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Sanitation microfinance: a solution to the household sanitation cash trap?

24 May 2013

SHARE recently published two case studies on sanitation microfinance in India and Tanzania, based on original research by Trémolet Consulting and MicroSave. Here, Sophie Trémolet identifies lessons learned from the research and a way forward for making microfinance part of the solution for reducing the sanitation access gap.  

Governments and donors are currently expecting households to fork out the bulk of the investments required to reach the Millennium Development Goals for sanitation, particularly in countries where on-site sanitation is the norm and the public sector has de facto withdrawn from service provision. This is the case, for example, in most of Sub-Saharan Africa where the sanitation MDG is very unlikely to be met.

Women with toilet, India

Yet, an improved sanitation solution can represent several multiples of a poor household’s annual income, and the costs of maintaining and emptying the facility on a regular basis to keep it functional can substantially add to this initial investment. For example, in Dar Es Salaam, a WaterAid study conducted by Trémolet Consulting found that these initial costs represent approximately 112% of a below poverty line household yearly income, while the running costs of the latrines can go up to 14% of this income.

Most poor households are not able to mobilise such a sum up-front. In the face of multiple competing demands on their cash (including for food, shelter, education, health, utility bills and the now sacrosanct mobile phone), most poor households would not prioritise getting a toilet unless all of the following conditions apply: a) they are convinced, mobilised or triggered to do so; b) they can find a nearby artisan or vendor to sell them what they are looking for and c) they can mobilise sufficient resources.

In a randomised controlled experiment conducted in the context of a WSP-run project in Indonesia, Paul Gertler of Berkeley Business school and colleagues concluded that “The main obstacle to constructing a toilet reported by households was the cost. Credit constraints likely limited households’ ability to build a toilet”. Identifying ways for households to cover such costs is therefore of paramount importance.

In Small-scale finance for water and sanitation, a joint publication between the European Union Water Initiative and the SHARE research consortium, Sophie Trémolet argued that microfinance can play a key role in mobilising financing to reach the sanitation Millennium Development Goal, and beyond, to achieve sustainable sanitation for all.

This publication was backed up by field research in India and Tanzania, jointly conducted by Trémolet Consulting and Microsave, the results of which have now been published by SHARE. These studies specifically examined the potential of microfinance to promote access to sanitation and found, on the basis of current experiences in India, that well designed microfinance schemes can help poor household afford sanitation.

In India, the research identified several microfinance programmes around the country where “toilet loans” had made a significantdifference in women’s lives. Overall, at least 146,000 toilet loans had enabled at least 730,000 people in India to build household sanitation facilities. The research identified a unique microfinance organisation dedicated to the WASH sector, Guardian, which was spun off from the water NGO Gramalaya and received initial support from Three years after the beginning of its operations, Guardian had disbursed 20,000 loans to households (60% of which were for sanitation) which attracted a 100% repayment rate.

Common features of successful programmes in India were that they were run by experienced MFIs (or younger MFIs that had received substantial external support to beef up their financial management) and that they operated in close coordination with NGOs or governments that conducted behaviour change and supply side support activities in parallel.

In Tanzania, the research was largely exploratory and focused on identifying the potential for development of such financial tools. We found a great interest from a number of local institutions for linking sanitation microfinance to the burgeoning housing microfinance market, even though there were diverging views about how this could best be done. Microsave, in association with Trémolet Consulting, will be working in Tanzania later this year with SHARE support in order to support microfinance institutions with measuring up demand and developing locally suitable microfinance products that could have a genuine potential to make a difference.

microfinance focus group, India

In both countries, the study found that using microfinance for sanitation can raise controversy, however. The times when microfinance was seen as the golden cure for under-development is now long gone, in the wake of the Andhra Pradesh crisis that started in July of 2010 which painted a bleak picture of profit-hungry microfinance institutions fuelling poor Indian peasants’ over-indebtedness and leading them to suicide. Development economists such as Esther Duflo and others have sought to rigorously evaluate the impact of microfinance and found no direct relationship between households taking on a micro-loan to start a small business and their ability to forge their way out of poverty.


Overall, the studies helped identify the following key points which should be borne in mind when designing and implementing microfinance schemes for sanitation:

•  Microfinance for sanitation can be income-enhancing: 
A toilet loan may not directly generate income and is therefore a far cry from the common microfinance approach, in which a woman borrows money to buy a hen and ends up running an entire farm. However, it is clearly income enhancing as it improves health and well-being and saves time for revenue earning activities. As such, households may be interested in taking on a loan if they are convinced that it would help them save money in the long-run;

•  Microfinance does not necessarily equal micro-credit:
Where micro-loans are not suitable, because local interest rates are simply too high or households are reluctant to borrow (or already overly indebted), solutions that combine savings and loans should be explored and compared against each other (inflation might quickly erode the value of savings if they do not attract interest);

•  Housing microfinance is growing in a number of countries and presents a lot of potential synergies with sanitation:
After all, who would think of taking a separate loan for building a toilet when already getting a mortgage to buy or build a house? Combining the two in a single loan might be tricky however and raises specific challenges, as sanitation may risk getting relegated so the interaction between those areas needs to be carefully thought through.

•  Institutions matter:
Many sanitation microfinance schemes have failed (or are now failing) because they are run by small NGOs with no existing systems to run a scheme. Running savings and loan schemes to support households with toilet construction is a very different activity from building toilets or providing elements of such toilets for free: they should not be mixed;

•  Sanitation microfinance is only part of the solution:
It should be considered as an important component of the mix of approaches to improve sanitation rather than in isolation. Take-up rates are likely to increase significantly if combined with well-planned behaviour change activities. Subsidies may also still be required to improve affordability. Rather than subsidising interest rates or providing up-front hardware subsidies, it could be more efficient for donors or governments looking to leverage household investments in sanitation to channel subsidies through microfinance institutions on an “output-basis”, so as to reduce the principal of each microloan.

Sophie Trémolet, May 2013