Katya Jenkins reviews “the latest craze in the creative use of microfinance” – the use of microcredit for the provision of clean water and sanitation – in Microfinance Focus. After examining a number of challenges facing microfinance for water and sanitation, she presents WaterCredit, an initiative of Water.org, as an example of a feasible model with high potential.
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.
Jenkins identifies several challenges to the widespread use microfinance for water and sanitation, including costly infrastructure in peri-urban areas and repayment problems if time savings resulting from better access to water are not converted into (sufficient) income generating activities.
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.
The Gates Foundation report Assessing Microfinance for Water and Sanitation, suggests that:
few commercial MFIs will be willing to invest money in such high-risk ventures [and 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.
WaterCredit seeks to tackle the above-mentioned challenges by working with established, sustainable, highly efficient MFIs that can provide loan products for water and sanitation options that meet the needs of their clients. Water.org provides grants for start-up and “software” activities such as product development, market assessments, and water/sanitation capacity building.
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.
As most clients are micro business owners, this ensures that time savings can be converted into extra income. In many cases, clients even pay less for their new metered household connection, than they previously had to pay to private water suppliers.
Jenkins conclusion is that:
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.
Source: Katya Jenkins, Microfinance Focus, 30 May 2011