Clients need finance options

Poor households need financing and are willing to work with loan terms

In 2012-2013, iDE partnered with IDinsight to research Willingness-to-Pay with Financing. The research showed that, under certain conditions, financing has the potential to increase latrine uptake fourfold (at a $50 market price) and decrease operating costs by 70%. However, setting up partnerships with microfinance institutions (MFIs) is a long, iterative process that requires a lot of hands-on management.

Building on the IDinsight research, iDE launched a sanitation financing pilot. Theoretically, developing a sanitation financing model is a one-time upfront cost, and marginal costs will decrease when the model is scaled and replicated. However, even when working with a partner with whom iDE had previously developed an effective model for selling water filters on credit, the lessons learned from the previous experience were not immediately applicable in the sanitation finance pilot project. Moreover, despite demonstrating that latrine loans were profitable and showed 100% repayment rates by the end of the pilot, MFI partners remained reluctant to providing latrine loans after the pilot programs. Three reasons are likely for this reluctance:

1. MFIs are for-profit enterprises, and latrine loans are less profitable than other products because latrines are not income-generating assets. Thus, latrines loans and other social-impact loans have been restricted to a minority percentage of an MFI’s total portfolio and are not considered a core part of the business.
2. MFIs may be waiting for more proof of a positive business impact. The first successful partnership in Cambodia between an MFI and a WASH organization (Hydrologic) is less than ten years old. While finding MFI partners is easier now with the recent proliferation of lenders, increased competition has made finding those willing to partner with development organizations on social loans that may not have the same significant returns a much harder proposition.
3. Third, by the end of the finance pilot, both MFI partners expressed interest in scaling up financing. However, when presented the ambitious targets of iDE’s program, they expressed significant reservations. In discussions with the management it seems that capital is not an issue, as they have access to affordable capital from organizations like Kiva that have a focus on WASH. Rather, it is their overall lack of capacity—insufficient human resources and limited management information systems— that makes it difficult to reach scale. Further support would likely be needed to help MFIs achieve scale quickly.

Unclear commitment and limited capacity for MFIs to provide sanitation financing at scale begged the question of whether efforts to engage them were worth the cost-savings of sanitation financing that the Willingness-to-Pay research demonstrated.

Providing access to finance that isn’t a loan

Because of the findings from the pilot project, iDE decided to explore what other models might be appropriate for providing financing to rural households that avoided the need for external institutional partnerships.

A survey conducted in 2017 on women’s roles in the latrine businesses identified that women had a significant stake in many of the businesses (see graphic below).

To help address the need for finance, iDE developed a training for latrine business owners with a special emphasis on women that focused on

• how to offer a payment installment plan (e.g., spreading the latrine payments over several months),
• how to evaluate client credit worthiness (i.e., likelihood that the client could and would repay),
• how to document plan repayment and make collections, and
• how to budget for this within the business.

The response to this training was positive: 41 latrine businesses attended the trainings, with 58 total participants. While men still comprised the majority of those participants, a third of the participants were women, with women representing half of the businesses.

While no goals were set on the number or percent of women involved in the training, iDE was very interested in trying to engage as many as possible as part of our gender equity strategy. Training, however, doesn’t necessarily imply empowerment, and we’re also cognizant of the risk of incidentally increasing the unpaid burden of work on women without necessarily improving their decision-making power or influence. Anecdotal feedback of participant enthusiasm and request for additional advanced training indicates that these pitfalls may have been avoided. A more detailed study of this effect is ongoing.

In order to encourage businesses to provide payment installment plans to the customers who need them most, iDE offered latrine business owners an insurance guarantee for defaults by poor customers (as identified by the Cambodian government’s IDPoor system). Essentially, businesses could recoup a percentage of their loss from iDE for a default by an IDPoor customer.

What we’re learning about Installment Plans

Following the training, these latrine businesses started to offer payment installment plans to clients who wanted to cancel their latrine order, often due to lack of total funds when the latrine was ready to be installed. As of mid-2018, 80 payment installment plans had been offered by the businesses; only one client had defaulted on repayment, two remained outstanding, with full repayment (96% rate) from all the others. To date, no businesses have applied to receive any reimbursement on defaults per iDE’s insurance guarantee.

As part of the training, iDE had suggested to businesses to assign an administrative fee on top of the latrine cost to recoup costs associated with their handling of the installment plan (i.e., having to make several trips for collection, etc.). Because businesses had a very difficult time getting customers to agree to the administrative fee, iDE switched the training to suggest that the latrine cost be increased by $5 and then to offer a $5 discount to those customers who could pay the full amount in cash on delivery.

Interestingly, an alternative to the installment payment plan that many customers identified as being interested in was a delayed payment in full, otherwise known as a “balloon payment.” iDE plans to investigate this kind of payment method and potentially include this model in future trainings.

An unintended consequence of this pilot was how the latrine businesses consistently applied what they learned from the payment installment plan training to other aspects of their business. The most frequently reported instance of this was businesses using payment tracking tools and collections training to recover funds when clients were unable to pay after latrines had been delivered. As of mid-2018, latrine businesses had reported using iDE’s training to support repayment on at least 176 remedial collection plans.

Recently, iDE has equipped the Sanitation Marketing Academy with a payment installment plan curriculum that has been revised and improved based on pilot learnings. These trainers have been tasked with supporting supply chain management staff to deliver these trainings and provide consistent coaching throughout iDE’s latrine business network.