Micro credit versus direct subsidies in improving health care in developing countries

Low-income countries face major disease burdens from preventable and treatable communicable diseases. A persistent puzzle is the low uptake of highly effective preventive health products, such as toilets, even when they are subsidised.

New research by Britta Augsburg, Bet Caeyers and Bansi Malde at the Institute for Fiscal Studies, NHH and the University of Kent, presented at the Royal Economic Society annual conference 2019, studies the extent to which direct subsidy programs – where government subsidies are delivered directly to individuals or households – can achieve greater uptake of preventive health investments through the complementary provision of micro-credit.

The study reveals two important complementarities: First, micro-credit enables subsidy ineligible families to make the investment by providing them with financial resources they would not otherwise have; second, micro-credit helps subsidy eligible families overcome financial barriers embedded within specific subsidy schemes, for instance, when the subsidy is provided after the preventive health investment is made to avoid misuse of funds.

The study builds on a randomised controlled trial in rural Maharashtra, India, which provided clients of a large micro-finance institution living in randomly selected villages with access to a micro-loan for sanitation. The micro-loan is collateral-free but offered to women in groups on a joint-liability basis.

The trial, which took place in 2015-2017, coincided with the launch of the Government of India’s flagship sanitation program, Swacch Bharat Mission (SBM). This program aims for India to become open defecation free by 2 October 2019, the 150th birth anniversary of Mahatma Gandhi. SBM offers subsidies to vulnerable households to cover a large part of toilet construction costs. However, the subsidy is available after the start of construction, with half available partway through the construction, and the rest once the toilet is completed.

Over half of the 1 billion people globally who defecate in the open live in India, with a lack of finance or affordability identified as the key barrier to owning a toilet by households. A companion study shows that prior to the start of the SBM and microfinance programs, fewer than 30% of the microfinance client households in the study owned a toilet. By September 2017, 41% of microfinance client households in the villages that didn’t receive the sanitation micro-loans (comparison villages) had a toilet compared with 50% in villages that received the sanitation microloans (intervention villages). Given that the microfinance program was randomly allocated to villages, this difference in toilet ownership can be attributed to the availability of the microfinance for sanitation.

In line with this, this study shows that among microfinance clients without a toilet at the start of the microfinance intervention, around 20%, regardless of their subsidy eligibility, take the sanitation micro-loan. Effects on toilet uptake, however, differ by subsidy eligibility status. Almost all subsidy ineligible households use the loan to construct a new toilet, resulting in a 20-percentage point (or 50%) increase in toilet ownership relative to the comparison group.

Among subsidy eligible households, only around 45% of loans result in a new toilet. Although households living in areas experiencing large delays in subsidy disbursement or high toilet costs were more likely to take the loan, they were much less likely to use the loan to construct a toilet. This suggests that while these households value the microloan to provide bridge- or supplementary- funding, the extensive delays and/or high toilet costs make toilet construction less attractive to subsidy eligible families, relative to other investments they could make.

These findings show that micro-credit and direct subsidy schemes can be meaningfully integrated to induce uptake of preventive health technologies. Governments might want to consider such purposeful integration when designing policies for financing of preventive health products.