Wanted to reemphasize the point about microfinance not necessarily done through MFIs - or NGO-MFIs only.

We need to address this as access to small credit - probably around USD 250-500 - especially for households. So it is microfinance in the sense of small sized loans. Also, a distinguishing feature is that this is not an income generating loan - and is likely to be treated as consumption or a housing improvement loan.

Such credit may be provided through different systems depending on the local context and a given country's financial sector development. These could include commercial banks (public sector or private), cooperative sector (societies/ banks), MFIs, NGOs, local revolving funds, self-help groups etc. many banks have themselves started to adopt methods of lending to SHgs etc. In fact we just met a leading private sector bank in India that has developed a portfolio under a Sustainable Livelihoods Initiative. They would need to be convinced to lend for sanitation.

With good local intermediaries, it would also be possible to access crowdfunding platforms.

However, all this requires efforts at both ends - on the demand side with households to assist them to understand and assess options, and assist them to access credit. On the supply side, it would require getting potential lenders familiar with sanitation and link them with potential areas where such demand exists.

It is clear as Sophie emphasized that the full cost of toilets cannot come through government programs or donors. Also as pointed out by Valentin, government programs provide subsidies as output based aid.. So bridge finance will be needed.

Without access to credit for these purposes sanitation access will remain a problem.

Meera

Thanks a lot for all these very interesting posts! I am learning a lot. I can imagine it could be a bit intimidating for "normal" members to write in this thread, but I would encourage you all to not be shy. Use this opportunity to ask the questions you have always wanted to ask or to tell us about your experiences with microfinance from "on the ground".

I have just moved a post by Valentin Post (WASTE) about the FINISH Society in India - which has ample experience with microfinance - into this thread. Please scrol up to Page 1 to read it or click here:
forum.susana.org/forum/categories/191-th...for-sanitation#14081

He had put it as a separate thread but I think it's better to keep it all together in one thread. If you have questions for Valentin and his team, please put them in this thread, too.

Kind regards,
Elisabeth

Some great posts emerged past coupla days! I would like to put my thoughts on some selected issues.

"NGO-run schemes are less successful because it is not in NGOs' DNA to collect loans and households can therefore easily confuse loans with hand-outs."

Though there are some truths in it, there are also some missing issues. In India, an MFI cannot be a recipient of aid funds since Indian Government considers MFIs as self-sustaining organisations. In Bangladesh, the picture is opposite where most MFIs have actually have development programs with very few exceptions like BURO, ASA who operate only microfinance programs. Here there is no prohibition on simultaneously conducting both stream of operations which at the end have both pros and cons.

Many development programs chose 'hybrid' NGOs-MFIs with also an objective of eventual graduation of their development programs through taking advantage of the access to finance option from the MFI operation. In those NGOs-MFIs there is also an intrinsic program capacity which is able to tune in well with the development program requirements. These NGO-MFIs are often recipient of multi-donor funds that are tailored to offer subsidized financial scheme. Finally, those NGO-MFIs also use their core-funding generated from microfinance operation to keep their program capacities alive which is not that easy for NGOs who do not operate microfinance programs. The disadvantage is that many smaller NGO-MFIs cannot actually distinguish among the merits of different operations: microfinance, development programs and private companies and mix-up their operations and eventually find themselves in a governance and compliance chaos and gets targeted by regulatory authorities.

I also like to support the notion that sanitation being a consumption need, needs to be carefully tailored through public finance policies since borrowers often have other consumption priorities like food, health, children's marriages, children's education exam fees and drinking water that bypass the need for better sanitation.

Hi all!
As we discuss the issue of microfinance for sanitation it is important to remember the rural and urban areas are different contexts and require different toilet solutions - which in turn depend on the density of the population. In many cases you will find that the decision on the purchase of toilet is individual (the household or family decision) rather than collective. This is a challenge for those who have developed a standard model that then want to sell either cash or credit based on group lending or a collective good.

As someone already said, the discussion has focused a lot on microfinance loans when it really is a vast subject that can include things like savings, insurance, remittances, and so on. To think only of loans may cloud the vision to other alternatives such as community funds or other local mechanisms for construction and purchase of toilets.

We need keep in mind that a credit for sanitation is a consumption credit. If the household system has other credit (or credits) the family doesn’t need a sanitation credit. A household system could collapse if it is over-indebted with multiple lines of credit where the incomes aren’t enough to pay two or more monthly payments. If the families are convinced the toilets are an important investment, the financial institution needs to make sure its methodology matches the context in which they are working. There are countries where the financial mechanism necessary is not an MFI, some cooperatives or other local credit systems may work for this purpose.

Regards

Otto

The overall objective of the Financial Inclusion Improves Sanitation and Health (FINISH) programme (www.finishsociety.org/) is "to improve sanitation and thereby, living and economic conditions of poor rural and peri-urban households, through economic incentives, primarily enhancing financial inclusion of these households."

The programme is designed with four sub-objectives vide:
1) To provide sanitation facilities at the household level through a combination of micro-credits by MFIs with a sanitation portfolio (capacities are built under the programme) and health insurance incentives.
2) To establish a financially sustainable sanitation improvement mechanism through public private partnership.
3) To develop information resource base for future programmes and demonstrable indicators linking health and sanitation.
4) To provide livelihood benefits to poorer sections and mainstream gender aspects.

The overall result of FINISH is "improved sanitation systems for 500,000 (lower limit) – 600,000 (upper limit) households in different states of India.”

Its programme strategy follows an integrated approach by combining demand generation through behaviour change & financial inclusion measures with increased access to improved sanitary and hygienic conditions, ultimately leading to a safer environment for all.

Micro finance policy environment - highlights of the microfinance sector
The microfinance sector in India has gone through 4 broad phases: (i) high growth (till 2010), (ii) high volatility (2010 – 11), (iii) consolidation (2011 – 13). It is now entering a phase of relative stability. After 3 years of the crisis, MFIs seem to be regaining some of the confidence with clients and lending institutions. Reserve Bank of India (RBI) recognizes the sector as it achieves the objective of financial inclusion by providing access to financial services to the unbanked population of India. With recent introduction of non-bank finance companies (NBFC)-MFI guidelines and priority sector lending (PSL) status being retained, RBI has reaffirmed MFI’s role in financial inclusion. There have been further amendments in the regulatory guidelines for providing flexibility to MFI players in terms of removal of interest rate, meeting net owned fund requirement and qualifying asset criteria etc.

Microfinance Outlook for 2015
The global microfinance market should once again achieve growth of 15-20% in 2015. Asia is displaying the strongest growth momentum. A particularly impressive development in this region is the revival of India’s microfinance market. Central Asia is being impacted by the economic crisis in Russia, leading to a slight slowdown in financial sector development compared to previous years.

According to the International Monetary Fund (IMF), economic growth in the 20 most important microfinance markets will increase from 4.4% to 4.8% in 2015. This means that microfinance countries will probably grow at twice the rate of developed economies. In terms of financing, local sources of financing are becoming increasingly important. International investors continue to play a major role but MFIs are seeking to focus on a smaller number of stronger financing partners.

Challenges
• Current focus of the microfinance sector is mainly on micro-credit with other products still evolving including thrift, insurance and remittance.
• MFIs are also facing the challenge of coping with the regulatory environment- continuous client data monitoring, reporting, technology adoption/up-gradation and building staff capacities as there are no investments in capacity building by MFIs themselves or the sector due to less availability of funds.
• The micro finance legislation bill still has not seen the light of day, which is a concern for the smaller NGO MFIs. FINISH while re-strategizing in 2011 had decided to focus on smaller MFIs. This lack of clarity adversely impacts using of micro-finance for sanitation.

FINISH has been successfully increasing sanitation coverage by adding on average 1 safe sanitation system every 3 to 4 minutes. In 2013-14 it added supply chain solutions to its (1) community mobilisation for demand creation and (2) financial inclusion. Thus the created demand was ‘timely and appropriately’ addressed. The dimension of ‘excreta reuse’ is being explored in close cooperation with WASTE.

The main trigger is bringing about behavioral change and building mental infrastructure to sustain sanitation (construction AND usage). Both human resource and partner development is done in a scientific or rather corporate manner. The Training Roadmap and Learning Guide that has been developed in close collaboration with WASTE contain six layers of trainings with detailed training Curricula which are updated from time to time. Need based capacity building initiatives are also undertaken targeting various levels and requirements.

FINISH trained around 2700 animators in 2014-15, who have been engaged as key grass-roots level facilitator. Similarly, local level masons are also identified and engaged by the partners to help households in construction of toilets. The awareness generation drives reached out to nearly 8,000,000 people (actually more as not all partners timely report on this) with help of IEC materials organized by partner organizations. We engage community members as workers/entrepreneurs for contributing to its very own community, so that the change achieved is sustained.

Cumulative achievement in terms of number of sanitation systems has increased and the total number of systems constructed has reached 435,507 by March 2015.

Trends
The earlier exclusive focus on micro finance has now been expanded to a broader access to financial services for the poor. This includes access to government subsidies, cooperative soft loan financing, CSR funding, vendor credit and client contribution. The total amount – excluding the Dutch Government grant of Euro 4.5 M to kickstart the process – is Euro 56.2 M. Thus the funding is no longer exclusively based on commercial micro finance, but it also includes these other categories. Client contribution also has gone up over the years reducing contributions from subsidy and microfinance.
The trend in 2014-15 over 2013-14 shows change in mindset of households to consider investment in sanitation (commercially financed + client contribution in 2014-15 at 52.7% vis-à-vis 41.9% in 2013-14) as their responsibility and not be dependent solely on government aid or other forms of finance. It also confirms usage sustainability to a large extent.

Financing Route Share ( %) 2010-11 2011-12 2012-13 2013-14 2014-15 Overall € Million
Commercially financed 100.0 67.1 51.8 29.5 24.9 42.8 24.1
Indian Gvt. Subsidy 0.0 26.3 37.0 57.6 46.3 40.0 22.5
Client 0.0 6.6 11.2 12.4 27.8 16.6 9.3
CSR 0.0 0.0 0.0 0.5 1.0 0.6 0.3
Total 100.0 100.0 100.0 100.0 100.0 100.0 56.2
Table Share (%) of Financing Categories Yearwise

In the Government sanitation programme the subsidy is back-ended, i.e. flows once the toilet is completed. FINISH is leveraging micro – credit to bride this working capital need, in collaboration with partners, government and beneficiaries. It also works with vendor credit to bridge this working capital need. In the past six months vendors have given credit of INR 80M (about Euro 1.1 M) in Rajasthan alone. The idea is to expand this further.

Governments policies will to a large extent determine which of these financial streams will become the most important. For instance the increase in Government subsidies would mean that sanitation demand generated by the project, can be met by and large by available government subsidies. Similarly changes in company law means that companies are now compelled to spend 2% of their profits on CSR activities. As sanitation is highly visible, this may offer a great financing potential. The main advantage is that now people who were before excluded, i.e. the ultra-poor, can be included in the sanitation drive. Thus it certainly contributes to the financial inclusion paragraph.

Valentin Post (WASTE), Vijay Athrey and Abhijit Banerji (Finish Society)

Website: www.finishsociety.org/

Hi Guys, wanted to share my thoughts on this discussion. I work for Negros Women for Tomorrow
Foundation (www.nwtf.org.ph), a microfinance working in Central Philippines.

I agree with you guys that a large-scale, multi-sectoral program involving government, funder/s, retail finance/ microfinance companies and the sanitation sector would help push these programs
to the mainstream. A combination of funding, right policies and technical support would definitely push MFIs/ retail providers to offer sanitation loans.

While generally there is a growing interest among MFIs and the retail financial sector for sanitation loans, only a few have actually taken action on this. Here in the Philippines, where there is also a highly competitive microfinance industry brought about by so many players but still, very few of these MFIs actually provide sanitation loans.

Here are a few thoughts that might be helpful:

1. To convert interest into action, a stronger case for sanitation loans must be made and how
it actually helps or compliments the overall microfinance portfolio as the amount for these loans
are generally smaller compared to a regular microfinance business loan.
e.g. In a saturated microfinance market, sanitation loans are a good way to maintain contact with
existing clients. It is also a good marketing message that can push stronger client recruitment.

2. MFIs need some sort of capacity building to ensure that they are capable of handling sanitation loans.
I am primarily referring to how MFIs assess these kinds of loans and how they design this product.
Few of the MFIs actually have multiple products (usually limited only to varying loan terms and loan sizes). With sanitation loans being a consumption product, MFIs are afraid that they don't have the internal capacity to be handling/ servicing these loans.

3. Another specific area where MFIs generally need help is in developing processes for this particular product. It is important that they look at this as this has a direct impact on user/ beneficiary experience and thus affects uptake of the product. For MFIs that actually go in and start sanitation loans, not much thought is usually put in working with the technical or product implementors to ensure that the whole process is user-driven, it is usually done the same way as regular business loans which makes it complicated for staff to administer it, duplicating some of the processes between MFI loan assessment and sanitation org. checking the client, etc. Streamlining these things will allow for more efficient internal processes, better client experience and great marketing for sanitation.


Raymond

Hi everyone,

Meera's post shares some useful insights and makes some great points. For me there are two key issues for financing sanitation.

1) How do we assess the right path to take? For our programme in the Philippines, and by the sounds of it in India, MFIs are the obvious solution. They are well established and regulated and they have the knowledge we in the NGO world lack about how to sustainably fund individuals and recover the money. In all honesty I wouldnt know how to assess another method, I have looked into CSR for certain activities like marketing or product development but not at an individual household level and to do this for thousands of households might need multiple partners so could end up needing more management than we realise and I don’t know that the donor company would want to handle that they just want to make a donation and get a letter showing what was done.

I would love to hear more about other financing options that are not MFIs but enable cost recovery.

2) What about finance options for less accessible areas? Again in the Philippines we have islands and upland areas where access is time consuming on a normal day, but for 6 months a year (typhoon season) it is not always possible. While we have an MFI partner who are very experienced there is some question about how we carry out regular collection in these areas and ensure payments are made. This is where I am struggling for other options and models. We are looking and community based savings but this would take a while to set up and probably need someone based on the islands initially.

Can anyone share models from less urban areas where access is an issue?

I firmly believe that creating access to finance for household is going to become the norm for many types of programmes in the future and NGOs will need to review processes and partnership procedures. I would also really like to hear about the processes anyone has gone through to partner with financial institutions and how they have managed this. Or is it easier to just persuade an MFI (or other type of funding organisation) to offer the credit and as an NGO not get any further involved?

Personally I also worry about idea of selling debt to households, I know it is one of the better more sustainable solutions, but is it entirely ethical?

I hope you don’t mind my asking more questions but this is a great opportunity to learn more!

Esther

A few quick thoughts on this topic on ‘microfinance for sanitation’…

First, we should probably be talking about “access to credit for households for their sanitation facilities”, rather than only credit from microfinance institutions. I guess, what Sophie describes is such wider meaning and will help broaden the discussion.

Access to credit for sanitation can in fact help widen the base for financial inclusion and a number of financial institutions (including banks) can be a part of this effort.

As I said earlier in my post for public finance, a critical aspect is how public finance is designed to leverage other funds. This requires a new design of programs (that aim to leverage funds) and appropriate support and advocacy to policies (e.g. for getting sanitation adequate attention in priority sector lending (PSL) in India). This would help incentivize financial institutions to lend for sanitation. Even for MFIs, policies related to getting sanitation included in their social performance assessment would help.

In India under the PAS Project (www.pas.org.in), as part of our work on urban sanitation, we have been working at city, state and national levels to develop a better understanding of nature of demand, types of options for household credit for sanitation as well as attempting to make things happen – at national and local levels. Some of our key findings include:

a) There is demand for credit for household sanitation in cities, but a number of issues related to availability of space, awareness about credit options, property ownership issues especially for old properties, building permission related issues, etc. For easy access to credit a major thrust is needed from local and state/national authorities to address these issues.

b) A number of credit opportunities are available for households and a good sanitation program will need to support households in making appropriate choices. At the same time, awareness needs to be created among different credit providers (banks, credit cooperatives, housing finance institutions, microfinance institutions etc.) about these opportunities, and supporting them to enter the sanitation finance space.

c) While latent demand for sanitation finance among households does exist, to unlock it on a large scale, appropriate government programs are needed. These may include establishing a partial incentive subsidy and supporting awareness among households about technical and credit options. Policies to incentivize banks and other financial institutions are also needed. For MFIs, access to funds that can be used for sanitation loans is important.

d) There seem to be opportunities to tap other sources of funds such as CSR and ‘social investors’ either through crowdfunding platforms or appropriate financial instruments. Such resource mobilization requires a presence and identification investors who have an appetite for social investments. However, to attract them, an eco-system at the local level is needed (with good monitoring) along with a few examples that have worked on-the-ground. In India, there are ample opportunities under the new Swachh Bharat (Clean India) Mission for making this happen. State Governments that are tasked with designing their own programs will need to ensure that credit for sanitation is promoted effectively.

e) By enabling access to credit there is a far greater chance to have a 'demand-led', rather than supply driven program. This will be difficult especially when governments are in a hurry to meet national aspirations and ambitious targets. So it is important to get more institutions involved and work at both policy and implementation levels,


Some of our papers and presentations are attached from recent work that maybe of interest. This is ongoing work and there will be more to share over the next year(s)...

Dear All

It is great to see engagement on the topic and I have been told by others who have been watching this exchange that more would soon come. I just wanted to pick up on a number of points that have been raised in the conversation, particularly on two questions raised by Frankie in his posts:

Why does microfinance for sanitation work in India? - It is true that most of the successful experience with (water) and sanitation microfinance to date has emerged in India, and as Goufrane showed in her post, this is an area that we have sought to document in our research. I would say two key differentiating factors include

- the fact that the microfinance sector is well-developed in India (particularly in certain States), which means that households are familiar with taking, managing and reimbursing loans (although there have been well-known cases where this has not worked so well, linked to over-indebtedness). An abundance of MFIs and NGOs with a microfinance arm has created healthy competition between these organisations and the more social-minded ones are interested in extending water and sanitation loans as a way to create a link with customers as Lesley Pories pointed out.

- the fact that microfinance is being extended by professional MFIs rather than as an add-on to a sanitation project run by an NGO. In my experience, NGO-run schemes are less successful because it is not in NGOs' DNA to collect loans and households can therefore easily confuse loans with hand-outs.

Do you know of any examples where development banks have set-up some sort of fund in a particular country earmarked for MFI's to extend sanitation loans?

Yes, we know particularly the example of the Sanitation Revolving Fund in Vietnam. In 2001, a Sanitation Revolving Fund (SR F) component was incorporated in the World Bank financed Three Cities Sanitation Project in Vietnam to provide loans to low-income households for building on-site sanitation facilities. The SRF provided small loans (USD 145) at partially subsidized rates to low-income and poor households to build a septic tank, a urine diverting
/ composting latrine or a sewer connection. To access the loans, households needed to join a Savings and Credit group, which bring together 12 to 20 people who must live close to each other to ensure community control. The loans covered approximately 65% of the average costs of a septic tank and enabled the household to spread these costs over two years. The loans acted as a catalyst for household investment although households needed to find other sources of finance to cover total investment costs, such as borrowing from friends and family.
The initial working capital for the revolving funds (USD 3 million) was provided as a grant by the World Bank, Denmark and Finland. The SR F was managed by the Women’s Union, a countrywide organisation representing the rights and interests of women that has a long experience with running micro-finance schemes. The initial working capital was revolved more than twice during the first phase of the project (2001 to 2004) and was then transferred for subsequent phases to be revolved further. Combined with demand generation and hygiene promotion activities, the SR F helped around 200 000 households build sanitation facilities over the course of seven years. The revolving fund mechanism allowed leveraging household investment by a factor of up to 25 times the amount of public funds spent. Repayment rates were extremely high (almost 100%).

This pilot approach was then scaled up in Vietnam, via other World Bank-funded projects or through a Domestic development bank, the Vietnam Bank for Social Policy (VSBP).

I also wanted to comment on Frankie's inference that "such a facility would be able to drive the interest rate incurred by the loanee substantially down".

There is a key point to discuss there. Based on modelling we had carried out for the setting up of a similar fund in Ghana in the context of designing a rural water and sanitation programme (which unfortunately did not see the light of day because Ghana could no longer borrow at country level), we found that the key determinant of whether households are able to repay a sanitation loan is not so much the interest rate level per se but rather the initial amount they need to borrow. If such a facility was set up blending public and private funds, we would therefore suggest that public funds be used for setting up the facility, sensitising the financial managers to the needs of the sanitation sector and providing a subsidy for poorer households to reduce investment costs but that interest rates be maintained at market rates in order to not distort the market in the long run. Do others have experience in this area that they would like to share?

Many thanks in advance and looking forward to another few weeks of good discussion, Sophie

Response to Frank's last post. I know of WB initiated microfinance loan fund mobilizing (to MFIs) organisation in Bangladesh called PKSF basically meaning Rural Employment Supporting Foundation and in Afghanistan called MISFA. But creating a loan-fund organisation just to finance for WASH would have a narrow objective as there are also other rural employment generating issues. The classic rural microfinance success talks about livelihood and entrepreneurial success but very few actually talks about WASH issues. Its because usually microfinance is used to fund consumption and livelihood and not WASH. But I know PKSF in Bangladesh initiated two new types of loans one of them being the Emergency Loans covering low cost loans for consumption, health, WASH and school exam fees.

Lesley's post has been proved of showing similar practice among Bangladeshi MFIs, especially those working in the disaster-prone areas. Post disaster food and sanitation problems emerge as a priority than sending out the livelihood loans. And as she rightly said, there is an urge among the MFIs for reaching out to the disadvantaged ones. There is a WB-initiated loan-funding organisation here in Bangladesh that offers subsidized rates for emergency or cash loan-fund and WASH is considered as an emergency. In this directed loans, borrowers receive 4%-interest bearing loan with a maximum amount of USD 70-100 with which they can add up, to install a tube-well or a ring-shaped pit latrine. But when they graduate to livelihood loans, the market interest rate can rise to 27% (caped by Bangladesh Microfinance Regulatory Authority).

Hi Frankie,
I work at Water.org, mentioned above by Goufrane, on our Indian portfolio.
We are still conducting research to determine if WASH loans are actually financially viable for the MFIs with whom we partner. Informally, I can tell you that in some cases, the rewards do not yet appear to be economic. That said, lending for "social causes" such as water and sanitation - basic human needs - seem to have a large positive impact on local perceptions of an MFI; at least that is what I have heard from several of our partners. As I imagine you are aware, microfinance has been under suspicion and attack from many after the AP Crisis in 2012. Lending for purposes that are not income-generating reassures the community that an organization actually cares about the people it serves and is not simply out there to exploit the poor. In addition, the MFIs can use the WASH lending for other long-term gains: some MFIs (although admittedly the minority) will disburse WASH loans to first-time borrowers. The average WASH loan is much smaller than the typical Income-Generating loan, which can also attract first-time borrowers since the amount to repay is not as intimidating. Successful repayment of the WASH loan then builds the credit history of these new borrowers, making them eligible for the larger Income-Generating loans. Thus the MFI that approaches the WASH loans in this fashion expands their client base for the more "profitable" loans.

In regard to your second question about governments earmarking loans for sanitation, the Reserve Bank of India places a lot of limits on how MFIs can allocate their portfolio. They have something like seven designated Priority Sectors that must comprise the bulk of an MFI's lending. Water and Sanitation are not officially part of these categories, but Water.org has been engaged for the past few years on encouraging their inclusion. In February, the RBI signaled its interest in making that change, likely due to the Swachh Bharat campaign that focuses on sanitation.

I hope this information has been helpful!