Microfinance for Rural Piped Water Services in Kenya: Using an Output-Based Aid Approach for Leveraging and Increasing Sustainability

This paper describes a pilot project in Kenya. The project uses an output-based aid (OBA) approach to leverage co-financing from a private microfinance bank for small piped water systems managed by community- based organizations. Water sector in rural Kenya suffers from severe constraints in availability of finance. Though the establishment of the Water Services Trust Fund has attracted donor resources, donors focus on new projects or those that have completely collapsed. Hence, existing small projects hesitate to invest in maintenance and business expansion. The pilot project was designed to minimize need for grants in the development of infrastructure, and to be scalable in the Kenyan context. It was based on innovations such as use of microfinance to leverage commercial resources, OBA structure to ensure appropriate incentives and development of a market for business development to increase sustainability of small water projects. Lessons include:

• Need for a project incubator to guide financial institutions in initial stages;
• Need for simple credit assessment tools;
• Importance of regulatory framework and enabling environment.