As public policy in many countries stipulates that households should finance their own on-site sanitation facilities, the question of facilitating access to finance for upfront costs (and in some cases, maintenance costs as well) is pressing. In this presentation, Sophie Trémolet looks at the role of public intervention including donor agencies) to stimulate the market of microfinance for sanitation.

1. MICROFINANCE FOR SANITATION
WHY IS IT NEEDED? WHERE HAS IT WORKED?
HOW CAN PUBLIC FUNDERS GET INVOLVED?
1
Mari
SOPHIE TREMOLET, DAR ES SALAAM, 16TH MAY 2014

2. Introduction
2
 Objectives
 Take stock of where we are in terms of using microfinance
for sanitation and identify needs for public funding
 Presentation overview
 The sanitation crisis
 What do we know about the need for and the role of
microfinance for sanitation (and water)?
 Where has it worked and how?
 What are potential benefits and opportunities for
funders?

3. The sanitation crisis
3

4. The sanitation crisis in numbers
4
 Sanitation MDG is seriously off-track
 2.6 billion without access to improved sanitation facilities
 In contexts where sewerage coverage is very limited (e.g. SSA), burden of
investment falls on households
 Sanitation is a cost-effective intervention: CBR 9 (WHO, 2007)
 Moving to SDGs: more investment will be needed to deliver sustainable
services (including downstream parts of the sanitation value chain)
 The example of 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 (WSP ESI)
 Estimated investment needs to increase access to improved sanitation
 USD 225 million a year to meet sanitation MDG (WSP CSO)
 78% of investments expected to come from households

5. What is needed?
5

6. Microfinance in the “sanitation mix”
6
 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

7. Defining a financing strategy
Communities with:
• Low hygiene awareness
• High open defecation
ODF
Behaviour change
Software support
Sanitation marketing
Microfinance
Improved sanitation
Partial coverage
Targeted subsidies Improved
sanitation
Full coverage
Public investments
Sustainable
sanitation

8. How microfinance can help?
8
 Help households invest in on-site sanitation
 Help spread the cost of investment over manageable period
 Enable construction of more durable latrines: likely to be
much cheaper over time
 Not income generating per se but income-enhancing
 Help sanitation businesses grow their activities
 Invest in equipment and mobilize working capital
 Income-generating, which can potentially be very substantial
 See: “these guys are extremely liquid!” on
http://vimeo.com/58465787

9. What do we know?
 Limited documented evidence until relatively recently but
a clear surge in interest in recent years
 RCT study in Indonesia funded by WSP: limited “access to
credit” is a key constraint preventing households from
investing in improved sanitation
 RCT in Cambodia (Id Insights):
 30 groups, randomly assigned to “cash” vs “credit” payment
 Offering MF loans for latrines dramatically increased uptake
of latrines (12% to 50% WTP),
 Reduced distribution costs per latrine sold (70% reduction in
distribution costs due to higher sales per village visit)

10. Research undertaken through SHARE
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 SHARE (Sanitation and Hygiene Applied Research for Equity)
 A £10mn 5-year research programme on sanitation funded by DFID and led by LSHTM
(2010-2015)
 Four main research themes, one on “sanitation markets”
 Research activities on sanitation microfinance
 Scoping study (including literature review)
 Case studies in India & Kenya (retrospective) and Tanzania (prospective)
 “Small-scale finance report” (EUWI/SHARE publication) on how to channel
donor funds to stimulate microfinance for watsan
 Ongoing “action-research” activity in Tanzania supporting MFIs & NGOs to
develop sanitation microfinance products (Nov 2013-Nov 2014)
 Undertaken jointly with MicroSave and WaterAid
 Set up Sanitation Microfinance working group (SanFin-Tz)
 Trained 8 institutions (4 MFIs, 4 NGOs) on market research for developing sanitation
microfinance products (January 2014)
 Supporting 3 institutions (ECFLOF, Tujijenge and CCI) to develop and market test
products over several months
 Extracting learning: What was the uptake? How did MFIs perform? Is it possible to
scale up and under what conditions?

11. Where has it worked?
11

12. Vietnam Sanitation Revolving Fund
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 SRF component in WB-financed sanitation project (2001)
 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
 Helped 200,000 households access sanitation in 7 years
 100% repayment rate
 Leveraged private funds: up to 25 times the public funds
provided initially
 Since been rolled out through Vietnam Bank for Social Policy

13. Leading market: India
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 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
 Market development supported by international programmes:
WaterCredit (water.org) or FINISH (Dutch-funded partnership)
 Many organisations started off as NGOs, but have set up
separate microfinance organisations or have initiated the process
 Repayment rates have consistently been very high (above 98%
and frequently at 100%)

14. Case study: Guardian (as of 2011)
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 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)

15. More limited experiences in Tanzania
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 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 (MAMADO with SDC support, CCI
with funding from Homeless International)

16. Identified potential applications
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17. Key players supporting MF
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 NGOs promoting microfinance
 Water.org (US-based)
 WaterCredit programme, funded by various foundations
 “Smart subsidies” in India, Kenya, Uganda
 Recent toolkits on water & sanitation microfinance
 Water for People (US-based)
 Sanitation as a Business (SaaB) programme, funded by BMGF
 Recent publication on their experiences (Bolivia, Guatemala, India,
Malawi, Peru, Rwanda and Uganda) - 6783 loans in total (6470
loans in India, 211 in Malawi)
 Eau Vive in Senegal (recent publication with AESN & FARM)
 Bilateral donors: DGIS (FINISH), DFID, SIDA (CLIFF)

18. Benefits for funders: leveraging!
18
18
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Software support per solution
Hardware subsidy per solution
Average household investment per solution
Sanitation financing model
0
5
10
15
20
25
Leverage ratio
$ private money invested/
$ public funds spent
Source: Trémolet, Kolsky & Perez (2010) for WSP
Sanitation revolving fund

19. What role can public funders play?
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 Potentially substantial untapped demand but market
remains small – public support/funding is justified
 First priority: kick start a market response
1. Identify financing needs of “small-scale actors”
2. Identify and support the partners that can roll-out microfinance and
the type of support they need in the context of an overall
approach to promote sanitation
3. Identify channels to provide such support
 Second priority: grow the market sustainably
1. Establish support structures to share experiences, knowledge and
lobby for policy changes
2. Support existing or create new financial institutions at national level
(e.g. Apex Bank in Ghana would receive funding from EIB/BMGF
under SAWiSTRA programme also funded by AFD)
3. Support overall reforms of the financial system

20. Identify adequate partners
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 Preferable to work with established financial institutions,
including MFIs, commercial banks or NGOs with strong
microfinance experience
 Do they have a number of key elements in place?
 Branch networks & 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
 What they need:
 Support for market research, product development for water and
sanitation
 Establish partnerships with institutions providing other elements of
the “sanitation support” approach (e.g. demand promotion)
 Access to credit at favourable terms to help them prioritise
sanitation and water lending

21. Assistance to MFIs is context-dependent
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 NGOs (e.g. water.org) can rely on “smart subsidies”
when overall financial infrastructure provide
adequate support to finance “social sectors”
Example: different financial models in India
SHG Bank Linkage Programme (SBLP) Priority lending for Commercial banks
SHG
NGO
Commercial
Bank
NABARD
JLG
MFI
Commercial
Bank

22. How to channel funding?
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23. Further information
sophie@tremolet.com
Sanitation financing papers on:
http://www.tremolet.com/focus-area/266
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http://www.shareresearch.org/Page/Detail/markets