Microfinance - A Solution to the Water and Sanitation Crisis? (Part 2)

   Despite my last blog posts talking about the many merits of microfinance, it has been used in developing countries to varying degrees of success. In India, the microfinance funding crisis in 2010 caused a complete slow down of the market as banks became unsure of lending due to the uncertainty of the sector (Tremolet and Kumar, 2013).

   Additionally, criticisms of microfinance have lauded it a ‘Neoliberal Fairytale’, as without a large injection of government or aid funds, the microfinance institutions charge very high interest rates - without a subsidy, this can soar up to 50% and beyond (Bateman and Chang, 2009). Businesses using microfinance loans that latch onto a good business idea that is accessible to poorer people will eventually result in a ‘pile-up’ of people taking on this idea, leading to over-saturation of the market. Overcrowding results from limited options in terms of technology, skills, and financial resources. Ultimately, microfinance can do little to solve these problems.

   However, these criticisms are mostly due to using microfinance for money making, but the schemes I am interested in are for sanitation where microfinance has been proven successful. A report commissioned by WaterAid found that in Tanzania, building a latrine can cost around 112% of a poor household’s yearly income. Therefore, being able to finance building a latrine through microcredit is very important.

Sanitation in Africa is vital to ensure water sources are not contaminated. Source

   In Africa, there are a number of different ways microfinance loans for sanitation can be ran. Traditional methods, Trontines’, consists of a groups of people, generally with a similar age or economic standing, who pool their financial resources. The aim of this is to reinforce social solidarity through financing activities with a shared common interest (Kouassi-Komlan and Fonseca, 2004). In West Africa, village and cooperative savings account and credit are another way: decentralised financial instruments which fall under a regional law adopted by the Council of Ministers of West African Economical and Monetary Union (UEMOA). This has emerged in response to demands for financing from members of communities and cooperatives in the last few years, and has become very popular. NGO projects are another source through credit schemes that have been set up in order to fight poverty and create employment through private sector development. They may also lend money for sanitation schemes with a low interest rate (Kouassi-Komlan and Fonseca, 2004).

   One of the most common problems with microfinance are its needs for solid guarantees, the management capacity of the financing organisations and their lack of enforcement of the legal framework when these organisations cannot fulfil their obligations. Additionally, not everyone has access to microfinance; in Kenya, only around 700,000 of the 9-10 million poor have access. Which proposes the question: is microfinance really available to the world’s poorest? Although I think microfinance can be a great initiative to fund sanitation facilities, I believe that it cannot be the only answer. It is important to keep researching and finding new innovative ways of funding sanitation coverage for the poorest in Africa.