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MICROFINANCE FOR SANITATION WHY IS IT NEEDED? WHERE HAS IT WORKED? HOW CAN PUBLIC FUNDERS GET INVOLVED? 1 Mari SOPHIE TREMOLET, DAR ES SALAAM, 16 TH MAY 2014
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Microfinance for sanitation: how can public funders get involved?

Dec 20, 2014

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Economy & Finance

SanFin-Tz

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.
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Page 1: Microfinance for sanitation: how can public funders get involved?

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MICROFINANCE FOR SANITATION

WHY IS IT NEEDED? WHERE HAS IT WORKED?HOW CAN PUBLIC FUNDERS GET INVOLVED?

Mari

SOPHIE TREMOLET, DAR ES SALAAM, 16TH MAY 2014

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Introduction

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?

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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 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

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What is needed?

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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

Page 7: Microfinance for sanitation: how can public funders get involved?

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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How microfinance can help?

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

Page 9: Microfinance for sanitation: how can public funders get involved?

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)

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Research undertaken through SHARE

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?

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Where has it worked?

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Vietnam Sanitation Revolving Fund

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

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Leading market: 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

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%)

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

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Identified potential applications

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Key players supporting MF

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)

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Benefits for funders: leveraging!

18

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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What role can public funders play?

Potentially substantial untapped demand but market remains small – public support/funding is justified

First priority: kick start a market response1. 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

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Identify adequate partners

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

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Assistance to MFIs is context-dependent

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

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How to channel funding?

Page 23: Microfinance for sanitation: how can public funders get involved?

23 Further information [email protected]

Sanitation financing papers on: http://www.tremolet.com/focus-area/266

http://www.shareresearch.org/Page/Detail/markets