Technical NotesMicrofinance for Water Access

The USAID-IUWASH Project aims to improve access to clean water for two million people across Indonesia. Toward this end, an important aspect of the Project’s technical approach is to mitigate the persistent deficiency of macro- and micro-level financing for water supply service improvement and expansion. The use of microfinance to help low-income households overcome financial barriers to obtaining piped water represents a notable example of how IUWASH is working to bridge the financing gap.

Increasing Access to Clean Water Using MicrofinanceExpanding piped water services does not by itself guarantee increased access to clean water, as there is a substantial upfront cost that many families around the country cannot afford. On average, new customers must pay a connection fee of approximately US$150 to tap into a municipal piped water system, although this charge can be as high as US$300 in cases where the pipe network has to be extended in order to reach the neighborhood.

Recognizing that connection fees continue to represent a significant barrier to increasing access to clean water

for low-income households, IUWASH will ramp up an approach implemented under the Environmental Services Program (ESP), a previous USAID project, whereby new customers can amortize the cost of a new connection through a partnership between the water utility and a local microfinance institution (MFI). This approach was very successful under ESP, resulting in 60,000 people gaining access to clean water,—but there are still opportunities for improvement and expansion. Since IUWASH began in March 2011, the Project has engaged MFIs and water utilities in each of the targeted provinces, seeking to build on existing partnerships and create new ones that break down the daunting lump sum connection fee into small, manageable monthly payments so that more people can “turn on the tap”. The diagram below illustrates the process by which IUWASH forges cooperation between MFIs and utilities.

Funding the Flow

Mrs. Rosniati, Microcredit for Water Access Beneficiary in Medan, North Sumatra (2009)

“This is what I need. The connection fee is Rp 1,340,000 and can be installed monthly for 18 times at Rp 92,000. This is an affordable price for

clean water for low-income people like me.”

Establishing Cooperation between Bank and Water Utility (PDAM)

Typical Microfinance Process Involving Banks The microfinance sector in Indonesia is one of the most developed globally, with a broad range of institutions, programs, and services that are governed by a detailed legal, regulatory, and supervisory framework. Microfinance services are provided by formal microfinance institutions, namely commercial banks and rural banks, which are regulated and supervised by Bank Indonesia as the central bank. The informal non-bank MFIs are organized as cooperatives.

How does the microcredit process for new water connections actually work? The first step is the preparation of a Microcredit Cooperative Agreement between the local water utility (Perusahaan Daerah Air Minum or PDAM) and the branch office of the local bank. This agreement contains the guidelines for the microcredit process, including the

responsibilities of each party. Once the guidelines are in place, IUWASH and related parties will provide internal training, and the water utility will open an account with the banking partner. Prospective customers can then begin applying for small loans to cover the connection fee.

If a customer fails to meet its monthly payment obligations to the bank for three consecutive months, then under the terms of the cooperation agreement, PDAM is required to terminate the water connection. In some cases, the PDAM will also provide a full or partial financial guarantee of all loans issued for new connections, thereby giving the bank an additional incentive to participate.

Triple Benefit for StakeholdersThe principal reason for the success of the microcredit program for new water connections is that each stakeholder—the bank, the water utility, and the customer—receives tangible benefits.

Benefits to Utility. From the standpoint of the water utility, a clear and direct benefit is attracting new customers, which expands the utility’s service base and increases its revenue flow. Further, offering microcredit to potential customers allows the utility to fulfill its public service mandate to serve all citizens, including low-income households.

Benefits to Bank. Similar to the water utility, the first and most obvious benefit of the partnership is the addition of new customers, which increases total loans and corresponding interest revenues. Importantly, offering loans for water supply connections is comparatively low risk, given the implicit and real guarantees provided by the utility and people’s need for water in their daily lives. And while the size of the initial loans may be small, it is important to see them as just that: initial loans. Once a new customer opens an account, there is ample opportunity for the bank to cross-sell other financial services, such as additional loans, insurance, time deposits and similar products.

Benefits to Customers. Access to clean water greatly enhances people’s overall wellbeing. The benefits include an improved standard of living and better health and hygiene practices, along with substantial time and financial savings that are well

General Scheme of Micro Financing for Water Access

documented. Having easier access to clean water improves people’s health (since piped water is safer and more reliable than other water sources), prevents waterborne diseases, and reduces expenses (since piped water costs much less than water purchased by the bottle from informal water vendors).

Results to DateWhile continuing to build on a successful partnership with Bank Rakyat Indonesia (BRI), IUWASH has also engaged new banking partners such as Bank Tabungan Negara (BTN), Bank Syariah Mandiri (BSM), and microfinance institution (MFI) such as a cooperative. As the accompanying table shows, there are currently 11 water utilities (nine new PDAMs and two PDAMs continuing an existing microfinance program) that have signed agreements with financing institutions and are now in the process of launching marketing campaigns to attract their first connections.

IUWASH is endeavoring to involve a portfolio of financing partners, thereby minimizing the extent to which the program’s success relies on any single institution. In this regard, BTN, BSM, and MFI such as cooperatives have embraced the concept of microcredit for water supply and engaged water utilities in several districts. Notably, these newer banking partners have helped to develop innovative approaches, such as involving local cooperatives as a means to attract and administer loans in a more cost-efficient manner.

IUWASH’s overall target is to establish 40,000 piped water connections financed through microcredit by 2016. To date,

about 3,476 new water connections has been installed through microcredit scheme which is spead in five cities of Serang, Kudus, Kendal, Mojokerto and Pinrang.

Microfinance for Water and Sanitation Initiative (June 2012)

Wilayah PDAM BankNorth Sumatra Langkat District

Binjai CityBank Syariah Mandiri (BSM)Bank Syariah Mandiri (BSM)

West Java/DKI Jakarta/Banten

Karawang District Bank Tabungan Negara (BTN)

West Java/DKI Jakarta/Banten

Serang Ditrict Bank Rakyat Indonesia (BRI)Bank Syariah Mandiri

West Java/DKI Jakarta/Banten

Lebak District Microfinance Institution (Cooperative) & BSM

Central Java Kudus District Bank Syariah Mandiri (BSM)

Central Java Kendal District BRI & BSM (plan)

Central Java Semarang District Bank Rakyat Indonesia (BRI)

East Java Surabaya City Bank Rakyat Indonesia (BRI

East Java Sidoarjo District BRI and BSM

East Java Mojokerto District Bank Rakyat Indonesia (BRI) BSM, BPR Bank Jatim

South Sulawesi Jeneponto District Koppas Utama Microfinance Institution (Cooperative)

Our cooperative is now able to distribute dividends or share the profits, which total 6–7 million rupiah per month. Hopefully, the amount will increase as new households are connected under the program being funded by BSM. We have been facing problems obtaining funds since there is high demand for leasing household connections

Ayatullah Humaini Head of Tirta Makmur Cooperative

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BSM has financed around 500 households. We have disbursed 500 million rupiah in credit in one month

Agung Wibowo Head of BSM Kudus Branch

I want to have my own PDAM connection, like those people who have already installed a PDAM water connection. But since I don’t have much money, I can only pay in installments

Ibu Hindiyati Community member of Lane Number 3, RT 03/ RW 01, Undaan Tengah village

I’m glad that I can use PDAM water. The water is clean. It feels clean when I bathe, unlike the well water. PDAM water can be used for drinking, washing, everything

Ibu Marfuah Community member, Lane Number 3, RT 03/ RW 01, Undaan Tengah village

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Technical NotesMicrofinance for Water Access

Indonesia Urban Water, Sanitation and Hygiene (IUWASH) is a five years development project funded by U.S. Agency for International Development (USAID) and implemented by Development Alternatives, Inc. (DAI).

For further information please contact:Indonesia Urban Water, Sanitation and Hygiene (IUWASH) Mayapada Tower 10th floor Jl. Jenderal Sudirman Kav. 28 Jakarta 12920, Indonesia Tel. +62-21 522 - 0540 Fax. +62-21 522 - 0539

www.iuwash.or.id www.facebook.com/iuwash twitter @airsanitasi