The author argues that the case of lending for water and sanitation is a "classic market failure". Though it can be a productive activity for lenders and borrowers, there are a variety of factors that cause it to remain a small share of local commercial banks and micro-finance institutions' portfolios. The report outlines ways that government donors and philanthropists can be effective at spurring on this market.
- In much of the developing world, water and sanitation providers are households, small-scale private operators, and NGOs. Small and medium enterprises tend to lack adequate financing, as their scale is too large for microfinance and too small for commercial banking.
- Local commercial banks and microfinance institutions rarely finance specifically for water and sanitation because they may be unfamiliar with the need or perceive it to be risky and/or low return.
- Loans for water and sanitation investment can be 'income enhancing' by reducing medical expenses and increasing productivity.
- Grant funding is well-suited to the challenges of small scale finance as it can provide support for capacity and information building. As grant funding from bilateral donors is in decline, foundations can play an increasingly important role.
- 'Socially minded' microfinance institutions are likely the best recipients for this type of funding.
- Water.org, partially supported by PepsiCo Foundation, is the only NGO to have a specific initiative for supporting microfinance institutions in water and sanitation lending.