can do more than just increase a household’s income.  The latest craze in the creative use of microfinance as a generator of positive externalities is the use of microcredit for the provision of clean water.

The idea is to provide individuals and households in the developing world with microcredit services that would allow them to access desperately needed clean water and safe sanitation, while simultaneously providing them with an opportunity to increase income generation.  These microloans are generally deemed to be non-productive “consumption” loans, not unlike microloans for housing; however, in some cases the potential exists to finance clean water microenterprises, in which clients could, for example, launch micro businesses to sell clean water to fellow poor villagers.

WaterCredit, an initiative of Water.org, recently launched the new WaterCredit.org website, which presents a tempting vision of the answers to all the world’s problems wrapped up in a neat little package. This certainly wouldn’t be the first time that the microfinance sector birthed an ingenious idea that was able to wield microfinance as a tool to alleviate a poverty-stricken community from ills from which it has suffered for centuries. But before we invest our life savings in this nascent idea, one question remains to be asked: is microfinance for water and sanitation just too idealistic?

Why Water and Sanitation?

The microfinance for water and sanitation initiative has important fundamental goals. The need for clean water distribution systems remains daunting; that fact is indisputable.  The data speaks for itself: the report from WHO and UNICEF on the Progress on Sanitation and Drinking-Water – 2010 Update explains that 13% of the global population or 884 million people – 37% of whom live in Sub–Saharan Africa – still use unimproved sources for drinking water.

The question is how to go about fulfilling this need.  The microfinance for water and sanitation concept is worth exploring because, to begin with, international aid is not providing and likely will not provide the necessary funds to establish clean water infrastructure the world over. There has to be a more sustainable option if we want to fulfill this universal need, and an option that can channel funds where they are needed faster than bureaucratically slow official development aid.  And since – according to the 2007 publication from The Netherlands Water Partnership (NWP) and The International Water and Sanitation Centre (IRC), Microfinance for Water, Sanitation and Hygiene: An Introduction – “often municipalities are not allowed to access credit because of the legal framework or because they cannot obtain a credit rating,” downscaling to the individual or community level provides an opportunity for sustainable financing that doesn’t exist at the municipal level, while simultaneously liberating communities from government corruption, inefficiency and instability.

Another important observation made by Water.org is that women and children in many poor regions of the world waste hours of productive time every day fetching water from the sources that are available to them, which are often up to a day’s hike away. So the theory behind its microfinance for water and sanitation initiative is this: provide these individuals and families with access to clean water and they can use their productive hours, well, producing. Along with other sources of income and cost savings, the opportunity for previously impossible economic enterprise will allow them to pay back the loan.
Also worth noting is that poor health is a frequent cause of loan default, as Freedom from Hunger and many others report.  Clean water is essential to good health, and therefore essential to economic growth and poverty reduction.

Microfinance for water and sanitation may also make possible the distribution of clean water to poor communities at a fraction of the cost they’re paying now. Global data shows that the poor often pay much higher prices for water than their wealthier counterparts; Water.org explains that “on average, urban slum dwellers pay 12 times more for a liter of water than those connected to municipal water supply systems.” If MFIs can partner either with businesses providing cheap, small-scale clean water technology (usually in the case of rural areas) or with local utility companies that can facilitate the laying of water connections in per-urban areas – or even with water microenterprises owned by clients themselves – who can manage to sell their products at a reasonable rate, they could create a win-win situation that could drastically change the health and wellness reality of their villages forever.

Major Challenges

As beneficial as widespread microfinance for water and sanitation could be, there are some potentially significant barriers to its implementation that would occur to any critical thinker. What are some of the major challenges to success for microfinance for water and sanitation? To begin with, providing peri-urban areas with clean water in a reliable and sustainable way often requires the establishment of sophisticated infrastructure. Clearly, this kind of construction can be costly, and therefore typically ill-suited for the traditional microcredit products, which are characterized by very small sums directed towards individual microenterprise (that is to say, that even if the loan is received through group lending, the individual is ultimately responsible for operating her own business and paying back her own loan). The burden of debt for large scale projects like this would be more than an individual could handle, and represents more single-investment risk than an MFI is typically willing to bear.

According to the NWP/IRC publication, “in Lomé, the capital of the West African country Togo, microfinance is used to facilitate the implementation of household water points, using shallow boreholes and rainwater harvesting tanks. These cost US$ 3,000 and US$ 1,000 respectively.”  The article goes on to say that in this case, the families that have taken out these loans have no trouble with repayment, but it is safe to assume that this would probably not be the case in all communities, since US$ 3,000 is rarely considered microcredit in Sub-Saharan Africa.

The next thing that comes to mind is that the theory that freeing up productive time will lead to higher incomes may not work out in practice. What about those communities that access unclean water sources close to home? Providing those communities with microfinance for water and sanitation will certainly improve their health, but without adding more productive hours to the day, the borrowers may be unable to repay the loan.  Even within communities that would be gaining productive hours, additional enterprise microloans may be required for them to launch or expand their micro businesses. In the absence of skills training and/or additional loans, these extra productive hours run the risk of going to waste.  Instinct tells us that in the case that the productive hours go to waste and the water system itself generates no income, the poor borrower(s) could even be left worse off than before accepting the loan.

In the case of clean water microenterprise initiatives, it is also worthwhile to consider the reasons behind why water provision services have traditionally been undertaken by governments, and not by private businesses.  The simple answer is that water and sanitation are largely considered to be public goods, to which all people should have equal access.  There are those who worry, as in the case of Philiip Mader In his paper Attempting the Production of Public Goods through Microfinance: the Case of Water and Sanitation, that “microfinance for water and sanitation tackles the symptoms, not causes, of the underprovision of water and sanitation to the poor…Some important collective action problems and larger institutional failings exist which the microfinance loans themselves cannot tackle.”  Mader also expresses his concern that microfinance for water and sanitation may even alienate communities in need from governments that could potentially provide a widespread solution.

Financial performance of these loans is also a concern for MFIs.  Microloans with stringent, short-term conditions and high interest rates very risky; according to the Gates Foundation report Assessing Microfinance for Water and Sanitation, few commercial MFIs will be willing to invest money in such high-risk ventures. Probably even fewer will be patient enough to extend the loan terms so that borrowers will have sufficient time to recover returns on investment. The result is that funding for R&D of these loan products is limited, since socially-focused NGOs with experience in microfinance are likely to be the only entities willing to offer these products without outside incentive, and these are much more limited in their access to financing than commercial MFIs.

Major Opportunities

April Rinne, Water.org’s Director of WaterCredit, has clearly considered these challenges and worked with her team to overcome them.  Despite my initial skepticism as to the viability of these projects, an interview with her has corrected some of these common misconceptions and reassured me with the simplicity that at least one organization has achieved with its model.

WaterCredit seeks out established, sustainable, highly efficient MFIs that are interested in offering loan products focused on the water and sanitation needs of their clients.  Loans may be made to individuals or groups, depending on the MFI’s lending policies, structure and growth plans.  Water.org partners with them, using grants for specific start-up and “software” activities (such as product development, market assessments, and water/sanitation capacity building) throughout the R&D and launch stages to design loan product terms and water supply options that are appropriate for the MFI’s target clientele profile.  WaterCredit loans are offered at sustainable terms, and interest rates are not subsidized.  This allows the MFI to incorporate the new loan product without jeopardizing its financial performance.  After the initial stages of new product incorporation, as the MFI learns more about the water and sanitation sector, its need for grant funding to undertake many activities declines.  In turn, this allows Water.org to move on to partner with other MFIs, thus reaching more people with water and sanitation and achieving greater efficiency with fewer funds.

The end clients under this model form the perfect target market because they can benefit greatly from access to clean water, yet are economically stable enough – due to their micro businesses – to be capable of paying off a “consumption” loan.  The clients’ status as micro business owners ensures that gained productive hours can indeed be used productively.  Rinne also explained that “in many cases, the WaterCredit loan installments the clients pay (for metered water from a household connection) actually cost them less than they would normally pay for water (from a truck or at the ‘water mafia’ price for those without connections).”  This means that for many of these clients, there is no need to even have a productive business in order to gain from these loans; and this is, of course, highly reassuring when considering the unpredictability of life in the developing world.  Either way, a robust ability to pay evaluation is done beforehand to assure that the clients don’t end up ultimately losing from this venture.

It seems like pure fantasy that WaterCredit could facilitate the provision of a loan product for clean water “technology” at such a low cost, but with rainwater tanks for rural areas costing as little as $300, the initiative begins to make sense.  That’s the key – lowering investment in clean water from $3,000 to $300 changes the story entirely.  In order to address these immediate individual needs for clean water, there isn’t necessarily a need for infrastructure, or even for well-drilling.  In peri-urban areas, prices vary greatly for individual connections to existing urban supply systems, but in nearly all cases clients are able to pay off the loan within a year.  And pay they do; the average global WaterCredit repayment rate (since 2006) is 98%.

The Way Ahead

So, yes, there are organizations that are already claiming great success with microfinance for water and sanitation, and there appears to be at least one example of a feasible model with great potential; however, if the 2010 social performance crisis and abundant bad press about abusive microfinance practices have taught us anything, it’s that we can’t assume positive impacts from any initiative simply because it sprang from good intentions, and that successful, sustainable solutions for poverty relief are neither simple nor easy.  Organizations considering launching microfinance for water and sanitation initiatives would be wise to take off the rose-tinted glasses to speculate on the potential for failure, since failure could mean further impoverishment of the “beneficiary” community.  In the case of microloans for water and sanitation, the loans can be larger than usual and the stakes are often higher, so great caution and great care need to be taken when designing programs and selecting target clientele.

The reality is that microcredit for water and sanitation is a different breed of microcredit, and the conditions must be adapted according to its special needs. In order to function properly, a microcredit for water and sanitation product demands to be designed around the specific needs and characteristics of the target clientele – maybe even more than other development projects. When choosing the type of water source, loan terms and supply channels, it is best to start with few assumptions and allow the MFI and its clients to shape the program.

Different locations and operating environments will also have varying levels of compatibility with microfinance for water and sanitation programs. Some will be better suited than others to the incorporation of them. For example, people in communities that do not have well-established MFIs will probably have less potential for microfinance for water and sanitation outreach, compared to those people living in communities with a strong MFI presence, and especially those in which a large amount of productive time can be gained by the convenient provision of clean water. Ease and cost-effectiveness of water sources and related geographic conditions should also be thoroughly studied, along with user-friendliness and maintenance needs.

In some cases, microfinance programs for water and sanitation will also require us to broaden our conception of traditional microcredit procedures, such as when credit for water and sanitation can have the most impact as a loan to a group of people within a community or to a small village.  The Gates Foundation promotes “a broader definition of microfinance that includes small loans to household borrowers, and funding of small projects with loan sizes of less than half a million USD from conventional microfinance providers and other financial sector players on a commercial basis.”  These projects could potentially function through the use of community-based organizations, in which the village is responsible for building and managing the water distribution system, and subsequently for paying back the loan. Successful community-managed insurance schemes could serve as an inspiration for new community-based credit for water and sanitation models. This would allow the village to eventually own the water “company,” to which each family would need to pay a very small utility bill monthly or yearly, to cover maintenance costs.  This community-based model may represent a more promising option for eliminating the cause of lack of water and sanitation provision to which Mader refers, but according to Rinne it has thus far proven quite tricky.

Where there’s a will, there’s a way. Certainly, there are some very innovative and determined NGOs that are motivated to take up the rewarding challenge of microfinance for water and sanitation and arm-wrestle it into submission; however, it will take a united effort, full of brainstorming and trial-and-error, before the kinks can be worked out.  The WaterCredit model is an important step toward addressing immediate water and sanitation needs, but more MFIs will have to be willing to bet on different structures for this innovative initiative to ensure widespread uptake and development of best practices.  The microfinance industry has an opportunity here to restore its good name, and the next few years will reveal whether or not microfinance products for water and sanitation represent an important tool in that process.

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Water credit was introduced

Water credit was introduced by water.org and successfully implemented by Guardian MFI, a sec. 25 company in India. Guardian is exclusively working for water and sanitation loans only and reached around 24000 women clients to have easy access to water and toilet facilities at houisehold level. Iam really proud of being a partner of water.org and water credit is being discussed at global level.

Water credit- not necessarily under microfinance arena

The potential value of micro credit for water and sanitation for the welfare of the poor and vulnerable people is great and no doubt it needs to be encouraged widely.
However there are certain areas of concern which include ‘target client selection with greater caution’ , likely exclusion of most vulnerable (if ineligible) and inequity gap in poverty segment, size of credit and ability to repay, productive utilization of gained productive hour at client level, judging the potential ( geography & water resources) for the water credit project in the given area, inevitable application of commercial business for institutional sustainability, capability of the MFI for undertaking etc.. In this respect this credit for water & sanitation is an unique and different breed in rural credit landscape.
As against the above unique features of the credit product intended for the welfare of the poor on the one hand , and the prevailing Microfinance crisis, caused by multiple borrowing leading to over indebtedness from demand side and multiple lending coupled with over dues from supply side, in an unethical competitive market environ in rural financial landscape , why not we consider the water and sanitation credit under general credit portfolio or priority sector credit portfolio(Indian context) of the commercial banks leaving out from Micro finance arena. When the ultimate purpose will be served irrespective of type of channel or institution for distribution of credit, is it so inevitable to bring this water credit under micro finance concept?
In the last, in Indian context, as per Reserve Bank of India recent guidelines (implementation of Malegam Committee recommendation for Microfinance companies 2011) NBFC-MFI type companies are required to extend 75% of their total loan for income generation activity. Will it be therefore a hurdle in conduiting water credit through such MFIs since water credit may not belong to the loan category of income generation ?

Referring to this articleion

Public goods and communal systems

Thank you for what I can only describe as a well-balanced article, and thank you also for correctly referring to my point about water and sanitation as public goods which defy individualistic interventions. Regrettably, water.org (or WaterPartners at the time) never allowed me to do research on their projects; otherwise I might have been able to check up on the successes which they report and corroborate their success story, if true.

The community-based models which you refer to at the end of your article indeed are more likely to have a real impact, and generally represent a better case for local self-financing. It simply makes more sense to suggest that a remote village establish its own collective system using loan finance, rather than promoting microfinance loans as an expensive stopgap in urban or peri-urban areas where piped systems exist but providers have simply neglected to serve the poor. However, as you correctly point out, the finance needed for communal systems is of a scale which microfinance providers today shy away from, and I don't see that changing as long as institutions focus on repayment rates rather than real impact (or simply equate the two). It might take more old-school real development finance rather than the very primitive MFI system we have today to make that work.

As a last note, you may also wish to point your readers towards the paper by Nadine Reis and Peter Mollinga (2009), which provided the first evidence on what happens when microfinance is used for water and sanitation: http://www.zef.de/staff/823.html. Very instructive.

Re: Public goods and communal systems

Thanks for the extra information, Phil, it was quite helpful. Do you know of any examples of communal system financing for WASH initiatives that have been implemented? I would be interested to learn more.

Re: Public goods and communal systems

With pleasure, Katya, here are some examples. Earlier on in my research I compiled a small database of all those projects using microfinance for water and/or sanitation which I found reported in the literature (donor, mostly). However, many of the projects were just briefly described or introduced in a “case study” box format. Here are the few which had some sort of communal element:

- CLIFF (Community-Led Infrastructure Financing Facility), funded by SIDA and DFID in India, with the aim of "slum upgrading towards community control". Trémolet et al., 2007, 29-30: Innovations in Financing Urban Water & Sanitation. International Water and Sanitation Center, The Hague. (This publication also mentions community based organisations in Kenya doing water works)

- CREPA & SODECI co-operation in Côte d’Ivoire, disbursing loans through a "local committee" from the community (though it is unclear whether some communal infrastructure was set up. Kouassi-Komlan, Évariste, 2007: Microfinance for water and sanitation in a por urban settlement in Abidjan: Case of Koweit, Côte d'ivoire. In: International Water and Sanitation Centre: Case Studies. Innovations in Financing Urban Water & Sanitation.

- DSK & other NGOs' project in Dhaka slum areas, Bangladesh; small-scale project finance over a large number of projects, with some gaining legal status. Kouassi-Komlan, Évariste, 2007: Micro finance institutions facilitate water access to poor households: Lomé, Togo. In: International Water and Sanitation Centre: Case Studies. Innovations in Financing Urban Water & Sanitation.

- “Susu” scheme in Ghana (Bongo District), an "indigenous financial scheme" with credit rings adapted to maintain and operate handpumps, apparently with 100% repayment rate. Agbenorheri, Maxwell/Catarina Fonseca, 2005: Local Financing Mechanisms for Water Supply. Background Report for WELL Briefing Note 16. (The same publication also indicates some SHG water activities in Kerala.)

If it is of any help to you, I can gladly send you the entire "database" of 20 projects/initiatives from 2009. I estimated at the time on that basis that at least 2 million people had been targeted by projects using microfinance for water and sanitation. Regards.

Innovative MF products and solutions

Great article and kudos to Water.org for pursuing this product in the face of so many obstacles. It is clearly not an easy product to adapt to many customers and is definitely going to take a lot of tinkering to be sustainable in the long run.

After all of the bad press the past few months it is a refreshing to hear of new MF initiatives. Especially ones focused on solving such difficult problems faced by many of the world's poor populations.

Thanks for covering the new product and best of luck to the fledgling WaterCredit team!

Vittana Fellow, Mongolia

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