Microfinance - the solution for the water and sanitation crisis? (Part 1)

Microfinance, alternatively called microcredit, is a term to describe financial services to those with low-income, or those with no/limited access to ‘typical’ banking systems. In essence, groups or individuals are given small loans with a regular repayment fee, to enable them to lift themselves out of poverty. Typically, microfinance has been used for income generation; to enable people to purchase items such as sewing machines to start their own business or become more employable. This ‘revolution’ in finance has allowed over 150 million low-income people around the world to receive small loans without collateral, to buy insurance and build up assets (Armendariz and Morduck, 2010). Microfinance has been vital for women's’ empowerment in many low-income countries, as it enables them to become more independent by making their own income and building transferable skills (Cheston and Kuhn, 2002).

However, more recently, people have started to use microfinance to invest in health and education. This has created an opening for microfinance to be used for the provision of safe water and sanitation supplies - particularly in regards to sanitation. There is a lack of universal access to water and sanitation that results in well over 1 million preventable deaths each year, and in both sectors, there is a critical need for greater sustainability (Montgomery et al., 2009). Sanitation has been cited as ‘the most important medical advance in the past 150 years’ (British Medical Journal, 2007) which microfinance has the potential to provide.

Interest repayments from a microfinance loan in India. Source: blogs.lse.ac.uk

In India, microfinance has been used most widely to fund local water and sanitation projects. Last year, I aided a peer’s work on water and sanitation in Bangalore, India, and found a local NGO to be financing small community groups led by woman to install toilets and drainage systems in their village. In urban India, often poorer households must rely on alternatives to state provision of water and sanitation, paying prices that range from 2-20 times more per litre of water than households with water connections (McPhail, 1993). Davis et al. (2008) research in Hyderabad posed the question: why do poor households choose more expensive but lower quality water and sanitation services than richer households? The answer lay in the mismatch of water and sanitation service pricing, and the financial management in low-income households. For example, poorer households tend to earn money and manage funds on a day-to-day basis, and thus find it difficult to save money to pay a monthly or bi-monthly utility bill (Whittington et al, 1991).

When Davis et al. conducted their research, households were asked about their interest in obtaining a microfinance loan of between 3,000-10,000 Rs. in order to obtain a municipal water connection, a toilet with a sewer connection, or both. By monitoring the WaterCredit programme developed by the US NGO WaterPartners International - which requires a family to form a joining liability group -  they found that respondents to their research were able to easily repay their loans, and build beneficial sanitation facilities.

There are, however, some people who are more sceptical of microfinance. Unfortunately, I am going to make this blog post come to a rather abrupt ending. In my next post, I will be looking at the arguments against microfinance, and asking the crucial questions: can the success of microfinance for water and sanitation in India be reproduced in Africa? And do these water and sanitation projects promote women’s empowerment? See you next time!