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Hi, I'm a finance blogger who is interested in how different financial tools, including microfinance, can deliver real value to consumers.
The â€œclassicâ€ model for microfinance entails lending for income generation. But the microfinance community is starting to experiment with ways to bring the power of microfinance for other purposes related to the needs of the poor and under served in the developing world. I interviewed April Rinne, Director of WaterCredit, about the role of microfinance in delivering improved access to water and sanitation.
Q: Tell me about WaterCredit.
WaterCredit is an initiative of Water.org, which operates in approximately ten countries in Asia, Africa, and Latin America. Water.org was officially launched earlier this month with the combination of WaterPartners International and H2O Africa. This gives us a much broader platform to engage in a variety of water-related work, including WaterCredit, and it also blends the strengths of the two co-founders of Water.org â€“ Gary White, who co-founded WaterPartners, and actor Matt Damon, who co-founded H2O Africa.
With WaterCredit, we put microfinance tools to use in the watsan sector. It connects the microfinance and watsan communities to scale up access to credit and capital for individual- and household-based watsan needs. It is the first program of its kind, linking microfinance with watsan through multiple models and across multiple countries. WaterCredit currently operates in India, Kenya and Bangladesh. We work with eleven partners â€“ a variety of commercially-oriented MFIs and NGOs.
Q: How does WaterCredit work?
This depends on the needs of the local community as well as the robustness of the indigenous microfinance and watsan sectors. We partner with watsan NGOs and MFIs, linking them together to share expertise and information and facilitating relationships to provide access to finance for MFI clients with unmet watsan needs.
WaterCredit loans may be used for sinks, latrines, water pumps, rainwater harvesting equipment and other basic watsan products. The rural communities we serve are those in which women (and often girls) may spend up to six hours a day walking to fetch water from a remote source. Frequently the water is dirty, which adds problems of water-borne disease. In urban areas women may spend the same amount of time queuing for water, which is often also of poor quality. By making loans for things that benefit access to water and hygiene, weâ€™re able to free up that time to use for other productive purposes, while lowering the incidence of water-borne disease and providing financial empowerment.
Q: Why credit instead of grants?
For water projects to succeed, you need local ownership, management, and accountability. One way to cultivate that interest is through sweat equity provided by the local community (and we may provide a grant to match that), but another simple yet more powerful instrument to use is debt. If end-users of WaterCredit know they have to repay the capital provided, theyâ€™re more likely to take accountability seriously. In addition, by providing appropriate debt capital that is then repaid, we are able to release and leverage the grant capital for much more effective purposes. To this end, we provide â€œsmart subsidyâ€ grant capital to MFIs and watsan NGOs for the â€œsoftwareâ€ costs associated with the development of a WaterCredit loan portfolio, such as product development and market assessment costs. We expect the â€œhardwareâ€ costs of launching a new watsan loan product to be the responsibility of the MFI, and in turn that any WaterCredit loan portfolio is financially sustainable.
Scalability is critical to the WaterCredit model, because there are more than 900 million people in the world without reliable access to clean, safe water. Microfinance has shown its ability to scale successfully over time, by adapting financial tools that are appropriate to the needs of the poor and underserved and requiring an ability to repay. The watsan needs of the poor simply wonâ€™t be met if we look at the situation only through a grant-based funding filter.
Q: Can you tell us a bit about the microfinance mechanism that WaterCredit uses?
Weâ€™ve provided catalytic grant capital (smart subsidies), debt capital, and a variety of credit enhancements (e.g. first loss loan guarantees and standby letters of credit) to attract additional commercial capital to the table for MFIs. The loans made by WaterCredit partner MFIs may be to individuals, households or groups of households via SHGs.
Q: What are the loan terms like?
WaterCredit loan sizes and terms vary by country. The global range is between $100-300 and the average size is $150. The loan tenor is usually between 18-24 months, and the interest rate is set by MFIs in relation to the rates of their other income- and non-income generating loan products. In India itâ€™s generally been between 18-22%. Weâ€™re very careful to work with our partners on setting appropriate terms, and undertake market assessments when needed to ensure weâ€™re striking a range between ability to repay.
Q: Who takes out the microloans?
About 90% of our clients are women, which isnâ€™t surprising since theyâ€™re more connected to the home and are often the ones who fetch the water.
Q: What else would you like to say about WaterCredit?
Until now, watsan organizations and MFIs have talked to each other occasionally at best. Watsan organizations generally donâ€™t have in-house financing expertise, and vice-versa, MFIs donâ€™t have in-house watsan expertise. I believe weâ€™re at the beginning of seeing that situation change. It will take time, but given the growing water strains and watsan needs of the global community, it wonâ€™t be possible for watsan and microfinance communities to remain in separate silos.
To quote a couple oft-used puns (the water world is full of them!) â€“ though WaterCredit may seem like just a drop in the bucket today, I think weâ€™re very early on to something thatâ€™s going to turn out to meet overflowing demand â€“ and a flood of success â€“ in the years and decades to come.