Micro credit for water supply and sanitation
Encyclopedia
Micro credit for water supply and sanitation is an innovative application of micro credit to provide loans to small enterprises and households in order to increase access to an improved water source
and sanitation
in developing countries. While most investments in water supply and sanitation infrastructure are financed by the public sector, current investment levels are insufficient to achieve universal access or, at the minimum, to reach the Millennium Development Goals related to water supply and sanitation. Commercial credit to public utilities is limited by low tariffs and insufficient cost recovery. Micro credits are a complementary or alternative approach to allow the poor to gain access to water supply and sanitation Funding is either provided to small-scale independent water providers who generate an income stream from selling water or to households in order to finance house connections, plumbing installations in their houses, or various forms of on-site sanitation such as septic tank
s or latrine
s. While they have become increasingly common, many microfinance institutions still have only limited experience with financing investments in water supply and sanitation. While there have been many pilot projects in both urban and rural areas, just a small number have actually been scaled up.
in water supply
and sanitation, there are three types of microcredit products in the water sector across urban and rural areas:
1. Retail loans aiming to improve access to water supply and sanitation at household level,
2. Loans for small and medium enterprises receiving micro credits for small water supply investments and
3. Loans for urban services upgrading and shared facilities in low income areas.
and the Vietnam Bank for Social Policies in South East Asia. In general, these credits are used to finance such things as bathrooms, toilets or water purifiers and range from 30 to 250 USD with a tenure generally less than three years. Although the potential market size is considered as huge in both rural and urban areas and some of these water and sanitation schemes have achieved a significant scale, compared to the microfinance institution’s overall size and scope, they still play a minor role.
In 1999, all microfinance institutions in Bangladesh
and more recent in Vietnam
had reached only about 9 percent and 2.4 percent of rural households respectively. In both countries, the water and sanitation portfolio amounts to less than two percent of the microfinance institution’s portfolio in total. However, borrowers for water supply and sanitation comprised 30 percent of total borrowers for Grameen Bank and 10 percent of total borrowers from Vietnam Bank for Social Policies.
Complementary to targeted micro credits, general purpose loans are increasingly gaining weight, as they are used for water and sanitation activities in India and a number of African countries (e.g. Benin
, Zambia
, and Uganda
). For instance, the water and sanitation portfolio of the Indian microfinance institution SEWA
Bank comprised 15 percent of all loans provided in the city of Admedabad over a period of five years.
Development aid
institutions particularly focused on establishing linkage with local microfinance institutions. USAID for instance, has been actively involved by assisting microfinance institutions in designing micro credit products for the water supply sector in Indonesia
.
Indonesia: Expanding customer base through cooperation
In 2006, the Bank Rakyat Indonesia
signed a Memorandum of Understanding
with the water utility PDAM Tanah to initiate water connections schemes on the basis of micro credits creating a win-win situation. The joint venture with technical support of the USAID Environmental Services Program is planned to be extended to other regions. By 2009, the involved institutions intend to have provided 10.000 households with water connections. According to Metha, the effort has resulted in benefits for the utility, the microfinance institution and for the customers who gained access to water supply. The utility benefited from the expanded customer base and additional water sales as it has helped to reduce its average costs by 42 percent over a period of three years and to reduce its non-revenue water ratio from a percentage of 56,5 in 2002 to 36 percent at the end of 2004. Furthermore, the impact assessment report c both institutions conclude, that the financial cooperation could be extended to finance PDAMS’s need for additional banking services.
Vietnam: Sanitation Revolving Fund managed by the Women’s Union
In 1999, the World Bank
in cooperation with the governments of Australia, Finland and Denmark supported the creation of a Sanitation Revolving Fund with an initial working capital of USD 3 million. The project was carried out in the cities of Danang, Haiphong and Quang Ninh.
The overall aim was to provide small loans (USD 145) to low-income and poor households for targeted sanitation investments such as septic tanks, urine diverting/composting latrines or sewer connections. Households willing to participate needed to join a savings and credit group of 12 to 20 people. Members of those groups were required to live near to each other to ensure community control. The loans had a catalyst effect for household investment. With loans covering approximately two thirds of investment costs, households had to find complementary sources of finance (from family and friends). In contrast to a centralized, supply-driven approach, where government institutions design a project with little community consultation and no capacity building for the community, this approach was strictly demand driven and thus required the Sanitation Revolving Fund to develop awareness raising campaigns for sanitation. Managed by the microfinance-experienced Women’s Union of Vietnam, the Sanitation Revolving Fund gave 200.000 households the opportunity to finance and build sanitation facilities over a period of seven years. With a leverage effect of up to 25 times the amount of public spending on household investment and repayment rates of almost 100 percent, the fund is seen as a best practice example by its financiers and thus considered to be scaled up with further support of the World Bank and the Vietnam Bank for Social Policies.
In comparison to retail loans on the household level, the experience with loan products for SME is fairly limited. These loan programs remain mostly at pilot level. However, the design of some recent projects using micro credits for community-based service providers in some African countries (such as those of the K-Rep Bank in Kenya and Togo) shows a sustainable expansion potential. In the case of Kenya’s K-Rep Bank, the Water and Sanitation Program, which facilitated the project, is already exploring a countrywide scaling up.
Kenya: K-Rep Bank finances community water projects
Kenya
has numerous community-managed small water enterprises. The financial and institutional frame conditions are enhancing the provision of commercial finance. The water and sanitation program in Africa has launched an initiative to use micro credits for the local water and sanitation sector. As part of this initiative, the commercial microfinance bank K-Rep provides loans to 21 community-managed water projects. The Global Partnership on Output-based Aid supports the programme by providing partial subsidies. Every project is pre-financed with a loan up to 80 percent of the project costs (in average USD 80.000). After an independent verification process, certifying a successful completion, a part of the loan is refinanced by a 40 percent Global Partnership on Output-based Aid subsidy. The remaining loan repayments have to be generated from water revenues. In Addition, technical management assistance grants are provided to assist with the project development and to enable the development of market based Business Development Services sector for small water projects. The assistance for further 21 projects have been approved by the Global Partnership on Output-based Aid and the European Union Water Facilities.
Togo: Micro credits for the productive use of rainwater-harvesting tanks and shallow boreholes
In Togo
, CREPA (Centre Regional pour l’Eau Potable et L’Assainissement à Faible Côut) was encouraging the liberalisation of water services in 2001. As a consequence, six domestic micro finance institutions were preparing micro credit scheme for a shallow borehole (3000 USD) or rainwater-harvesting tank (1000 USD) for at least two households from a certain area. The loans are originally dedicated to households, which act as small private provider selling water in bulk or in buckets. However the funds are directly disbursed to the private (drilling) companies. In the period from 2001 to 2006, roughly 1200 water points were built and are hence used for small business activities by the households participated in that programme.
Improved water source
According to the Joint Monitoring Program for Water Supply and Sanitation by the World Health Organization and UNICEF the following are considered as "improved" water sources:* household connections* public standpipes* boreholes* protected dug wells...
and sanitation
Sanitation
Sanitation is the hygienic means of promoting health through prevention of human contact with the hazards of wastes. Hazards can be either physical, microbiological, biological or chemical agents of disease. Wastes that can cause health problems are human and animal feces, solid wastes, domestic...
in developing countries. While most investments in water supply and sanitation infrastructure are financed by the public sector, current investment levels are insufficient to achieve universal access or, at the minimum, to reach the Millennium Development Goals related to water supply and sanitation. Commercial credit to public utilities is limited by low tariffs and insufficient cost recovery. Micro credits are a complementary or alternative approach to allow the poor to gain access to water supply and sanitation Funding is either provided to small-scale independent water providers who generate an income stream from selling water or to households in order to finance house connections, plumbing installations in their houses, or various forms of on-site sanitation such as septic tank
Septic tank
A septic tank is a key component of the septic system, a small-scale sewage treatment system common in areas with no connection to main sewage pipes provided by local governments or private corporations...
s or latrine
Latrine
A latrine is a communal facility containing one or more commonly many toilets which may be simple pit toilets or in the case of the United States Armed Forces any toilet including modern flush toilets...
s. While they have become increasingly common, many microfinance institutions still have only limited experience with financing investments in water supply and sanitation. While there have been many pilot projects in both urban and rural areas, just a small number have actually been scaled up.
Classification
According to an extensive study of microfinanceMicrofinance
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....
in water supply
Water supply
Water supply is the provision of water by public utilities, commercial organisations, community endeavours or by individuals, usually via a system of pumps and pipes...
and sanitation, there are three types of microcredit products in the water sector across urban and rural areas:
1. Retail loans aiming to improve access to water supply and sanitation at household level,
2. Loans for small and medium enterprises receiving micro credits for small water supply investments and
3. Loans for urban services upgrading and shared facilities in low income areas.
Retail loans for household water and sanitation
Retail loans for water and sanitation facilities are being offered to individuals by some large and commonly known microfinance institutions such as the Grameen BankGrameen Bank
The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...
and the Vietnam Bank for Social Policies in South East Asia. In general, these credits are used to finance such things as bathrooms, toilets or water purifiers and range from 30 to 250 USD with a tenure generally less than three years. Although the potential market size is considered as huge in both rural and urban areas and some of these water and sanitation schemes have achieved a significant scale, compared to the microfinance institution’s overall size and scope, they still play a minor role.
In 1999, all microfinance institutions in Bangladesh
Bangladesh
Bangladesh , officially the People's Republic of Bangladesh is a sovereign state located in South Asia. It is bordered by India on all sides except for a small border with Burma to the far southeast and by the Bay of Bengal to the south...
and more recent in Vietnam
Vietnam
Vietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...
had reached only about 9 percent and 2.4 percent of rural households respectively. In both countries, the water and sanitation portfolio amounts to less than two percent of the microfinance institution’s portfolio in total. However, borrowers for water supply and sanitation comprised 30 percent of total borrowers for Grameen Bank and 10 percent of total borrowers from Vietnam Bank for Social Policies.
Complementary to targeted micro credits, general purpose loans are increasingly gaining weight, as they are used for water and sanitation activities in India and a number of African countries (e.g. Benin
Benin
Benin , officially the Republic of Benin, is a country in West Africa. It borders Togo to the west, Nigeria to the east and Burkina Faso and Niger to the north. Its small southern coastline on the Bight of Benin is where a majority of the population is located...
, Zambia
Zambia
Zambia , officially the Republic of Zambia, is a landlocked country in Southern Africa. The neighbouring countries are the Democratic Republic of the Congo to the north, Tanzania to the north-east, Malawi to the east, Mozambique, Zimbabwe, Botswana and Namibia to the south, and Angola to the west....
, and Uganda
Uganda
Uganda , officially the Republic of Uganda, is a landlocked country in East Africa. Uganda is also known as the "Pearl of Africa". It is bordered on the east by Kenya, on the north by South Sudan, on the west by the Democratic Republic of the Congo, on the southwest by Rwanda, and on the south by...
). For instance, the water and sanitation portfolio of the Indian microfinance institution SEWA
SEWA
The Self-Employed Women's Association of India is a trade union for poor, self-employed women workers in India. SEWA was founded in 1972 by the noted Gandhian and civil rights leader Dr Ela Bhatt. SEWA's main office is located in Ahmedabad, Gujarat, and it works in several states of India. SEWA...
Bank comprised 15 percent of all loans provided in the city of Admedabad over a period of five years.
Development aid
Development aid
Development aid or development cooperation is aid given by governments and other agencies to support the economic, environmental, social and political development of developing countries.It is distinguished...
institutions particularly focused on establishing linkage with local microfinance institutions. USAID for instance, has been actively involved by assisting microfinance institutions in designing micro credit products for the water supply sector in Indonesia
Indonesia
Indonesia , officially the Republic of Indonesia , is a country in Southeast Asia and Oceania. Indonesia is an archipelago comprising approximately 13,000 islands. It has 33 provinces with over 238 million people, and is the world's fourth most populous country. Indonesia is a republic, with an...
.
Indonesia: Expanding customer base through cooperation
In 2006, the Bank Rakyat Indonesia
Bank Rakyat Indonesia
Bank Rakyat Indonesia or PT. Bank Rakyat Indonesia , , is one of the larger banks in Indonesia. It specialises in small scale and microfinance style borrowing from and lending to its approximately 30 million retail clients through its over 4,000 branches, units and rural service posts...
signed a Memorandum of Understanding
Memorandum of understanding
A memorandum of understanding is a document describing a bilateral or multilateral agreement between parties. It expresses a convergence of will between the parties, indicating an intended common line of action. It is often used in cases where parties either do not imply a legal commitment or in...
with the water utility PDAM Tanah to initiate water connections schemes on the basis of micro credits creating a win-win situation. The joint venture with technical support of the USAID Environmental Services Program is planned to be extended to other regions. By 2009, the involved institutions intend to have provided 10.000 households with water connections. According to Metha, the effort has resulted in benefits for the utility, the microfinance institution and for the customers who gained access to water supply. The utility benefited from the expanded customer base and additional water sales as it has helped to reduce its average costs by 42 percent over a period of three years and to reduce its non-revenue water ratio from a percentage of 56,5 in 2002 to 36 percent at the end of 2004. Furthermore, the impact assessment report c both institutions conclude, that the financial cooperation could be extended to finance PDAMS’s need for additional banking services.
Vietnam: Sanitation Revolving Fund managed by the Women’s Union
In 1999, the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
in cooperation with the governments of Australia, Finland and Denmark supported the creation of a Sanitation Revolving Fund with an initial working capital of USD 3 million. The project was carried out in the cities of Danang, Haiphong and Quang Ninh.
The overall aim was to provide small loans (USD 145) to low-income and poor households for targeted sanitation investments such as septic tanks, urine diverting/composting latrines or sewer connections. Households willing to participate needed to join a savings and credit group of 12 to 20 people. Members of those groups were required to live near to each other to ensure community control. The loans had a catalyst effect for household investment. With loans covering approximately two thirds of investment costs, households had to find complementary sources of finance (from family and friends). In contrast to a centralized, supply-driven approach, where government institutions design a project with little community consultation and no capacity building for the community, this approach was strictly demand driven and thus required the Sanitation Revolving Fund to develop awareness raising campaigns for sanitation. Managed by the microfinance-experienced Women’s Union of Vietnam, the Sanitation Revolving Fund gave 200.000 households the opportunity to finance and build sanitation facilities over a period of seven years. With a leverage effect of up to 25 times the amount of public spending on household investment and repayment rates of almost 100 percent, the fund is seen as a best practice example by its financiers and thus considered to be scaled up with further support of the World Bank and the Vietnam Bank for Social Policies.
Small and medium enterprise (SME) loans for water and sanitation
SME-type loans are used for investments by community groups, for private providers in greenfield contexts or for rehabilitation measures of water supply and sanitation. Supplied by mature microfinance institutions, these loans are seen as suitable for other suppliers in the value chain such as pit latrine emptiers and tanker suppliers. With the right frame conditions such as a solid policy environment and clear institutional relationships, there is a market potential for small-scale water supply projects.In comparison to retail loans on the household level, the experience with loan products for SME is fairly limited. These loan programs remain mostly at pilot level. However, the design of some recent projects using micro credits for community-based service providers in some African countries (such as those of the K-Rep Bank in Kenya and Togo) shows a sustainable expansion potential. In the case of Kenya’s K-Rep Bank, the Water and Sanitation Program, which facilitated the project, is already exploring a countrywide scaling up.
Kenya: K-Rep Bank finances community water projects
Kenya
Kenya
Kenya , officially known as the Republic of Kenya, is a country in East Africa that lies on the equator, with the Indian Ocean to its south-east...
has numerous community-managed small water enterprises. The financial and institutional frame conditions are enhancing the provision of commercial finance. The water and sanitation program in Africa has launched an initiative to use micro credits for the local water and sanitation sector. As part of this initiative, the commercial microfinance bank K-Rep provides loans to 21 community-managed water projects. The Global Partnership on Output-based Aid supports the programme by providing partial subsidies. Every project is pre-financed with a loan up to 80 percent of the project costs (in average USD 80.000). After an independent verification process, certifying a successful completion, a part of the loan is refinanced by a 40 percent Global Partnership on Output-based Aid subsidy. The remaining loan repayments have to be generated from water revenues. In Addition, technical management assistance grants are provided to assist with the project development and to enable the development of market based Business Development Services sector for small water projects. The assistance for further 21 projects have been approved by the Global Partnership on Output-based Aid and the European Union Water Facilities.
Togo: Micro credits for the productive use of rainwater-harvesting tanks and shallow boreholes
In Togo
Togo
Togo, officially the Togolese Republic , is a country in West Africa bordered by Ghana to the west, Benin to the east and Burkina Faso to the north. It extends south to the Gulf of Guinea, on which the capital Lomé is located. Togo covers an area of approximately with a population of approximately...
, CREPA (Centre Regional pour l’Eau Potable et L’Assainissement à Faible Côut) was encouraging the liberalisation of water services in 2001. As a consequence, six domestic micro finance institutions were preparing micro credit scheme for a shallow borehole (3000 USD) or rainwater-harvesting tank (1000 USD) for at least two households from a certain area. The loans are originally dedicated to households, which act as small private provider selling water in bulk or in buckets. However the funds are directly disbursed to the private (drilling) companies. In the period from 2001 to 2006, roughly 1200 water points were built and are hence used for small business activities by the households participated in that programme.