What businesses and communities want from sanitation microfinance
What do we still need to know to make microfinance work for water and sanitation? Rémi Kaupp, Urban Sanitation and Resilience Advisor at WaterAid UK, reflects on the issue from business, provider and community views.
At this year’s World Water Week, I took part in a panel organised by Water.org, to discuss ‘the state of the evidence base for WASH microfinance’, or, in other words: what do we still need to know to make microfinance work for water and sanitation? Other panellists included Sophie Trémolet (World Bank), Chris Dunston (Hilton Foundation) and Deborah Foy (Opportunity International).
The questions from the audience were useful to gauge what can worry investors (for example, duration to recover loans, which impacts can be expected). But I wanted to bring other views, specifically from those using microfinance, based on feedback I have seen and heard previously. Each of these points of view has led us to questions warranting further exploration.
1. The business view: is this the right kind of money?
We have seen water, sanitation and hygiene (WASH) businesses, like the sludge-emptying entrepreneurs in Dar es Salaam, using microfinance loans to expand their business, for instance to purchase new equipment and cover wider areas. In fact, we found that loans from established microfinance providers, despite having a much higher interest rate, were more desirable and more effective than bank loans (which were too inflexible) and loans from a revolving fund we had created (which had a long repayment period).
And yet, loans are not usually the best way to support an emerging business: start-ups need seed capital, initial investments, and investors ready to share some of the risk. Current funding usually includes NGO grants with heavy reporting requirements, and loans which prevent hopping over the ‘valley of death’. As I have written before: “As a rule of thumb, if you have heard about a sanitation ‘business’, it is likely to be heavily subsidised, which doesn’t reflect the dreams of a ‘Sanitation Silicon Valley’”. The recent ‘Toilet Accelerator’ of the Toilet Board Coalition goes some way to address this gap.
2. The provider view: how can WASH be sexy?
Another type of WASH loans is those made available to households so that they can purchase a water connection or a toilet. It has often been difficult to convince microfinance institutions to provide such loans: they are bigger than many small business loans, but won’t increase the borrower’s income in the short term, and therefore are perceived as more risky. In addition, it is harder to repossess a toilet or a water point than a home, so WASH loans offer less security for the lender.
The question is therefore: how can we make WASH loans more attractive? Several innovations are promising. For instance, our partner WaterSHED in Cambodia, already at the forefront of toilet marketing, is now selling the Paradise Shelter, a flat-pack toilet superstructure that can be installed quickly at a lower price than usual structures, and can also be repossessed quickly if a borrower defaults on their loan.
Another booming area is container-based sanitation, whereby residents pay a small upfront cost to install a toilet with a replaceable container, and then pay a small regular fee to have it hygienically emptied when needed. This model of ‘sanitation as a service’ is growing steadily in Kenya, in Haiti, in Ghana and in Madagascar. The lower initial cost makes it much easier for households to take on the loan and for lenders to invest.
3. The community view: is it just about WASH?
I previously worked closely with Slum Dwellers International, a network of slum dwellers, and the Asian Coalition for Housing Rights, a network of community-led organisations working on urban poverty. One of the insights I learnt from them was that WASH is crucial, but “in the end it’s just another bit of infrastructure”; they have used community funds and city-level funds to provide micro-loans to poor residents, who undertook a range of improvements, such as garbage removal, transport, toilets, road paving, home improvements…
In their view, ‘WASH’ is not a separate undertaking but a part of wider home improvements or public realm works. It is therefore counter-productive to have distinct ‘WASH loans’ that restrict borrowers; in their experience, it is more useful to provide home improvement loans, for instance. This runs counter to the wishes of WASH NGOs like us, who want to focus efforts on a single issue – but this is not the reality of urban life.
Focusing on a single issue also hides an inconvenient truth: improving basic infrastructure in informal and often illegal settlements is not neutral, it is a political statement, often the first step towards securing tenure. Slum dweller organisations have understood this, and see their funds and microfinance as tools to create community action and communal improvements. Loans specifically for WASH risk fragmenting this action.
And always: equity
One final worry for me is how microfinance only helps the ‘working poor’, who have sufficient income to reimburse a loan. We need to do better for poorer families – for instance the inspiring BRAC WASH programme combines loans with subsidies for the poorest. We recently reviewed how subsidies can be smarter and we still need to find creative ways to make sanitation affordable for the poorest.