Event Description
Can microfinance be a viable, sustainable option in providing affordable financing to the poor for water and sanitation needs? What else needs to be in place to make it succeed? When is it (or not) the right solution? Experts and audience members will "unpack" the key elements of the business case (market research, incentives, enabling environment, etc.) from the perspective of different stakeholder groups across the water and sanitation value chains. Successes and challenges will be highlighted. The format will be interactive, generate critical questions and encourage active audience participation. A targeted discussion with experts from Asia, Africa and the Middle East will uncover the factors that make a strong (or weak) business case. Stakeholder groups will include donors, MFIs, meso-financing institutions, social investment funds, small scale and utility service providers and community (NGO) facilitators. Small group break-out sessions during the Open Space will tie the issues raised during the Interactive Dialogue to your own programme area. Groups will convene around topics of mutual interest such as specific programs (e.g. urban or rural; sanitation or water access market; household or community solutions) or business case challenges (e.g. market research, subsidies, legal structures, etc.).  Experts from the Interactive Dialogue will facilitate and provide expertise to stimulate a dynamic group discussion.  


Programme

Chair:  Mr. John Wasielewski, Director of Microenterprise Office and Development Credit Authority, United States Agency for International Development (USAID)

Speakers Bio

Biographies for Moderators and Expert Panelist

Breakout Session - Program Descriptions

• Triple Jump Fund Management
• Fact Sheet: BRAC
• Fact Sheet: WASTE 
• Community Development Fund (CDF) Ethiopia
• CREPA Overview
• Water.org: Kisumu WaterCredit Program Summary
• CHF International: Water and Sanitation Overview
• CHF Financing Summary

Event Summary and Conclusions
Can microfinance be a viable, sustainable option in providing affordable financing to the poor for water and sanitation?  Is there a convincing business case for it, when and for whom?  Seven experts representing the NGO, Microfinance Institution (MFI), investor, and donor communities joined USAID’s Office of Development Credit and the Bill & Melinda Gates Foundation to unpack the business case and explore the issues, challenges and opportunities for scaling up microfinance in the water and sanitation (watsan) sectors.  The increasing relevance and heightened interest in the topic to the international watsan community was underlined by the fact that the USAID-hosted seminar drew a full occupancy crowd (100 people) during the last afternoon session of the week-long conference.

The expert panel shared different models and challenged each other on the requirements of product, market and enabling environment that impact a business case including product offering, market segmentation, smart subsidies, risk assessment and mitigation strategies, and regulatory policies.

The product:  One of the key stumbling blocks for MFIs is that loans for access to clean water and sanitation facilities are non-revenue generating.  Even if having these services improve the health of their clientele who can then be more productive citizens and better payback existing loans, MFIs do not capture this ‘indirect economic value’.  WASTE, an NGO that focuses on sanitation solutions, is partnering with insurance giant TATA-AIG, UNU-MERIT and SNS-REAAL to measure the health impacts in India from improved sanitation in economic and statistical terms. The business case tested is to offer lower health insurance premiums to the poor who purchase sanitation services with microfinance.  While some MFIs point to existing home improvement loans to cover household watsan needs, consensus is that it is best to develop customized products since the risk assessment costs and repayment schedules differ, especially for the more costly sanitation solutions.  Another approach is to tie watsan loans to income generating activities such as using piped water in managing home gardens or livestock, or selling fecal matter/urine for fertilizer, but these approaches are not expected to reach the needed scale.   

Target market:  Much discussion exists around the appropriate target market for microfinance: ultra-poor vs. poor, rural vs. urban, households vs. community groups vs. small entrepreneurs/service providers.  To be clear, microfinance is not for the ultra-poor and is only viable where consumers are able to engage in cash-generating activities.  However, as seen in the BRAC (Bangladesh) and Finnish Community Development Fund (Ethiopia) examples, MFIs can serve to disburse grants through their network, helping to develop the watsan market and cultivate customers for the future.  Another point is that MFIs should take an integrated value chain approach by offering financing options to small watsan entrepreneurs (artisans, installers, maintenance service providers) and household consumers as this strengthens the overall economy and watsan market – both from the supply and demand creation side.  Transaction costs and cost of capital (interest rates) influence affordability. Rural markets and less developed MFI markets will have higher transaction costs, yet increased competition, use of mobile technology and innovative retail solutions will help to lower these transaction costs over time. 

Smart Subsidies:  Common agreement exists that offering credit is not enough. While the debate between the proper blend between smart subsidies (for software) and microcredit (for hardware) may differ depending on market conditions and actors, the fact remains that “smart subsidies” are still required to build sustainable market conditions.  Smart subsidies for market research, community mobilization, advocacy and hygiene promotion for sanitation demand creation, capacity building grants for service providers and MFIs, and multi-stakeholder facilitation are ways in which donors and NGOs can support sustainable market development without distorting prices through product grants (e.g. flooding the market with 100% subsidized products).  CREPA, active in West and Central Africa, and Water.org shared various models in which different stakeholders can provide smart subsidies. The challenge remains that catalyzing a market is a long-term play, while development projects last only three to four years.

Enabling environment:  Risk – both market and financial – are key to a business case.  Interest rates reflect transaction costs, repayment risk and cost of capital.  Transaction costs, as noted, can be reduced through new technologies and reaching scale.  Repayment risk can be reduced through third party training, certification and contractual agreements to ensure quality of watsan service, as well as through guarantee funds, first loss loan reserves, and standby letters of credit.  Such vehicles provided by public monies help not only to reduce financial risk for the MFI but can also successfully attract commercial investors, as reported by Water.org and CHF International.  Regulatory policies that increase fluidity (and availability) of financial capital, encourage entrepreneurship, secure land ownership and allow MFIs greater flexibility in product features, including savings, all lead toward a stronger business case. 

Conclusion:  While Microfinance is not the end-all financing solution for watsan for the poor, it is a valid financing mechanism to leverage if the conditions are favorable.  Whether or not microfinance for watsan can be scaled remains a point of discussion.  Fact is, as Triple Jump (an MFI investment fund) reported, that interest is real and growing within the MFI sector to explore this new product offering.  The opportunity to leverage this growing interest should be capitalized upon by the watsan community of NGOs, utilities and donors when developing solutions for the poor.