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Micro credit for water supply and sanitation is an innovative application of micro credit to provide loans to small enterprises and households in order to increase access to an improved water source and sanitation in developing countries. While most investments in water supply and sanitation infrastructure are financed by the public sector, current investment levels are insufficient to achieve universal access or, at the minimum, to reach the Millennium Development Goals related to water supply and sanitation. Commercial credit to public utilities is limited by low tariffs and insufficient cost recovery. Micro credits are a complementary or alternative approach to allow the poor to gain access to water supply and sanitation Funding is either provided to small-scale independent water providers who generate an income stream from selling water or to households in order to finance house connections, plumbing installations in their houses, or various forms of on-site sanitation such as septic tanks or latrines. While they have become increasingly common, many microfinance institutions still have only limited experience with financing investments in water supply and sanitation. While there have been many pilot projects in both urban and rural areas, just a small number have actually been scaled up.

Classification
According to an extensive study of microfinance in water supply and sanitation, there are three types of microcredit products in the water sector across urban and rural areas: 1. Retail loans aiming to improve access to water supply and sanitation at household level, 2.	Loans for small and medium enterprises receiving micro credits for small water supply investments and 3.	Loans for urban services upgrading and shared facilities in low income areas.

Retail loans for household water and sanitation
Retail loans for water and sanitation facilities are being offered to individuals by some large and commonly known microfinance institutions such as the Grameen Bank and the Vietnam Bank for Social Policies in South East Asia. In general, these credits are used to finance such things as bathrooms, toilets or water purifiers and range from 30 to 250 USD with a tenure generally less than three years. Although the potential market size is considered as huge in both rural and urban areas and some of these water and sanitation schemes have achieved a significant scale, compared to the microfinance institution’s overall size and scope, they still play a minor role.

In 1999, all microfinance institutions in Bangladesh and more recent in Vietnam had reached only about 9 percent and 2.4 percent of rural households respectively. In both countries, the water and sanitation portfolio amounts to less than two percent of the microfinance institution’s portfolio in total. However, borrowers for water supply and sanitation comprised 30 percent of total borrowers for Grameen Bank and 10 percent of total borrowers from Vietnam Bank for Social Policies.

Complementary to targeted micro credits, general purpose loans are increasingly gaining weight, as they are used for water and sanitation activities in India and a number of African countries (e.g. Benin, Zambia, and Uganda). For instance, the water and sanitation portfolio of the Indian microfinance institution SEWA Bank comprised 15 percent of all loans provided in the city of Admedabad over a period of five years.

Development aid institutions particularly focused on establishing linkage with local microfinance institutions. USAID for instance, has been actively involved by assisting microfinance institutions in designing micro credit products for the water supply sector in Indonesia.

Indonesia: Expanding customer base through cooperation In 2006, the Bank Rakyat Indonesia signed a Memorandum of Understanding with the water utility PDAM Tanah to initiate water connections schemes on the basis of micro credits creating a win-win situation. The joint venture with technical support of the USAID Environmental Services Program is planned to be extended to other regions. By 2009, the involved institutions intend to have provided 10.000 households with water connections. According to Metha, the effort has resulted in benefits for the utility, the microfinance institution and for the customers who gained access to water supply. The utility benefited from the expanded customer base and additional water sales as it has helped to reduce its average costs by 42 percent over a period of three years and to reduce its non-revenue water ratio from a percentage of 56,5 in 2002 to 36 percent at the end of 2004. Furthermore, the impact assessment report c both institutions conclude, that the financial cooperation could be extended to finance PDAMS’s need for additional banking services.

Vietnam: Sanitation Revolving Fund managed by the Women’s Union In 1999, the World Bank in cooperation with the governments of Australia, Finland and Denmark supported the creation of a Sanitation Revolving Fund with an initial working capital of USD 3 million. The project was carried out in the cities of Danang, Haiphong and Quang Ninh. The overall aim was to provide small loans (USD 145) to low-income and poor households for targeted sanitation investments such as septic tanks, urine diverting/composting latrines or sewer connections. Households willing to participate needed to join a savings and credit group of 12 to 20 people. Members of those groups were required to live near to each other to ensure community control. The loans had a catalyst effect for household investment. With loans covering approximately two thirds of investment costs, households had to find complementary sources of finance (from family and friends). In contrast to a centralized, supply-driven approach, where government institutions design a project with little community consultation and no capacity building for the community, this approach was strictly demand driven and thus required the Sanitation Revolving Fund to develop awareness raising campaigns for sanitation. Managed by the microfinance-experienced Women’s Union of Vietnam, the Sanitation Revolving Fund gave 200.000 households the opportunity to finance and build sanitation facilities over a period of seven years. With a leverage effect of up to 25 times the amount of public spending on household investment and repayment rates of almost 100 percent, the fund is seen as a best practice example by its financiers and thus considered to be scaled up with further support of the World Bank and the Vietnam Bank for Social Policies.

Small and medium enterprise (SME) loans for water and sanitation
SME-type loans are used for investments by community groups, for private providers in greenfield contexts or for rehabilitation measures of water supply and sanitation. Supplied by mature microfinance institutions, these loans are seen as suitable for other suppliers in the value chain such as pit latrine emptiers and tanker suppliers. With the right frame conditions such as solid a policy environment and clear institutional relationships, there is a market potential for small-scale water supply projects.

In comparison to retail loans on the household level, the experience with loan products for SME is fairly limited. These loan programs remain mostly at pilot level. However, the design of some recent projects using micro credits for community-based service providers in some African countries (such as those of the K-Rep Bank in Kenya and Togo) shows a sustainable expansion potential. In the case of Kenya’s K-Rep Bank, the Water and Sanitation Program, which facilitated the project, is already exploring a countrywide scaling up.

Kenya: K-Rep Bank finances community water projects Kenya has numerous community-managed small water enterprises. The financial and institutional frame conditions are enhancing the provision of commercial finance. The water and sanitation program in Africa has launched an initiative to use micro credits for the local water and sanitation sector. As part of this initiative, the commercial microfinance bank K-Rep provides loans to 21 community-managed water projects. The Global Partnership on Output-based Aid supports the programme by providing partial subsidies. Every project is pre-financed with a loan up to 80 percent of the project costs (in average USD 80.000). After an independent verification process, certifying a successful completion, a part of the loan is refinanced by a 40 percent Global Partnership on Output-based Aid subsidy. The remaining loan repayments have to be generated from water revenues. In Addition, technical management assistance grants are provided to assist with the project development and to enable the development of market based Business Development Services sector for small water projects. The assistance for further 21 projects have been approved by the Global Partnership on Output-based Aid and the European Union Water Facilities.

Togo: Micro credits for the productive use of rainwater-harvesting tanks and shallow boreholes In Togo, CREPA (Centre Regional pour l’Eau Potable et L’Assainissement à Faible Côut) was encouraging the liberalisation of water services in 2001. As a consequence, six domestic micro finance institutions were preparing micro credit scheme for a shallow borehole (3000 USD) or rainwater-harvesting tank (1000 USD) for at least two households from a certain area. The loans are originally dedicated to households, which act as small private provider selling water in bulk or in buckets. However the funds are directly disbursed to the private (drilling) companies. In the period from 2001 to 2006, roughly 1200 water points were built and are hence used for small business activities by the households participated in that programme.

Loans for urban services upgrading and shared facilities in low income areas
According to UN-Habitat, by 2020 the number people living in the urban slums of developing countries without adequate WSS services will increase to about 1.4 billion. In this scenario, micro credits could be used as an instrument to finance the upgrade or building of shared facilities in “slum areas”.

Additional Information

 * WaterCredit by Water.org
 * Vietnam Women's Union
 * Three Cities Sanitation Project in Vietnam