Microcredit for water supply and sanitation

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Microcredit for water supply and sanitation is the application of microcredit to provide loans to small enterprises and households in order to increase access to an improved water source and sanitation in developing countries. While most investments in water supply and sanitation infrastructure are financed by the public sector, current investment levels are insufficient to achieve universal access. Commercial credit to public utilities is limited by low tariffs and insufficient cost recovery. Microcredits are a complementary or alternative approach to allow the poor to gain access to water supply and sanitation [1][2] Funding is either provided to small-scale independent water providers who generate an income stream from selling water or to households in order to finance house connections, plumbing installations in their houses, or various forms of on-site sanitation such as latrines. Many microfinance institutions still have only limited experience with financing investments in water supply and sanitation.[3] While there have been many pilot projects in both urban and rural areas, just a small number have been scaled up.[4][5] Individual credits are repaid in part through cost-savings as a result of having a water connection which can significantly lower a family’s average water expenditures, if it previously had to rely on much more expensive water sold by water vendors. Water credits can also generate additional income by spending time for productive purposes that was previously spent fetching water. Investments in sanitation provide health benefits that can also translate into more time available for productive work.[6]

According to a study of microfinance in water supply and sanitation published in 2008, there are three types of microcredit products in the water sector across urban and rural areas:[3]

  • Microcredits aiming to improve access to water supply and sanitation at household level,
  • Credits for small and medium enterprises for small water supply investments, and
  • Credits for urban services upgrading and shared facilities in low income areas.

Since the last type of credits has apparently not been used widely, this article is limited to the first two types of credits for water supply and sanitation.

Household credits for water and sanitation[edit]

Microcredits can be targeted specifically at water and sanitation, or general purpose microcredits are simply used for water and sanitation. In both cases, microcredits are typically used to finance household water and sewerage connections, bathrooms, toilets, latrines, rainwater harvesting tanks or water purifiers. They range from 30 to 250 USD with a tenure of generally less than three years.

Microfinance institutions such as the Grameen Bank, the Vietnam Bank for Social Policies and numerous microfinance institutions in India and Kenya, offer credits to individuals for water and sanitation facilities. NGOs that are not microfinance institutions, such as Dustha Shasthya Kendra (DSK) in Bangladesh or Community Integrated Development Initiatives in Uganda, also provide credits for water supply and sanitation. The potential market size is considered huge in both rural and urban areas and some of these water and sanitation schemes have achieved a significant scale. Nevertheless, compared to the microfinance institution’s overall size, they still play a minor role.[3] In 1999, all microfinance institutions in Bangladesh and more recently in Vietnam had reached only about 9 percent and 2.4 percent of rural households respectively. In both countries, the water and sanitation portfolio amounts to less than two percent of the microfinance institution’s portfolio in total. However, borrowers for water supply and sanitation comprised 30 percent of total borrowers for Grameen Bank and 10 percent of total borrowers from Vietnam Bank for Social Policies. For instance, the water and sanitation portfolio of the Indian microfinance institution SEWA Bank comprised 15 percent of all loans provided in the city of Admedabad over a period of five years.

WaterCredit: Creating Water and Sanitation Portfolios for Microfinance Institutions[edit]

The US-based NGO, Water.org, through its WaterCredit initiative, supports microfinance institutions and NGOs in India, Bangladesh, Kenya and Uganda in providing microcredit for water supply and sanitation since 2003. As of 2011 it has helped its 13 partner organizations to make 51,000 credits. The organization claims a 97% repayment rate and says that 90% of its borrowers are women.[7] WaterCredit does not subsidize interest rates and typically does not make microcredits directly. Instead, it connects microfinance institutions with water and sanitation NGOs to develop water and sanitation microcredits, including through market assessments and capacity building. Only in exceptional cases it provides guarantees, standy letters of credit or the initial capital to establish a revolving fund managed by an NGO that has not been engaged in microcredit previously.[6]

Indonesia: Expanding customer base through cooperation[edit]

Since 2003 the Bank Rakyat Indonesia financed water connections with the water utility PDAM through microcredits with support from the USAID Environmental Services Program. According to an impact assessment conducted in 2005, the program helped the utility to increase its customer base by 40% which reduced its costs per cubic meter of water sold by 42% and to reduce its non-revenue water 56.5% in 2002 to 36% percent at the end of 2004.[8]

Vietnam: Sanitation Revolving Fund managed by the Women’s Union[edit]

In 1999, the World Bank in cooperation with the governments of Australia, Finland and Denmark supported the creation of a Sanitation Revolving Fund with an initial working capital of USD 3 million. The project was carried out in the cities of Danang, Haiphong and Quang Ninh. The aim was to provide small loans (USD 145) to low-income and poor households for targeted sanitation investments such as septic tanks, urine diverting/composting latrines or sewer connections. Households willing to participate needed to join a savings and credit group of 12 to 20 people. Members of those groups were required to live near to each other to ensure community control. The loans had a catalyst effect for household investment. With loans covering approximately two thirds of investment costs, households had to find complementary sources of finance (from family and friends). In contrast to a centralized, supply-driven approach, where government institutions design a project with little community consultation and no capacity building for the community, this approach was strictly demand driven and thus required the Sanitation Revolving Fund to develop awareness raising campaigns for sanitation. Managed by the microfinance-experienced Women’s Union of Vietnam, the Sanitation Revolving Fund gave 200.000 households the opportunity to finance and build sanitation facilities over a period of seven years. With a leverage effect of up to 25 times the amount of public spending on household investment and repayment rates of almost 100 percent, the fund is seen as a best practice example by its financiers. In 2009 it was considered to be scaled up with further support of the World Bank and the Vietnam Bank for Social Policies.[9]

Small and medium enterprise (SME) loans for water and sanitation[edit]

SME-type loans are used for investments by community groups, for private providers in greenfield contexts or for rehabilitation measures of water supply and sanitation. Supplied by mature microfinance institutions, these loans are seen as suitable for other suppliers in the value chain such as pit latrine emptiers and tanker suppliers. With the right frame conditions such as a solid policy environment and clear institutional relationships, there is a market potential for small-scale water supply projects.

In comparison to retail loans on the household level, the experience with loan products for SME is fairly limited. These loan programs remain mostly at pilot level. However, the design of some recent projects using microcredits for community-based service providers in some African countries (such as those of the K-Rep Bank in Kenya and Togo) shows a sustainable expansion potential. In the case of Kenya’s K-Rep Bank, the Water and Sanitation Program, which facilitated the project, is already exploring a countrywide scaling up.

Kenya: K-Rep Bank finances community water projects[edit]

Kenya has numerous community-managed small water enterprises. The Water and Sanitation Program (WSP) has launched an initiative to use microcredits to promote these enterprises. As part of this initiative, the commercial microfinance bank K-Rep Bank provides loans to 21 community-managed water projects. The Global Partnership on Output-based Aid (GPOBA) supports the programme by providing partial subsidies. Every project is pre-financed with a credit of up to 80 percent of the project costs (in average USD 80.000). After an independent verification process, certifying a successful completion, a part of the loan is refinanced by a 40 percent Output-based Aid subsidy. The remaining loan repayments have to be generated from water revenues. In addition, technical assistance grants are provided to assist with the project development.

Togo: Microcredits for the productive use of rainwater-harvesting tanks and shallow boreholes[edit]

In Togo, CREPA (Centre Regional pour l’Eau Potable et L’Assainissement à Faible Côut) was encouraging the liberalisation of water services in 2001. As a consequence, six domestic microfinance institutions were preparing microcredit scheme for a shallow borehole (3000 USD) or rainwater-harvesting tank (1000 USD) for at least two households from a certain area. The loans are originally dedicated to households, which act as small private provider selling water in bulk or in buckets. However the funds are directly disbursed to the private (drilling) companies. In the period from 2001 to 2006, roughly 1200 water points were built and are hence used for small business activities by the households participated in that programme.[citation needed]

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