Encouraging a microfinance and WASH nexus to support a sustainable COVID-19 recovery
How can we bring traditional water, sanitation and hygiene interventions together with microfinance approaches to support low-income households to gain sustainable services? WaterAid Bangladesh's Country Director and former Head of Programmes discuss, sharing their experience of piloting a micro-WASH-finance scheme.
Microfinance and WASH (water, sanitation and hygiene) may not seem the most compatible match. Hardcore providers of WASH through development interventions have advocated access to WASH as fundamental rights, often to be provided through grant support or subsidy (full or partial) for low-income households. In their view, low-income households should not have to directly invest in WASH via an interest-bearing loan at market rate.
Contrastingly, microfinance has typically helped low-income households address shocks such as family emergencies or income loss, and provided access to capital for initiatives or small enterprises such as selling groceries, poultry keeping or cow rearing via financial products, such as loans, with affordable terms. And microcredit is viewed as a special kind of financial intermediation, not grant-based charity. The gulf between the two approaches has seemingly deterred either side from exploring the benefits of successfully bringing them together.
Looking at microfinance and WASH as complementary
A solution could be sought by amalgamating the two without altering their goals. While inclusive microfinance should continue supporting deprived communities with innovative financial services for WASH, WASH providers can scope a workable exit plan for people to sustain the hardware and safe practices after the grants. This sustainability remains a challenge for WASH projects.
Conventional WASH projects have mostly focused on hardware interventions, which are simply one-time capital investments. Operation and maintenance has been limited to community user groups or management committees, without sustainable means of financing. As a result, we often see that when taps and toilets stop working after a project is over the community tends to wait for external assistance even for minor repairs, as they have been used to that support for years. This lack of functional ownership and dependent attitude poses the big question: how do we ensure long-term sustainability?
Critical analysis of our approaches and others' improves design
One criticism of the development sector is that we do not share our failures often and honestly enough, and often reinvent wheels, leaving the true picture of design and implementation unseen. It is high time for us to end these practices and see what worked and what did not, how to build on past failures or successes, and take a critical view of our current delivery approaches.
Our consideration of microfinance stemmed from critically analysing our own work. Two key areas drew the most attention: long-term sustainability of WASH facilities in communities; and poor quality of latrine superstructures installed by households. The first reflects a gap in the flow of institutional financing mechanisms, beyond formation of user groups or management committees. As economic development progresses, changing lifestyles mean people have less time to participate in community groups and there is a tendency towards individual ownership of assets and access to services. Some serious rethinking was therefore required for such social contracting arrangements, which had been based mostly on semi-formal cooperation. The latter issue was simply linked to needing to create demand for high-quality superstructures, with financing mechanisms for construction by individual households.
This analysis encouraged us to look carefully at alternative WASH financing approaches and to rethink our strategy. From the beginning we have been careful to capitalise on the strengths of both microfinance and WASH: the community mobilisation and demand creation skills of conventional WASH practitioners; and microfinance professionals’ skills of financial appraisal and efficient management of financial instruments.
From analysing other organisations’ experiences, we noted that mixing these two distinct skills and having them delivered by the same individual has not been a successful strategy. If you ask a microfinance loan officer to motivate communities investing in WASH superstructure you are not making the best use of his or her specialised skills for implementing a financial scheme. And you should not expect frontline WASH promotion agents to perform efficiently as credit officers, at least not without rigorous training.
As both sets of specialised skills are available in communities, we think it is better for each to do their own job and bring them under a common project. At the same time, we did not want to distort the prevailing market rates for micro-finance loan products (20–25% per year), considering sustainability beyond project period, or the microfinance institution (MFI) would not be able to cover its operations costs without subsidy from donors.
Our project to improve WASH with microfinance
We partnered with SKS and ESDO to design and pilot a simple and scalable micro-WASH-finance (MWF) project in Gaibandha, Thakurgaon and Panchagar districts to improve WASH facilities for rural communities through microfinancing. The design involved participation of both microfinance and WASH clusters of SKS and ESDO, to capture skills around WASH technologies, community mobilisation and demand creation, and protocols for loan appraisal and administration. We set a break-even target of 21 months, after which the scheme should be able to continue without subsidy.
In designing the scheme we took lessons from existing diverse types of loans offered by MFIs, such as consumer loan, education loan and emergency loan – many of which do not generate immediate financial returns, as do typical business loans. We invited the MFI wings of SKS and ESDO to lead design and implementation, in partnership with their WASH counterparts.
We developed the MWF scheme with two integral components: a loan product for WASH infrastructure as capital investment; and savings to cover operation and maintenance and small repair expenses. The role of the WASH counterpart was to create demand for WASH infrastructure among the community. Once any household became interested in installing a WASH facility, the WASH counterpart would introduce them to the MF team at the nearest branch office.
The household was then required to enroll in the regular nearby microfinance group and remain a regular member. They must then maintain a deposit account with the MFI, after which they would soon become eligible for applying for a WASH loan, along with other loan facilities. The WASH NGO provides technical assistance to guide the client on the technology, but the client must manage the loan.
Clear division of roles between MFI and NGO
What is unique in the design of our MWF scheme is the clear demarcation of roles between MFI and NGO (in this case under the same umbrella management of SKS and ESDO). The NGO’s role was demand creation, technical assistance and follow up; the MFI unit was responsible for financial appraisal, loan disbursement and recovery. This was the unique feature of our model in the first phase – each cluster doing the task they are specialised in.
When we rolled out the project, WaterAid provided the funding to cover the MFIs’ operational deficit during the scheme, with additional staff for demand creation, compensating for the lower revenue generated from WASH loans, which were below average loan size for MFIs. MFIs provided the loan fund from their own sources and were responsible for covering administrative costs from the revenue earned through service charges. There was a deliberate effort to not distort operational norms of MFIs by reducing the service charge for the loan, to promote long-term sustainability. More than 90% of the financing for MWF scheme over two years was contributed by the MFI. The remaining portion came from the operational subsidy, which was to be no longer required after the two-year break-even goal.
The results of the pilot phase were encouraging, so, as we entered the second phase, we relaxed the conditionality of the credit component to allow clients to use some of the loan for purposes other than construction of toilets or water points. This enabled the MFIs to offer more attractive loan products for WASH without compromising their average loan size. The option to use the loan for multiple purposes also served as an incentive for clients where access to affordable financial services was a challenge for poorer communities. The result was an encouraging recovery rate above 99%.
Mainstreaming micro-WASH-finance and including the poorest
Having been inspired by the experience of our MWF pilots, in Bangladesh we are considering a gradual mainstreaming of MWF components in our strategic planning and programme design. There is, however, a limitation to our current design – the standard financial package is still not suitable for those living in extreme poverty. This segment of poor communities needs special attention, with subsidised schemes. When designing WASH projects for the poorest people, we need to explore the scope for incorporating smart subsidies by creating multiple links with public and market augmenting schemes, thus facilitating a ‘graduation’ from extreme poverty.
Is MWF appropriate for most, if not all, MFIs in Bangladesh? What are the challenges? A joint study by the World Bank Group and Water.org (PDF) in 2015 found that the risk associated with WASH products is similar to that of regular loan products, with a repayment rate of over 99%.
It is changing mindsets of MFIs and ‘WASHwalas’ (WASH promotion agents) that is important. The hesitation is often mutual – MFIs hesitate to downscale their loans for apparently non-productive purposes such as WASH, while NGOs have historically perceived such facilities as basic rights of citizens and therefore the responsibility of duty-bearers and donor communities to provide.
However, these notions are gradually changing. Our experience shows that encouraging outcomes for low-income communities can come from a strategic partnership between MFIs and WASH NGOs, with each focusing on their specific capabilities. In fact, another possible approach for MFI-led WASH financing that can derive even greater success is a dedicated WASH wing within the organisation, especially in less remote locations.
Collaboration and integration in the new normal post-COVID-19
In the new normal of a post-COVID-19 world, the financial and development sectors must both realign their strategic intents. People are more conscious than ever of the importance of health and hand hygiene, and there is a dire need for running water or handwashing facilities in every household and community, to enable people to protect themselves and others from the pandemic.
Rapid hygiene promotion at unprecedented scale across Bangladesh has created an opportunity for MFIs to address the growing demand for financing WASH products and facilities in communities. WASH NGOs can complement this through innovations in efficient design of WASH commodities, building technical capacities of local WASH entrepreneurs and facilitating business links with MFIs.
Microfinance is rooted in the economy of Bangladesh – there are more than 750 registered MFIs, and, in 2017, about 27 million active microfinance borrowers with loans totaling about US$7,897 million and deposit balances more than $5,038 million. With innovative and continual improvement of financial packages, microfinance has established itself as a powerful means for contributing to sustainable development and women’s empowerment for underdeveloped economies. Now it is critically important to strengthen engagement of MFIs in reviving Bangladesh’s economy post-COVID.
MFIs have the legacy of supporting the recovery of local economies with savings, emergency loans, credit shield and short-term financing for housing after natural disasters. It is time for them to incorporate the agenda of improving health and hygiene through inclusive WASH into their longstanding agenda of addressing poverty. WASH-MFI links must be furthered, to prepare ourselves for the new normal landscape of development strategy, financing and delivery.
Hasin Jahan is Country Director at WaterAid Bangladesh and Hossain I. Adib is Head of Programme Implementation at Practical Action, Bangladesh Country Office (and former Head of Programmes at WaterAid Bangladesh).