Financial services and environmental health : household credit for water and sanitation

This paper, for technical professional staff in the U.S. Agency for International Development (USAID) advocates the use of microfinance institutions as an integral part of financing strategies for increasing home-based water supply and sanitation (WS&S) coverage in urban and peri-urban areas. It examines whether a credit approach is superior to grants for supporting on-site peri-urban WS&S, what lessons from microfinance can be used in the design of credit programmes, and what types institutions are best suited to supply household credit to support WS&S initiatives. The lack of appropriate credit instruments and institutions limits poor consumers' ability to pay lump sums for up-front costs such as water and sewage conn fees, or for on-site water and sanitation facilities. After the introduction, chapter two gives the rationale for targeting households as the market for loans and explains how urban and peri-urban markets differ from those in rural areas. It discusses the shift in water and sanitation programmes from a supply-led approach to one based on demand, distinguishing between facilities households are willing to pay for and those that may require subsidies. Chapter three gives an overview of credit, cost recovery, and WS&S, and discusses the changing views about the role of microfinancial services in supporting economic and social development. It explains that household credit services are no longer seen as a vehicle for subsidizing low-income groups but as a way to satisfy demand in low-income market segments for simple and appropriate financial products. Chapter four summarizes a number of institutional frameworks and credit programmes that might support efforts to de improved WS&S facilities. Chapter five examines examples of credit-financed approaches to WS&S development targeted at low-income groups in ten countries. These examples include household credit as well as other programmes but are not presented as studies due to the uneven availability of data. Lastly, chapter six offers conclusions about the general characteristics of successful credit schemes and summarizes recommendations on their design and management.