The Small Scale Finance “puzzle”

Sophie Trémolet, Stockholm, 25 August 2011

2

Why look at Small Scale Finance? Financial needs Limitations of domestic private financing markets

The role of public finance How can public finance help? What are EU donors currently doing?

Case study: supporting sanitation microfinance in India

Key messages

Group discussion

Presentation overview

3

What is small scale finance? Small-scale finance (SSF) includes:

Microfinance: primarily to households, upper bound: ~ USD 5,000 Mesofinance: to small-scale enterprises, upper bound: ~ USD 500,000

Provided to Small Scale Agents (SSAs) Households, SSIPs, SMEs, CBOs, NGOs, local governments

Why look at small scale finance? Small Scale Agents finance and serve a substantial portion of the WATSAN market, particularly for the poor

Households are primary investors in on-site sanitation and water SSIPs serve a high percentage of the population (40 to 90%)

SSAs face a number of constraints, including financing: Lack of legal recognition e.g. informal status of operator, land tenure issues Poor institutional capacity (insufficient training, lack of business skills) Lack of capital or collateral for small private enterprises Limited access to liquidities for consumers

Introduction

Financing needs and instruments

4

Small Scale Agents Type of infrastructure for which they need finance

Financing needs

Households Water SanitationHousehold connections or water tanks

On-site sanitation facilities

Microfinance mechanisms such as:•Micro loans•Savings and loans combined •Group lending and solidarity mechanisms

Community Based Organizations (CBOs)

Water Sanitation

CBOs, user committees, cooperatives, neighbourhood organizations and self-help groups.

Upgrading, rehabilitation and extension of small piped networks/point source operators

Management of public toilets e.g. latrine cleaners and O&M

• Medium term loans (for community contribution and O&M management)

• Savings (savings first policy)/current accounts, short-term loans for repair

Small Scale Agents Type of infrastructure for which they need finance

Financing needs

Private Enterprises Water SanitationSmall Scale Providers •Water kiosk operators & carters•Latrine emptiers•Masons, small construction companies

• Small scale equipment e.g. gloves, carts, protective clothing

• Building materials

• Short term loans (working capital)

• Capital investment loans• Leasing of expensive

assets• Savings instruments• Current accounts • Overdraft facilities

Water tankers

Vacuum tankers

SME Private Operators•Equipment suppliers•Small water network operators (e.g. Aguateros)•Small sewerage network operators •Private land & housing developers

- Larger scale investments for equipment (as above)- Distribution networks e.g. building small bore sewer network

5

Financing needs and instruments

6

Gaps in SSF provision Domestic financing markets often inadequate

Financial institutions unaware of the needs of WATSAN sector Lending terms inadequate (high interest rates, short maturities)

Households

CBOs

Small Scale Providers

7

The “missing middle”

8

Public finance can help catalyse domestic private finance Bridge the capacity / awareness gaps Support the development of tailored products for WATSAN Soften financial terms

Potential financing instruments Grants (for capacity building, market research, product development, seed

financing for revolving funds, OBA subsidies) Equity (participation to investment funds or MFIs) Loans on concessional terms, guarantees

Main difficulties and risks in using donor funding Grant financing overall limited High transaction costs for donors to get involved at this level Donor intervention can distort local financial markets

How can public finance help?

9

Potential uses of public funding

Maximising the leveraging effect

10

Sanitation financing model

Source: Trémolet, Kolsky & Perez (2010) for WSPSanitation revolving fund

How to get funds from A to B?

A: Donor (source of funds)Implausible?

B: Small-scale Agents (SSA)

MFI / NGO (Microfinance

Institution)

Microfinance loan

Repayment, savings

Local commercial

bank

Commercial loan

Repayment

APEX (at national

level)

MIVs/ Multi-donor Trust Fund Donor flow: loan, equity, grant

Private flow: loan, (occasional savings)

12

Survey objectives Understand what EU donors are doing in the area of SSF in general and

whether they are providing/supporting SSF for WATSAN

Results of EU donor survey Responses from AFD, ACP-EU/DEVCO, DGIS, DFID, EIB, GIZ, SIDA and

DANIDA More information expected from Finland and Norway

Overall findings EU donors have limited experience in this area Most EU donors are focused on lending at national level to public actors

(Ministries, public utilities, more rarely local governments) Information is difficult to track (partly due to multiplicity of financial channels

and decentralised nature of many EU donor institutions) Some have expressed strong interest (e.g. EIB or AFD) in developing their

activities in that area going further, others have decided against (e.g. GIZ)

What are EU donors doing?

13

What are EU donors doing? Donor Support to SSF?

Support to SSF for

WATSAN?Comments

Micro Meso Micro Meso AFD Y Y N N Interested in exploring SSF for WATSANACP-EU/DEVCO

Y Y Y Y One project financed by the Water Facility (Kenya, via co-financing with WB via GPOBA)EU-ACP microfinance program (limited impact)

GIZ Y Y N N Decided after extensive research in Kenya & Uganda not to support SSF for WATSAN

DGIS Y Y Y Y Only 0.4% of their SSF portfolio goes to WATSAN (USD 0.3mn in 2009) and only for mesofinance

SIDA Y Y Y Y Only general support via core funding provided to WSP

DANIDA Y Y N N They foresee starting support to MF in Vietnam in the near future

Other information (not completed a full survey) DFID has experience in SSF in general (e.g. CLIFF) but not specifically in WATSAN, except through its involvement in GPOBA (link to the K-Rep program) EIB has ample experience in SSF in general (especially through European Investment Fund) but limited in WATSAN sector

Broadly agree that SSF for WATSAN can be a tool to help the poor but not the ultra-poor

Mostly agreed that improving access to SSF can enhance poor people’s access to WATSAN and that donors have an important role to play (although GIZ was more circumspect)

Diverging views as to whether on-lending terms should be restricted (AFD: conditions on passing down loan concessionality could be imposed; GIZ: strive not to distort the market)

Mostly agree that the lack of revenue-generation associated with water investments (for households) is not a constraint on microfinance (revenue generation exists for SSIPs, masons, etc…)

14

EU donor views on SSF

Case study: “Toilet loans” in India High demand for sanitation at household level

Low coverage rates in rural areas in particular (~ 27%) Total Sanitation Campaign aimed at boosting coverage

Growing number of NGOs and MFIs getting involved in the “toilet loan” business in urban and rural areas

NGO/MFI Number of toilet loans

BISWA 115,000 in last 2 yrs

Guardian 12,000 in last 3 yrs

BWDC 9000 in last 3 yrs

ESAF 3600

Grameen Koota 5050

RDO Trust 700

IIRD 552

SAMBAV 1710

Sample total ~ 150,000 loans~ 750,000 people

The microfinance context in India

SHG

NGO

Commercial Bank

JLG

MFI

Commercial Bank

NABARD

Guardian: supporting an NGO-MFI First “water and sanitation-focused” MFI (spun-off from an NGO,

Gramalaya) operating since 2008 Still small-scale (1 district in Tamil Nadu) but growing fast (20,000 loans

disbursed over 3 years, 60% for sanitation) Operating in rural areas and urban slums “Toilet loans”: between USD 180 to 225, over 18 months, 18% yearly

interest rate (reducing) + 3% charges Strong demand for toilet loans, 100% repayment rates Recognize can only reach ~ 30-40% population in villages Financial sources

Grant support: ~ USD 165,000 (water.org) – 6% funding Commercial funding: ~ USD 2.6 mn (local commercial bank, social

investors incl. Acumen Fund and Milaap) High “Leverage ratio” (16)

FINISH: Financial Inclusion Improves Sanitation and Health A 5-year multi-partner programme in India set up in 2008 Goal: support 1 million sanitation systems by 2013 through

a combined approach (with microfinance focus) Acts as an umbrella fund contributing to 6 partner NGOs who

dedicate 10% of their MF portfolio to sanitation Sanitation loans of 88 USD to 7,777USD Innovative aspects:

OBA-type payments to implementing partners and field workers for increased coverage (up to 100%). Accounts for 40% total budget

Life & health insurance component, linked to sanitation investment 132,000 toilet loans made thus far in 7 states across India Grant contributions by DGIS and BMGF estimated at 9% total

funding whilst the rest of financing is leveraged from banks18

FINISH – Innovative partnership

FINISH project in India (2)

19

P r o g r a m m e m a n a g e m e n t b o a r d

E x t e r n a l c o m m e r c i a l f i n a n c i n g

B W D C , B I S W A , E S A F , I I R D , S A M B H A V , R D O

1 m i l l i o n f i n a n c i a l l y i n c l u d e d c l i e n t s w i t h s a f e s a n i t a t i o n

P r o g r a m m e d i r e c t o r & h i s t e a m – a d d . s a n i t a t i o n s u p p o r t

M i c r o i n s u r a n c e

B I S W AB I S W A

N A B A R DN A B A R D N H BN H B

Community-Led Infrastructure Financing Facility

20

Community financing of housing & slum improvement projects (including sanitation)

Phase 1 (2002-2010) Initially piloted in India in 2002, later extended to Kenya & Philippines Managed by Homeless International Donor funding: DFID (USD 11.2mn) and SIDA (USD 4.6mn) – grants used as seed funding for revolving fund and leverage commercial financing Leveraged financial & non-financial resources: USD 87mn (leverage: 5) Implemented 29 projects (4 of which sanitation)

Type of support: 75% capital grants: enable partners to provide loans to projects (these

funds are later revolved to support new projects) Operational grants to cover costs of project preparation & management Loan guarantees from Homeless International guarantee fund

Phase 2 (2010-15) Increased funding: DFID (USD 24mn) and SIDA (USD 6.5mn) Looking to expand range of implementing partners and number of countries

21

Limited access to financing is a key obstacle for SSA to deliver sustainable services (by no means the only one and not necessarily the most important)

Few MFIs/ NGOs are involved in channelling financing to SSAs in WATSAN There is a need for building their capacity and awareness of financing needs

in WATSAN sector

Small-scale finance is not limited to micro-credit Consider a broad range of financial instruments at various scales and

combining them for maximum effect

SSF is only one instrument amongst many others, not a panacea Best suited to meet the needs of the “missing middle” rather than BOP

Donors can use a variety of channels to transfer finance to SSAs Consider channelling financing via multi-donor bodies and APEXes at

national level rather than directly

Sanitation may be the sub-sector where needs are greatest and holds most potential

“Take home” messages

22

1. How can donors contribute to supporting SSF: what works and what does not work?

2. How can we scale up support for SSF? 

Group work: 45 minutes – then reporting back and conclusions

Questions for group work

23

Meera Mehta (perspective from India)

Can MF make a significant contribution to improving access to water and sanitation (in particular) in India? [in answering this question, could allude to the current difficulties faced by some MFIs following the Andhra Pradesh crisis and how this has impacted the MF market so far]

What can the Rest of the World (and in particular East Africa, where she has worked extensively) learn from the India experience? What is “special” there that could not easily be transferred and what adjustments to the model may need to be done?

Questions for panel participants

24

April Rinne (perspective from international NGO)

In the experience of water.org, is it preferable to “bet” on supporting WATSAN NGOs to become more financially savvy or to “educate” financial institutions so that they better understand the financial needs of WATSAN actors?

Does she see more potential in microfinance for households or for small-scale entrepreneurs? Where should the emphasis go?

Questions for panel participants

25

Dick Van Ginhoven (perspective from bilateral EU donor)

Can MF be a key tool to meet the MDGs?

If so, how can bilateral grant donors best support the development of microfinance markets: any lessons from the FINISH project?

Questions for panel participants

26

Monica Scatasta

How can development banks incorporate micro and meso finance in the design of their lending projects?

Do they need to rely on broader efforts by grant donors in order to stimulate a market response?

How can coordination be achieved?

Questions for panel participants