Microfinance for Water: An Example of Client-Focused Innovation
Microfinance was conceived in the name of community service. In fact, one could argue that the industry’s DNA inherently aligns it with the needs of local communities. This is one of the industry’s core strengths. As Michael Porter and other insightful business thinkers have emphasized, excessive focus on short-term financial performance while ignoring customer and community well-being distorts decision making, inhibits innovation and ultimately limits financial success. Those companies that create “Shared Value” by aligning their products and services with the needs of their clients and local communities will innovate and grow over the long-run. Yet as events of recent years demonstrate, precisely because of its sustainable success microfinance was not exempt from the nearsighted tendency to prioritize short-term financial results. Fortunately, with current global efforts such as the Smart Campaign there is a conscious and concerted effort across the industry to refocus on the needs of our clients and the health of our communities.
In countless communities across the globe, access to clean water and sanitation still remains an unmet need. Despite substantial efforts over the last 20 years, close to one billion people still lack access to safe water. More than 2.6 billion people – more than one in every three people alive – don’t have adequate sanitation. To put that in stark perspective, more people in the world have a mobile phone than a toilet. Water collection and health problems related to poor sanitation impose significant time and productivity costs at the individual, household, community and national levels.
It’s hard to be productive when you spend your day sick, scavenging or waiting long hours for water. Moreover, when macro trends such as urbanization and climate change are factored in, water- and sanitation-related challenges are further magnified. Yet they must be tackled, if not out of a simple moral obligation, then to ensure our collective well-being in an increasingly globalized world.
Traditional approaches to financing water and sanitation needs in the developing world – which typically have consisted of “waiting to win the grant lottery,” drilling ever-more wells, and lack of ongoing funding for maintenance and local skills training – are coming up short. Often the costs of a water or sanitation connection (averaging $150 in India, or $250 in Kenya) are prohibitive for a poor family, yet if they had such connection, the family’s entire life, livelihood and well-being would materially change overnight.
Moreover, they could realize significant long-term cost savings that result from having reliable access to a known source of water and improved hygiene.
Microfinance can help address this crisis by tapping into our creative and collaborative resources to revolutionize how the global water and sanitation crisis is understood.
As Steve Jobs said, “creativity is just connecting things.” With the goals of addressing the water and sanitation crisis and enabling MFIs to better meet their clients’ most basic needs, Water.org’s WaterCredit initiative links the water, sanitation and microfinance sectors. WaterCredit brings together diverse actors including MFIs, municipalities, public water utilities, and water and sanitation product manufacturers to grow water and sanitation assets and infrastructure at the city, community and household levels. It represents an example of creative cross-sector collaboration and “orthogonal thinking”: tackling one problem (access to safe water and sanitation) by focusing on overcoming a related yet critical bottleneck elsewhere (access to finance).
Under the standard WaterCredit model, Water.org provides capacity-building grants, or “smart subsidies”, to MFIs and water and sanitation actors for market assessments, product development, staff training, marketing and loan tracking. These grants are “smart” because they are targeted expressly at specific activities that enable MFIs to launch, expand and scale sustainable portfolios of water and sanitation-specific loans. They enable partner organizations to design high-quality financial products that are in demand by clients, without subsidizing costs at the client level. As the MFI gets more familiar with the water and sanitation sector and builds internal capacity to grow its WaterCredit portfolio, the smart subsidy support phases out. This careful structuring creates sustainable and scalable WaterCredit portfolios over time.
To date, with support from funders including the PepsiCo Foundation and The MasterCard Foundation, more than 57,000 loans disbursed by twenty four WaterCredit partner MFIs in four countries in Asia and Africa clearly demonstrate that the resulting products can be profitable for MFIs. But equally if not more importantly, WaterCredit loans meet immediate and urgent client needs and enhance household income by increasing productive time, decreasing water expenditures and improving family health. Clients with access to clean water and sanitation are healthier, better educated and more productive.
WaterCredit facilitates MFI innovation that improves client and community health, mutually benefiting both the community and the MFI. It also provides key insights that may be applied to other new product initiatives by MFIs, such as lending for health care, sustainable energy and other “green loans.” The ability of microfinance to help address basic client needs exemplifies the industry’s natural potential as a community-first business and demonstrates the tremendous potential of microfinance to create the “Shared Value” that will help it grow and prosper as a commercial industry for many years to come.
This blog highlights very well the role microfinance can play in enabling access to water and sanitation thereby fulfilling a fundamental unmet need for poor families and driving a sense of ownership of the infrastructure.
There are however a few challenges with and limitations of the microfinance approach and I thought it might be useful sharing some of the important ones based on our experiences with water sanitation projects in urban slums across India –
1) Demand cannot be assumed — Even in urban areas where people are generally more aware of the importance of water and sanitation, our experience suggests that awareness does not necessarily (and easily) translate into willingness to pay for accessing facilities (since there is no obvious income benefit in the short term). Behavior change is also not easy to achieve. In fact it might be the biggest obstacle as noted in a recent article in the New York Times on community water plants(http://www.nytimes.com/2012/03/22/business/energy-environment/liter-by-…). Therefore, creating real demand and subsequently monitoring functionality and usage of the infrastructure is critical. Clearly, health and other outcomes (productivity etc.) will only improve if people actually use the facilities on a regular basis.
2) Fairly onerous requirements for MFIs — Unlike the standard loan product for income generating activities, loans for water and sanitation need to be offered in conjunction with a much broader set of services (demand creation, assisting communities with technical aspects of construction, liaising with the government for approval of household connections, monitoring end use utilization of the loan and functionality and usage of the infrastructure) and offering this complete package can be quite daunting even for the most socially driven MFI. To overcome this, some MFIs collaborate with community-based organizations in the short term or set up partner NGO entities that can take care of the crucial, non-credit activities.
3) Maximizing coverage requires government support and possibly subsidy — our experience suggests that if close to a 100% coverage is to be achieved in a particular slum, government schemes that subsidize household level infrastructure costs play a critical role. The Slum Networking Project in Ahmedabad which covered entire slums with a suite of basic services is a case in point. The project required households to contribute a subsidized amount towards the infrastructure. In projects like these, while households still need to contribute (thus ensuring that there is ownership), easing of the financial burden enables participation of a larger number of families. Customer satisfaction surveys conducted by some of our partner organizations suggest that usage of infrastructure continues to be high (80-90%) 3-4 years after the facilities were constructed even in projects where government subsidies were accessed by families.
Closer to the views of Urvashi Prasad, I assert that Water and sanitation need to be treated as non credit activities to be arranged in collaboration with community organisation/SHG federation/ NGO or local government bodies like Gram Pachayat/municipalities. Accommodation of these basic needs of the poor under micro credit activities need rethink. Indiscriminate supply of Micro credit for non income generating activities have done enough damage in micro finance community
Probably any type of credit for water and sanitation might help the people above poverty line
Unlike in traditional approaches, the post-construction usage/maintenance of structures created under WaterCredit loans are extremely encouraging; Unsubsidized monetary participation by clients, which the WaterCredit model entails is a reason attributed for this.