Dear Mr. Christoph,

This has different aspect, in that, it is aimed to learn from the experience of other members, whether microfinance caused problems in sanitation sector.

Thank you,

F H Mughal

Dear Mr. Mughal,
I am sure you remember that we had a discussion about microfinance lately in this forum.
I did not get the point why discussing it again on another thread, as you took part in the discussion and as you are a very clear sistematic thinker for in my perspective, I thought I may have missed an additional aspect.
Could you explain?
Thank you.
Christoph

This was also discussed in last month's "Sanitation as a business" conference here in Kampala, with some apparently successful microfinance institutions present. I hope the proceedings will be available soon.

In general the debate is around "consumptive" vs. "productive" loans, where sanitation is clearly a consumptive one and thus usually not considered a good choice by MFIs.

Personally I also think that there needs to be a debate around "dedicated" MFIs, i.e. those banking only institutions that have been build up with donor funds and do nothing but microfinance. I think this leads to unnecessarily high overhead costs and profit "optimizations" that ultimately counteract the very idea of MFIs (and let them appear not much different than the exploitative money lenders they were seeking to replace originally).
If microfinance is coupled to a real business though, lets say an agricultural input and produce trader, it can be done with much lower overhead costs and partially even at a loss if the company deems it to be beneficial in the medium to long term (and if it can be offset by other profits).

The same logic can apply to microfinance in sanitation. The entrepreneur who builds the toilet can much more efficiently offer a loan for it and later collect the payments together with regular service charges. I think this should work especially well with UDDTs as they need to be emptied more regularly.

An good idea to start this could be (government) subsidized loan insurances though, which would make it easier for such entrepreneurs to calculate the risks involved and which could be used for a "pro poor" approach permanently.

In the report: “State of the World 2013 – Is Sustainability is Still Possible?” I came across an interesting note by Doug Satre (Box 17-1). Tracing the history briefly on microfinance, Doug says that currently there are an estimated 500 million microsavings accounts around the world. Many providers aimed to make microfinance profitable, allowing it to attract investor capital and thus achieve greater scale. The microfinance industry has exploded to include over 1,000 institutions serving an estimated 85 million clients.

While Doug’s discussion is in the context of sustainable agriculture, it is a fact there is significant growth of microfinance institutions. This is also valid for Pakistan. However, microfinance in sanitation sector has not picked up the pace, as yet, in the Sindh province of Pakistan, primarily due to low priority for sanitation.

Here is the interesting part of Doug’s write-up. He says that after an initial burst of wild enthusiasm, there is now a growing debate about the effectiveness of these credit mechanisms as tool for ending poverty. This is especially true where the focus on scalability has caused lending institutions to neglect impoverished rural populations. The farmers who can take out loans sometimes borrow for costly agricultural inputs and then become trapped in a vicious cycle of crop failure and debt. Particularly troubling are the reports of up to 200,000 farmer suicides in India, where farmers have borrowed to buy expensive genetically modified organisms, chemical fertilizers, and pesticides.

Reading this makes me to think twice about microfinance in sanitation field, as those problems mentioned above, could put progress in sanitation in the rural areas in reverse gear. While taking microfinance system to a next higher level, where greed for more money crops in, may cause problems, I would appreciate, if forum members can share their experience of situations where microfinance in sanitation has brought in more problems and, whether the effectiveness of microfinance in sanitation sector is doubtful.

F H Mughal