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MICROFINANCE FOR SANITATION

WHY IS IT NEEDED? WHERE HAS IT WORKED?WHAT ARE THE LESSONS?

Mari

SOPHIE TREMOLET, DAR ES SALAAM, 3RD DECEMBER 2013

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Why is it needed?

Sanitation microfinance

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The sanitation crisis

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The sanitation crisis in numbers Sanitation MDG is seriously off-track

2.6 billion without improved sanitation worldwide In Tanzania: 26mn use unsanitary or shared latrines and 5.4mn have

no latrine at all and defecate in the open

This “sanitation crisis” is a significant burden on the economy Tanzania loses 301 billion Tsh/year due to inadequate sanitation Equivalent to USD 5/person/year or 1% of national GDP

Estimated investment needs in Tanzania USD 225 million a year to meet sanitation MDG (WB CSO) 78% of investments expected to come from households More investment will be needed to deliver sustainable services

(including downstream parts of the sanitation value chain) Sanitation is a cost-effective intervention: approximately 9 USD return

for 1 USD of investment (WHO, 2007)

How can households mobilise such sums?

How can microfinance help?

Growing interest in sanitation microfinance Strong demand from national and local governments and international

donors active in the sanitation sector for a greater understanding of how to use microfinance instruments

Several MFIs/Banks/NGOs offering sanitation microfinance products; or apply existing products for sanitation

Gap in knowledge re. role of microfinance Limited documented evidence but solid WSP study in Indonesia shows

that low access to finance was key factor limiting investment Work undertaken with SHARE support:

Scoping study (including literature review) Case studies in India, Tanzania and Kenya “Small-scale finance report” on how to channel donor funding to stimulate

microfinance for water and sanitation In India: Research looked into existing experience in microfinance for

sanitation In Tanzania: Research assessed the potential for the development of

microfinance for sanitation

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Microfinance in the “sanitation mix”

Governments and WASH sector practitioners are working on closing the “sanitation gap” and increase access to sanitation through a mix of approaches:

Demand-side: sanitation promotion Supply-side: sanitation marketing In fewer cases: limited support for access to finance

Microfinance can help mobilise funding to build improved latrines

Different products and schemes likely to be needed according to income groups and ability to borrow

Defining a financing strategy

Communities with:

• Low hygiene awareness

• High open defecation

ODF

Behaviour change Software support

Sanitation marketing

Microfinance Improved sanitationPartial coverage

Targeted subsidies

Improved sanitationFull coverage

Public investments Sustainable

sanitation

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Where has it worked?

Sanitation microfinance

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Case study research: India

Microfinance is a rapidly expanding sector in India, including for sanitation

In 2011, we had identified at least 146,000 toilet loans that enabled at least 730,000 people in India to build household sanitation facilities

Toilet loans are provided by a range of institutions: NGOs, MFIs and non-banking financial companies

Many organisations started off as NGOs, but have set up separate microfinance organisations or are in the process of doing so

Repayment rates have consistently been very high (above 98% and frequently at 100%)

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Case study: Guardian (as of 2011) First “water and sanitation-focused” MFI (spun-off from an NGO,

Gramalaya) operating since 2008 Still small-scale (1 district in Tamil Nadu - India) but growing fast (20,000

loans disbursed over 3 years, 60% for sanitation) Operating in rural areas and urban slums “Toilet loans”: between USD 180 to 225, over 18 months, 18% yearly interest

rate (reducing) + 3% charges Strong demand for toilet loans, 100% repayment rates Recognize can only reach ~ 30-40% population in villages

Financial sources Grant support: ~ USD 165,000 (water.org) – 6% funding Commercial funding: ~ USD 2.6 mn (local commercial bank, social

investors incl. Acumen Fund and Milaap) High “Leverage ratio” (16)

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Case study research: Tanzania Microfinance for sanitation is

underdeveloped mainly because: MFIs have a very limited appreciation of the

financing needs of sanitation sector actors MFI clients are wary of taking on a loan for

sanitation services as these are not seen as income generating and therefore cannot contribute towards repaying the debt

Existing initiatives had limited success They were introduced by NGOs with limited

prior microfinance experience

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Identified potential applications

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What are potential benefits?

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Benefits for subscribers

Households Spreads the cost of investment over manageable period Enables construction of more durable latrines: likely to

be much cheaper over time Not income generating per se but income-enhancing

Small businesses Invest in equipment (e.g. gulper) and mobilize working

capital Income-generating, which can potentially be very

substantial See: “these guys are extremely liquid!” on http

://vimeo.com/58465787

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Benefits for financial institutions

Large untapped market at present: needs are only likely to grow with urbanisation and rising living standard expectations

Aligned with national policy objectives Examples around the world show very

high repayment rates – if implemented by professional organisations

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Benefits to public: leveraging!

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Vietnam

Mah

arash

tra

Moza

mbiq

ue

Banglad

esh

Ecuad

or

Seneg

al0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average household investment per solution Hardware subsidy per solutionSoftware support per solution

Sanitation financing model

Vietnam

Mahara

shtra

Bangladesh

Moza

mbique

Ecuador

Senega

l0

5

10

15

20

25

Leverage ratio $ private money invested/

$ public funds spent

Source: Trémolet, Kolsky & Perez (2010) for WSPSanitation revolving fund

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Vietnam Sanitation Revolving Fund SRF component in WB-financed sanitation project Loans to low-income households to build sanitation

facilities in urban areas Small loans (average USD 145, covering 65% of investment

costs), 24-month period, subsidized interest rate (< 6% yearly)

Managed by well-established MFI (Women’s Union) Savings-and-Credit groups established at neighborhood level WB & other donors contributed USD 3mn in seed financing Tagged to a broader project, with hygiene & demand

promotion

Results Initial capital revolved more than twice in 3 years, then

transferred to local municipality to be revolved further; 100% repayment rate

Leveraged private funds: up to 25 times the public funds provided initially

Extreme poor excluded but alternative solutions considered

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Previous research: conclusions

Potentially substantial untapped demand but market remains small – public support might be justified

How to kick start a market response? Preferable to provide software support to financial

institutions, including MFIs, commercial banks or NGOs with strong microfinance experience

Existing financial institutions already have a number of key elements in place to roll out sanitation microfinance products and collect repayments: network of branches, a trained “sales force”, existing customers who have already formed groups for borrowing and could take on a sanitation loan, systems to assess credit history and track repayment

Sanitation sector should build on these existing experiences and networks

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What type of support is needed?

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How to channel public funding?

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Key outstanding questions

What are key constraints that prevent households from investing in sanitation equipment and facilities? Is access to finance a critical factor or are there others?

What type of microfinance products could help them overcome these constraints: savings products, micro-credit, a combination of both?

What is the potential for combining sanitation financing with housing finance?

How can public programmes be most effective in supporting the development of sanitation microfinance and incorporating microfinance into their own programmes?

How can public funds be best channelled to trigger a market response at scale?

22 Team

sophie@tremolet.comgoufrane@tremolet.com