Credit Crunch: Affordable financing options for WASH businesses are badly needed
In a series of posts, we will present the main challenges that businesses face when expanding the range of WASH products and services available to households in Ethiopia. After describing these challenges, we will recommend specific regulatory and/or policy actions to address those issues, and which also are intended to improve the overall business climate in the country – so that enterprises can more easily start up, grow, and serve their communities sustainably.
This seventh of eight planned articles addresses some of the challenges experienced by enterprises when seeking credit (loans) to finance their water, sanitation, and hygiene (WASH) product and service lines.
Why does this matter?
Currently, only nine percent of Ethiopians have access to basic sanitation services – a serious situation that affects public health, education, and many other aspects of the country’s economic and social well-being (JMP, 2021). Achieving universal access to basic WASH facilities cannot be done by government or NGOs alone; it will require a strong contribution from the country’s private sector. The Government of Ethiopia recognizes this and is working to strengthen private sector businesses that offer WASH products and services (including household sanitation) as a key element of its greater focus on hygiene and environmental health (FMoH, 2016). These measures are necessary because the current market only meets a small fraction of the country’s enormous needs.
To gain insight into how these challenges can be addressed, and to do so in a manner that ensures the solutions are affordable to all, the USAID Transform WASH team spoke with a wide range of experts – including business owners, government officials, and technical specialists in Ethiopia and other East African countries – to get their advice and recommendations on how to develop and expand Ethiopia’s WASH market. The post that follows is largely based on these experts’ reflections.
To explore this topic in more depth, follow this link to the full Learning Note.
The credit challenge
Small and medium enterprises (SMEs) in Ethiopia often cite the lack of access to affordable financing as one of their top challenges (others include taxes and tariffs, access to foreign exchange, start-up capital requirements, intellectual property rights, importing equipment and raw materials, and others discussed in the Learning Note referenced above). For enterprises offering sanitation and other WASH products and services, accessing loans is even more difficult than in other sectors of the economy. This is because financial service providers, including commercial banks, microfinance institutions (MFIs), and savings and credit cooperatives (SACCOs) typically have little or no experience working with such businesses (agricultural businesses are more frequently the recipients of financing). Additionally, finance institutions have seen the WASH sector as highly subsidized by the government and other agencies and, therefore, not profitable with high risk for lending. Potential investors and entrepreneurs may also be unsure about the magnitude of consumer demand for WASH products and services, so they question the ability of WASH-related businesses to start up and remain profitable.
However, observations from Transform WASH experience indicate that WASH businesses generally have acceptable rates of loan repayment, though these enterprises sometimes have problems with late payments due to the seasonality of their customers’ agriculture-based income (Aboma, 2020). From a business’s perspective, even when loans are available, the high interest rates are a key disincentive to borrowing money needed for importing supplies and equipment, business expansion, or for other major expenses.
It’s important to keep in mind that the term “WASH business” refers to a broad range of enterprises, including small-scale masons, who make and/or install latrines; retail shops that sell latrine pans and related supplies; importers and wholesale distributors; and commercial manufacturing operations. Many such businesses not only offer WASH products and services, but also manufacture or sell other items. For smaller enterprises, borrowing from SACCOs or MFIs may be suitable options, but as mentioned above, these financing institutions may be unfamiliar with WASH business. For larger-scale WASH product manufacturing, financing will likely need to be secured through commercial banks (or brought in by foreign joint-venture partners).
How to address the financing challenge?
Part of the financing solution will require building a greater understanding within the financial sector of the scope and scale of business opportunities offered by the WASH sector. The government-led, multi-partner One WASH National Programme (OWNP) recognizes the importance of strengthening the private sector for WASH and has highlighted the importance of introducing innovative financing models through commercial banks and MFIs (OWNP, 2019).
The Ministry of Finance and Economic Cooperation, a key OWNP player, is particularly well-positioned to increase the availability of loans to WASH businesses. There is a growing body of evidence from interventions carried out with OWNP (such as the USAID Transform WASH project and others) that demonstrate the positive influence of MFI and SACCO loans made to WASH enterprises (Aboma, 2020).
Some potential WASH sector investors and entrepreneurs have expressed a desire for “demand guarantees” by the government or development agencies to ensure, for example, a minimum sales quantity or pricing level. Again, this may result from a lack of familiarity with the WASH sector, from perceptions that consumer demand and willingness to pay are not strong enough, or a concern that the WASH marketplace is still new and untested in the country. More effective communication and dissemination of WASH market information, sharing of the experiences of existing WASH enterprises, and giving a voice to satisfied household WASH customers who desire improved products and services could all contribute to strengthening financing opportunities for the growing WASH private sector.
- Collaborate with the Federal Cooperative Agency and the National Bank of Ethiopia to help commercial banks, SACCOs, and MFIs develop loan products suitable for businesses manufacturing or selling WASH products and services.
- Establish systems to track WASH market demand, sales, pricing, and other relevant data to help regulatory and finance institutions to support and manage more effectively the expansion of the WASH economy.
- Encourage national and development banks in Ethiopia to set a target percentage of their funding to provide low-interest loans to qualified WASH sector enterprises. In addition, establish a “loan guarantee” facility to help encourage financial institutions to engage with the private WASH marketplace.
- Address the perceived risk of making loans to WASH businesses through improved communication with the financial sector and by presenting evidence of consumer demand and loan repayment records.
- Encourage OWNP partners to provide demand guarantees for WASH product orders and service contracts. Ensuring stability and profitability, especially in this early phase of the WASH market’s evolution, will help reduce start-up risks both for local manufacturers and importers.
The next (and final) post in this series will address the critical issue of consumer financing to purchase WASH products and services.
Photo Credit: Monte Achenbach, Masons constructing toilet slabs
About Transform WASH
USAID Transform WASH aims to improve water, sanitation and hygiene (WASH) outcomes in Ethiopia by increasing market access to and sustained use of a broader spectrum of affordable WASH products and services, with a substantial focus on sanitation.
Transform WASH achieves this by transforming the market for low-cost quality WASH products and services: stimulating demand at the community level, strengthening supply chains, and improving the enabling environment for a vibrant private market.
USAID Transform WASH is a USAID-funded activity implemented by PSI in collaboration with SNV, Plan International, and IRC WASH. The consortium is working closely with government agencies, including the Ministry of Health, the Ministry of Water, Irrigation and Electricity, the One WASH National Program, and regional and sub-regional governments.