Does microcredit for water and sanitation improve household welfare? Evidence from Indonesia

The water supply and sanitation (WSS) sector requires large household investments and expenditure. Microfinance provides an alternative financing scheme to support in reaching universal access to WSS to improve public health and well-being. Using propensity score matching to Water.org’s household survey data, combined with the Village Potential’s village statistics, this study aims to evaluate the impact of microcredit devoted to improvements in water and sanitation facilities towards household welfare measured by the WSS Joint Monitoring Programme (JMP) ladder status, income, and the share of health expenditure. Due to data availability limitations, the results indicated an associative relationship, as opposed to a causality relationship, between WSS microcredit participation and the respective outcomes. Participation in WSS microcredit was significantly associated with a higher JMP ladder for sanitation access but not with a JMP ladder for water access. Moreover, borrowers’ participation in WSS microcredit was associated with a significantly higher monthly income and a significantly lower proportion of health expenditure. Future evaluation studies of WSS microcredit should focus on improving data collection or conducting randomized control trials. For ensuring better practices, microfinance institutions (MFIs) should conduct stringent monitoring on fund usage to assure households benefit from the expected outcomes of WSS improvements.