Microfinance for Sanitation - and report on sanitation lending experiences in seven countries (Bolivia, India, Malawi, Peru, Uganda etc) (Water for People)

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  • Elisabeth
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Re: Microfinance for Sanitation

Hi,
I would like to point out to the people who have contributed in this thread last year that we now have a structured discussion on this topic which started yesterday and which is enriched by some world renowned experts in this field, please see here:
forum.susana.org/forum/categories/191-th...nance-for-sanitation

Perhaps you could take the main learnings or main open issues that came up in this thread and use it to enrich the discussion in the new microfinance thread? Or if there are questions that you always wanted to ask the experts, here is now your chance.
Please put them into this thread:
forum.susana.org/forum/categories/191-th...nance-for-sanitation

Regards,
Elisabeth
Dr. Elisabeth von Muench
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  • AquaVerde
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Re: Microfinance for Sanitation

Dear Geoff,

Thanks for your clarification about your system. How about having a special "Toilet Revolving Fund" by external support/founders managed by a bank to start the financing process and to keep a toilet/sanitation installation/improvement scheme running? This external funds (WB, EUCOM-Aid and so on) have to cover up by "refilling" for the "usual" "losses" like bank fees and some usual non repayments.

Is this "Revolving Fund" suggestion practical in comparison to ongoing "usual" large governmental top to down installation schemes for piped sanitation systems and rural VIPs financed by WB, EUCOM-Aid and so on?

Regards,
Detlef
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  • JKMakowka
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Re: Microfinance for Sanitation

Thanks for the clarification, and sorry for being a bit "snotty" in my assumptions.

So what it basically boils down to is that MFIs prefer to give loans for other objectives (probably productive instead of consumptive) and need to be incentivised by the toilet producers to offer credit for this purpose?

Seems like a viable strategy in the short term to reach your goals of increased latrine coverage, but I doubt this kind of market distortion (which ultimately the poor customers pay for) is something beneficial in the long term.

I think for these consumptive loans it is better to cut out the MFI (or commercial bank) middle-man all together and let the producers deal with offering rate payments by themselves (but an insurance for small producers against large-scale defaulting of customers could be beneficial).

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  • ggrevell
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Re: Microfinance for Sanitation

Dear all,

Thanks Detlef for highlighting that post.

Link: www.watershedasia.org/microfinance-boosts-latrines/

Krischan and Cristoph are correct: the monthly payments indicated in step #5 include interest (though it wasn't our intention to deliberately omit that information). Thanks for requesting clarification.

The interest rate offered is 2.75% per month with declining balance - equivalent to 33% on an annual basis. The collection of the fee described in the blog entry does not lead to a lower interest rate for the consumer --> the rate is the same as for other 'non-business' loans, which are available between USD 20 and USD 10,000 for 3-30 months.

I can understand Krischan's suggestion that the fee is meant to make interest rates appear lower, but in reality there is not a choice available to consumers between the current interest and a higher one. In our experience, MFIs do not want to offer loans with higher interest rates in order to offset the higher cost/risk profile of these types of loans. Perhaps they believe that consumers (or other stakeholders) are very sensitive to headline interest rates. So instead we see the status quo: MFIs doing little-to-no proactive promotion of loans for toilets.

I agree that suppliers will ultimately pass on all costs to consumers (leaving aside cross-subsidization between products). But I think comparison with credit cards is noteworthy. Merchants build the cost of credit-card financing into prices because consumers place a value on it. On small ticket items, consumers who pay 100% upfront with cash rarely demand a discount. Unfortunately, or fortunately (depending on your perspective) upfront (cash) payers are thereby subsidizing the financing cost of borrowers. If we assume that those with cash available are not the poorest, perhaps this cross-subsidy feature has an equity advantage...

One thing WaterSHED has seen clearly is that more and more households are purchasing latrines with credit when it's proactively promoted as an option. Several MFIs we've worked with will not participate proactively unless they earn an additional fee. Latrine suppliers (and indirectly, consumers) are willing to pay such fees. And the scheme does not require unsustainable donor funds to continue working.

We'll be happy to keep updating the forum on the progress as we collect more data and experience over time.

Best regards,

Geoff
----
Geoff Revell
watershedasia.org | happytap.net
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  • former member
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Re: Microfinance for Sanitation

I cannot add much to this discussion save for a small experiment we conducted in connection with launching our prototype Microflush toilets in Ghana. We experimented with sanitation credits to 5 households purchasing a Microflush toilet. The interest rate was set at 20% (a bit less than half of what banks charge IF the household would qualify for such a loan. The 20% reflects the need for the fund to be revolving under rather high inflation and for the marginal cost of managing the process. It is a tad low even for the provider-managed process. While the banks have the funds, their overhead is high. It is best if one can id or create sanitation sales-credit organizations that issue and manage a revolving loan fund while also linking households to toilet MAKERs (as GSAP calls them). Such a turnkey approach is efficient and would result in the most affordable loans in my opinion.

++++++++
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  • Marijn Zandee
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Re: Microfinance for Sanitation

Dear all,

In these somewhat lost days between Christmas and New Year.

Why do we not try to reverse the microcredit logic? And try a "toilet savings scheme", deposit X amount per month and after 24 months you can have your toilet build. In order to make the idea attractive we may have to look at somewhat old marketing materials from banks out of the times that they still encouraged people to save instead of to have maximum lines of credit. This way interest rates would actually help people instead of making the toilet more expensive (interest given should cover inflation + a small bonus).

One obvious challenge is that these sort of financial institutions would have to somehow invest the deposited money to be able to cover interest, otherwise it will just end up being a ponzi-scheme.

Kind regards

Marijn
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  • christoph
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Re: Microfinance for Sanitation

@Detlef -
Step 5 contains for sure the interest (which will be in the normal range), maybe that there is a slight reduction due to the fee of 2 % but the fee has absolutely nothing to do with the monthly interest rates.

@ Florian -
I am aware that 30% interest is a “normal” thing for this kind of credit. I don´t have another idea on how to be able to transfer the toilets on cheaper rates – the idea of a beforehand 10% savings seems a way. Another way could be to be a considerable amount at the end of a credit. But I am sure there are much “better” - more professional – people who are thinking about the models.

@Sherina –
Only now I realized that your numbers are somewhat low, besides those of India where the loans have been VERY small. Did you compare your experiences with other models and other groups and are you able to comment if your described experiences are representative for the specific country?

@all -
Does anybody have experiences with a water service provider providing a loan, being paid in connection to the water tariff?

Yours
Christoph

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  • AquaVerde
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Re: Microfinance for Sanitation

I asked the colleagues for more clarification:
www.watershedasia.org/microfinance-boost...trines/#comment-8782
lets see how transparent they will be
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  • JKMakowka
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Re: Microfinance for Sanitation

I am quite sure that there is still an interest rate on the monthly payments which the article seems to omit on purpose. In general this seems to be a scheme to make interest rates appear lower to the purchaser, as the latrine supplier will certainly add those banking fees to the final price of the latrine.

Reminds me a bit of those 0% financing of a new TV in your favorite large brand electronics store that just has inflated prices to compensate for it.

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  • AquaVerde
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Re: Microfinance for Sanitation

Dear All,

I found this on the topic:
"WaterSHED’s Hands-Off philosophy leads it to promote solutions that minimize the role of outside donors and NGOs with the dual goals of increased sustainability and replicability."



"Instead of subsidizing the MFI, WaterSHED encouraged VisionFund to charge a loan origination fee in the form of an interchange fee. The fee is similar to the interchange fee paid by merchants around the world who accept payment cards such as VISA or Mastercard, and is typically around 2 percent of the purchase price. Also following the payment card model, VisionFund pays the toilet seller directly instead of disbursing the loan to the consumer."

Link: www.watershedasia.org/microfinance-boosts-latrines/

2% seems to me very promising, even I do not understand all points fully :(

Maybe still some hidden costs involved!? The difference from surprisingly 2% to the mentioned "usual" 25% - 50% makes me wounder.

All the best
Detlef SCHWAGER
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  • smunyana
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Re: Microfinance for Sanitation

Hi JK

Thanks for these insights. Certainly very helpful.
Additionally such software as MIFOS would certainly be very useful to help entities such as local savings cooperatives with loan management.
The interest rates remain a real challenge particularly as all this is aimed at making the products more affordable for households.

Best
Sherina
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  • JKMakowka
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Re: Microfinance for Sanitation

I also have some general remarks:

There are some interesting innovations in micro finance to lower the overhead costs. For example: en.wikipedia.org/wiki/Mifos

As an external donor one can also simply provide an "insurance" fund to make commercial loans available to the poor, and it is not uncommon to include a back-insurance into microfinace products.

Last but not least 30%/a interest rate sounds much, but often you have 10% (or more) inflation the same time, which has to be subtracted to get the real interest rate.

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