Microfinance sector in kenya
Funded with generous support from the David and Lucile Packard Foundation
This report analyzes the potential for using innovative financing mechanisms to sustainably improve water
supply and sanitation in Kenya. The term “sustainable” is used in the financial sense, i.e. a lack of external
donor support over the long-term, and in the environmental sense, defined in terms of watershed protection,
lack of surface water contamination, and protection of scarce water resources.
We conducted a desk review of existing evidence on the use of microfinance in the water supply and sanitation
(WS&S) sector; held a series of meetings with 168 households in 7 villages in Kericho and Nyando Districts of
Western Kenya; interviewed independent and State water providers, and other key informants. Our results
should not be interpreted to be representative of Kenya, although some of the main findings are supported by
other evidence and by literature in the water and sanitation sector. We also conducted a more detailed analysis
of one community managing the Kapekelek water system in Kericho district.
Management capacity continues to be a problem in many small water systems in Kenya. Improved access to
financing would undoubtedly be helpful to many of the better-managed systems, but lenders should extend
these loans with an eye toward the types of management failures common in the WS&S sector.
Water tariffs in many rural and small-town systems are too low, and most connections are still unmetered,
preventing many systems from recovering operations and maintenance costs, let alone service debt on
expanded or improved systems. Unfortunately, many customers are accustomed to unrealistically low tariffs
and expect government subsidies. Shifting public attitudes on tariffs is difficult but would be facilitated by
requiring active community participation, which will also serve to inform communities about the true costs of
water infrastructure and mobilize support for higher water tariffs.
Household “retail” loans, including group lending, appear promising for water supply. However, there are
very few cases in Africa of ongoing programs that lend for improvements in water supply without external
The case for retail loans for sanitation
is less clear. Most of the failures observed in microfinance have been
in sanitation programs. Though simple pit latrines are inexpensive in rural areas, these households may wish to
borrow for more durable, hygienic toilets however.
Community-based lending in WS&S may help predominately middle-class consumers and not the rural
poor, though this is not necessarily a problem. There may well be poor rural villages which are willing and
able to pay both O&M costs and debt service. These villages can identify themselves to MFIs through a well-
crafted borrowing arrangement. In many cases, however, it may be relatively better-off communities or
households who are most interested in using microfinance to improve their WS&S situation.
Improving access to water supply, not environmental sustainability was the predominant concern among
households, NGOs and government officials. Throughout a number of meetings and interviews,
environmental “sustainability” concerns were rarely raised spontaneously. Water availability, driven by seasonal
rainfall patterns, was very often a concern but was rarely linked to upstream watershed protection.
Potential roles for donors interested in microfinance in WS&S
Support communities in developing project proposals in the framework of existing programs (like the
K-Rep program), or MFIs in learning how to perform “due diligence” for community-based lending.
Support programs for household “retail” lending to extend household connections, perhaps through
capital subsidies for the largest, most capital-intensive infrastructure elements (i.e. water and sewer
mains). In sanitation, donor support could also be used to cover “software” costs of hygiene education
programs which stimulate demand for toilets (like the Community-Led Total Sanitation program).
Support more careful third-party program evaluations of pilot projects. Anecdotal evidence from
these programs, often written by the implementing NGO or agency, does not provide sufficient
evidence to design strategies for scaling up this approach.
Rather than directly capitalize MFIs or subsidize interest rates, subsidize capital costs for projects
through a coordinated approach like the Global Partnership on Output-Based Aid (as in the K-Rep
program), National Challenge Funds, Water Services Trust Fund, or the Africa Water Alliance
(AfDB). These capital subsidies should be scarce enough not to crowd out financing.Source: www.researchgate.net
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