Microfinance for Sanitation

Learnings from experiences with microfinance in water and sanitation schemes

This paper tackles the integration of microfinance into water and sanitation projects. It states that using microfinance to support small scale enterprise has had impressive results however the use of microfinance for water and sanitation provision remains a fairly new idea. It gives case studies from low-cost sanitation, Lesotho; Co-operative Housing Foundation, Honduras; self help provision of family toilets, Yogyakarta, Indonesia; Strategic Sanitation Programme, Kumasi, Ghana; Mvula Trust, South Africa; Sulabh International, India; and Orangi slum sanitation in Karachi, Pakistan.

From these examples the paper sees that key factors for successful microcredit for sanitation are that:

  • The local market for sanitation facilities needs to be developed. This demand may already exist and can be brought out or generated through an effective promotion scheme;
  • Sanitation can be seen as part of an overall shelter improvement package;
  • It is essential to use appropriate and affordable technology;
  • Technical support and help with contracts are attractive and much appreciated characteristics of any sanitation scheme;
  • It is advisable to provide a variety of different sanitation options to meet the specific needs of individuals.

The paper also sees that some general rules from microfinance are applicable to water and sanitation schemes. These show that:

  • The credit scheme should be based upon market research of locally based demand, appropriate financial and accounting systems, thorough understanding of the borrower and intermediary capabilities;
  • Interest rates need to be based on the cost of funds, administration and labour costs, loan loss allowances, margin for inflation and a return on capital. Cost recovery is central to the financing mechanisms used as in this way a sustainable financial system is achieved;
  • The aims of the MFIs need to be clearly defined. Where credit is just a sideline to other activities there is a danger that financial rules won't be so strictly enforced;
  • Loan administration and collection systems need to be simple;
  • Government agencies are often inappropriate vehicles for delivering either sustainable credit services or water and sanitation services. Government should have a regulating role;
  • MFIs work best in a stable financial environment;
  • Donors should not be allowed to set disbursement targets as this serves to distort market.