Driving Latrine Affordability With Access to Finance

LESSON LEARNED: Financing has significant impact on latrine uptake, but setting up sanitation financing is a hands-on effort that requires significant investments in field-level coordination and partner management.

The Sanitation Marketing Scale-Up (SMSU) project partnered with IDinsight to research Willingness-to-Pay with Financing. Sanitation financing is a promising approach for increasing latrine uptake cost effectively.

Under certain conditions, financing has the potential to increase latrine uptake fourfold at a $50 market price and decrease operating costs by 70%. However, setting up partnerships with microfinance institutions (MFIs) is a long, iterative process that requires a lot of hands-on management.

Theoretically, developing the sanitation financing model (known in the sector as Sanitation Financing, or SanFin) is a one-time upfront cost, and marginal costs will decrease when the model is scaled and replicated. However, even when working with a partner with whom iDE had previously developed an effective model for selling water filters on credit, the lessons learned from the previous experience were not immediately adopted in the SanFin pilot project. Moreover, despite demonstrating that latrine loans were profitable and showed 100% repayment rates by the end of the pilot, MFI partners still showed reluctance in integrating SanFin at scale after the pilot programs. Three reasons are likely for this reluctance.

First, MFIs are for-profit enterprises, and latrine loans are less profitable than other products because latrines are not income-generating assets. Thus, latrines loans and other social-impact loans have been restricted to a minority percentage of an MFI’s total portfolio and are not considered a core part of the business.

Second, MFIs may be waiting for more proof of SanFin’s positive business impact. The first successful partnership in Cambodia between an MFI and a WASH organization (Hydrologic) began only three years ago. Now, finding interested MFI partners is easier, with MFIs voluntarily seeking to partner with development organizations on social loans. Financing products with positive social impact are becoming a more prominent consideration for MFIs, especially as they look to attract social investment funds, improve their public image, and compete for rural market share. However, it is too early to see MFIs making large institutional changes to accommodate the scale and speed of SanFin that the WASH sector is looking for.

Third, by the end of the SanFin pilot, both MFI partners expressed interest in scaling up SanFin. However, when presented the ambitious targets of SMSU, they expressed significant reservations. In discussions with the management it seems that capital is not an issue, as they have access to affordable capital from organizations like Kiva that have a focus on WASH. Rather, it is their overall lack of capacity—insufficient human resources and limited management information systems— that makes it difficult to reach scale as quickly as SMSU required. Further support would likely be needed to help MFIs achieve scale quickly.

Unclear commitment and limited capacity of MFIs to do SanFin at scale begs the question of whether efforts to engage them are worth the cost-savings of SanFin that the Willingness-to-Pay research demonstrated. It is worth exploring what other models are appropriate for providing financing to rural households that may avoid the need for external institutional partnerships. More learning and experimentation is necessary to better understand how to integrate financing in sanitation market development.