Posted in Business

The missing middle

If you want to start an informal micro-enterprise, then it is usually possible to secure micro-credit, while banks will back well-established medium-to-large companies.  But in between lies an entire segment of entrepreneurs who are faced with a terrible problem: virtually no financial services serve their segment.

Recently I attended a workshop that had been organized by WASTE Netherlands on business opportunities in Sanitation.

There has been a shift to investing in the less explored sectors like sanitation and given the fact that this is a sector where most of the work should be done, its saddening.

Anyway, for two days, with representatives from Kenya, Ethiopia, Tanzania and Benin,  we had intensive  discussions on the possibilities of upscaling sanitation into viable business opportunities in the respective countries.

The objectives of the workshop were:

  • To explore opportunities for local financing of sanitation
  • To explore options for boosting sustainable financing mechanisms
  • To share experiences and lessons learnt from local sanitation models
  • To Make proposals on how to improve sanitation
  • Open new opportunities for financing sanitation as a business

Sanitation businesses are everywhere but faced with a lot of challenges that make them appear invisible. the main chalenge is few or nonexistent sustainable finacing options. This points to the need for financing models that reorient the focus onto local entrepreneurs especially the ones in sanitation businesses. Local financing is the best solution to fiancing these businesses but are there available products from our financial institutions that cater for such enterprises?

The realities of carrying out a micro sanitation business especially in the informal settlements where the service is met by far much more demand than supply is characterised by infrastructure, logistical, financial and social challenges that reinforces the obscurity of the invisible entrepreneur. It is upto the entrepreneurs to step up and grab every opportunity they can get to make their businesses work and become visible and then the financial institutions and other players will be willing to give them a second look.

Bringing together people from the financial institutions, business world, development partners and policy makers as in the case of Nakuru Municipality who were well represented by their municipal leaders, the workshop explored ways of upscaling sanitation businesses into viable investment opportunities.

It was more of a FYI to the financiers that Hey look, there is a big opportunity in sanitation that has been untapped for so long and you can invest in the sector and still realize your goals as commercial institutions.

As much as opportunities exist in investing and opening up access to finances for all actors in the entire sanitation chain including transport and treatment. However it also requires boosting up information opportunities for the entrepreneurs on financing and channels open for this. To determine the viability of local businesses under credit consideration, there is need to define the roles and responsibilities of all actors in the chain. If one level does not play its role, then other businesses will be affected. On the side of the entrepreneurs, formation of groups helps to improve their credit rating to be acceptable to banks.

Accessing financial resources from a financial institution for an entrepreneur is based on factors such as business orientation of the individual or enterprise, potential for growth and the risk factors associated with financing such a venture. The absence of good infrastructural support for accessing finance coupled with lack of security for the loans makes them less attractive to financiers. Other local conditions such as the inability of the customers to pay up for services rendered also compromise the ability of the entrepreneur to make proper projection on returns on investment.

Financial institutions realise the potential that lies in tapping into the small sanitation businesses. As highlighted by the Ethiopian Omo Mircro Finance Initiatives (OMFI), funding sustainable sanitation is an area of great potential. Experience from Kenya’s K-rep and Family banks too alludes to the vast potential in the otherwise traditional “unbankable lot”.

The very fact that this sector still remains largely unregulated becomes a challenge to the financial institutions; Lack of adequate collateral is another challenge to providing loans for the businesses. Even when in groups, SMEs are not able to mount sufficient assets to act as security for loans. Other concerns raised include the low technical feasibility of the sanitation businesses.

There was a common agreement that there have been a lot of discussions on how to address the issue in a more sustainable manner but this needs to move from mere rhetoric to practical action vested on local knowledge and realities of the communities.

But it also got me thinking about the missing middle? Is that what is happening to sanitation businesses? or is the sector still too small to be in the middle?

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Author:

Eco-entrepreneur and a Project Manager in Auckland, New Zealand.

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