Microfinance

Microfinance is a lending mechanism, which is similar to a loan given by a bank, but differs in its nature and size. Microfinance is generally small in volume and responds directly to the specific needs of rural or low-income urban communities (WPP 2010). The term microfinance usually refers to microloans, microcredits or small loans that are given to individuals, households, groups or small business owners (entrepreneurs).

For example, a family or an individual buys a water/sanitation system. Here, the filter, rope pump or latrine can be considered as an investment for which the family or an individual contracts a loan. This becomes attractive for the microfinance institute (MFI), when the client can show that the investment will improve his/her income (e.g. treadle pump to irrigate a vegetable garden) (SINGELING et al. 2009).

On-site water and sanitation investment usually remains a household responsibility with choice about cost and quality limited to market conditions (VARLEY 1995). Therefore, microfinance is a suitable way for those who cannot afford to invest in expensive but higher quality water and sanitation systems.

For instance in Wogodogo, a low-income neighbourhood in Burkina Faso, a savings-microcredit initiative was established for household management of domestic waste and the development of household sanitation facilities. The credit was provided by LAGEMYAM, a women’s association working for improved sanitation. LAGEMYAM agreed to finance the initial 70% required to start up the credit system. The interest rate was set to cover the administrative costs. No securities to back up the loan were required, as the population did not have the resources to meet such requirements (SINGELING et al. 2009).

There are generally two kinds of sources:

• Formal Sources: microfinance banks, rural banks, NGOs, credit unions and micro loan organisations
• Informal Sources: community-based saving, loan groups and individuals

There are four types of microfinance for water and sanitation:

Formal loans for households: NGOs, micro loan organisations and microfinance banks usually provide these kinds of loans.In this case the borrowers apply for loans and enter into a legal agreement to make repayments according to a schedule. Depending upon the regulations of the governing institution, the borrowers may or may not provide securities (VARLEY 1995).

Targeted loans for households: These kinds of loans are mainly provided by development agencies that aim at improving water and sanitation conditions. They are specifically targeted at households who have poor sanitation facilities. The micro loan provider does not give the loan unless the borrower agrees to use it purposefully and with the quality required by the loan provider. In this case, monitoring is usually done by the loan provider to ensure that the loan has been used purposefully and with the quality agreed upon.

Informal loans: These are provided by community-based saving and loan groups as well as individuals (for example friends and relatives). To be able to get access to these loans membership in the group is a must.

Loans for small businesses: These types of loans are offered mainly to entrepreneurs who engage in the water and sanitation business (see sanitation as a business). It can be either formal or informal depending on the source of finance. The loans are mainly used by the enterprise as working capital or investment allowing it to buy raw material, or allowing it to create a stock of finished products (SINGELING et al. 2009).

(Adapted from KARNANI 2011)

Microfinance has grown considerably in the last 30 years and become increasingly commercialised. The volatile combination of profit-seeking companies, minimal competition, and vulnerable, ill-informed, and ill-educated borrowers has opened up dangerous potential for exploiting the poor.For instance, in the Indian state of Andhra Pradesh more than 200 people committed suicide, allegedly because of intimidation by MFIs. Government authorities closed down 50 branches of two major MFIs in 2006 and charged them with exploiting the poor with suspect interest rates and intimidating the borrowers with forced loan recovery practices.

For getting access to any kind of loan there are terms and conditions under which the loan is given. These terms and conditions include: type of loan, interest rate, period of the loan, securities, currency, methods of repayments, etc. Therefore, it is very important to be aware of all terms and conditions of micro loan providers and only then agree to take the loan. This will help to avoid any future frustrations.