The water sector in Kenya, especially in rural areas, has suffered from significant constraints in the availability of finance. Government resources have been limited and non-governmental organizations
(NGOs) and faith-based charities have to some degree filled the financing gap. However, this finance suffers from a lack of coordination and predictability. With the newly set up Water Services Trust Fund (WSTF), donor resources have increased and focus on reaching the poorest. As a result, local communitybased organizations (CBOs) have generally developed water supply systems using their own internal resources and available grants; often this extends the development period of a project to over
five years. Many CBOs are interested in commercial loans to expedite the financing of their infrastructure as demonstrated by the comprehensive field assessments by government and other agencies, such as
the Athi Water Services Board (a public asset holding company), K-Rep Bank (a microfinance bank) and the World Bank’s Water and Sanitation Program. Donor funds focus on new projects or those that have completely collapsed as it is easier to show resultant “impacts” of new infrastructure. Thus, there are minimal incentives for existing small projects to invest in maintenance and business expansion through capital investments. These trends exist against a backdrop of sector reforms that seek to increase the
autonomy of water providers. The Kenyan financial sector has seen increasing levels of liquidity resulting
from reduced domestic borrowing by the government. Local finance institutions are investigating the introduction of more innovative financial products to expand their portfolios and diversify their assets.
Kenya has a well-developed microfinance sub-sector that has expressed interest in the water sector as it fits well with its mandate to serve the poor. Mehta and Virjee (2003) have noted that the water sector provides an entry point for local finance institutions to develop expertise in infrastructure lending. The confluence of these factors makes Kenya an ideal context for the development of innovative credit-based finance products for community-managed small piped water systems. This paper describes a pilot project which uses an outputbased aid (OBA) approach to leverage co-financing from a private commercial
microfinance bank (K-Rep Bank Ltd) to increase the sustainability of CBO owned and managed small piped water systems.