Energy Access and the Microfinance Sector
Modern economies are built on access to modern energy services at an affordable price. Therefore, it is perhaps not surprising that over 1.4 billion people in the developing world lack access to electricity. For Bottom of Pyramid (BoP) rural populations in developing countries, even the most basic energy needs are a significant drain on their meagre resources. The costs of paying for mobile-charging services and kerosene for lighting and cooking account for about 30% of household income. This reliance on expensive energy sources, even without taking into consideration the health and safety costs of kerosene, keeps people rooted in a poverty cycle.
Microfinance Institutions (MFIs) are in a position to bring micro-energy solutions to off-grid rural communities by leveraging their network among the economically deprived, the access to financial services they provide, and their expertise in bringing people out of poverty. Loans that provide clients with access to basic energy services through solar products makes them more loyal customers and protects MFIs from defaults on loan payments when kerosene price go up. However, comparatively few MFIs and cooperatives have advanced beyond the pilot stage in clean energy loan financing. There are obstacles across the off-grid energy supply chain, and MFIs must strike a balance between not jumping into scenarios doomed to fail and not doing enough to take advantage of a major market.
MFIs have had successes in supporting micro-enterprises within the off-grid energy sector. Their role, however, is better suited for users that have some qualifications for credit and make loans that are large enough to be financially attractive for MFIs. Solar is currently the most attractive off-grid solution (not including cooking), but it requires a high initial cost of capital. For entrepreneurs, the savings from switching away from kerosene and the additional economic activities, including income from providing mobile-phone charging services, are substantial enough that these loans carry low levels of risk. Another example of successful involvement of MFIs are solar micro-grids, like the ones supported by Mahashakti Foundation in a couple of villages such as Odisha, India. Entire communities pitch in together and reduce the risk profile. Once there is access to electricity, it can be utilized for productive activities, opening further opportunities for MFIs.
For the very poor, MFIs may not be the most suited vehicle for access to finance. They do not qualify for loans, their needs are very small (solar lantern or a pico-system) and MFIs lack a strong distribution network in rural areas, especially in Africa where the population density is low. Without distribution and post-sales servicing, end-users are unlikely to successfully integrate the new energy sources in their economic lives, making these investments risky from the MFIs perspective. The SMEs that serve as energy providers in the rural off-grid energy sector also tend to be start-ups, which adds to MFIs’ perception of energy as a risky sector. MFIs need to invest a substantial amount of time and money to boost their capacity to penetrate the poorest off-grid rural populations.
Access to more modern energy services have other social benefits that cannot be captured as direct or immediate monetary returns. A solar lamp can save fuel expenditures for a poor household in the short term, but the educational benefits for children can alter the family’s long-term ability to climb out of the poverty cycle. Improved cook-stoves require less firewood, which has environmental benefits. But the MFIs’ investors and business model do not allow them to make the necessary investment to reach end-users whose energy needs are basic and who have high risk profiles for less tangible returns.
There are, however, novel approaches like Solar Sister’s micro-consignment lending model that open opportunities for MFIs. Currently, this approach still requires donor support initially and MFIs only participate at a later stage, but MFI participation could expand with maturity. It seeks to simultaneously address women’s empowerment and energy poverty through an Avon-style distribution system for basic products like solar lanterns. Women are given a startup kit of inventory, training and marketing support. They then go out to their network and effectively function as a distribution channel and pay back Solar Sister once sales start. At the end-user level, savings groups are used to purchase solar lanterns. Eventually, the entrepreneurs qualify for credit through MFIs. This model has proved scalable in Uganda, Rwanda and South Sudan.
Using a similar approach, SolarNow is addressing the distribution challenges in Uganda and Tanzania with a franchise model. Its franchises expand its network and are responsible for sales and installations of Solar Home Systems (SHSs) while the head office supports marketing, training, and credit assessments. This model is flexible and enables rapid scaling-up through standardization. Providing franchisees with working capital loans is a less risky alternative to lending directly to end-users for MFIs. Franchisees are selected with care, and their skills and networks help absorb local circumstances without undue shock. The subjective knowledge of franchisees is also useful in making assessments of credit-worthiness and monitoring repayment. They also serve as a vital channel of communication with the end-users to ensure understanding of and satisfaction with the product.
A more widespread and perhaps more scalable solution is the pay-as-you-go (PAYG) model. Instead of people, it relies on mobile phone infrastructure for distribution network of solar products imbedded with chips that block electricity once the customer’s balance has been used. End-user customers only pay 10-30% of the system cost up-front. They then purchase credits through mobile-based payments or cash payments to a designated agent for ability to use the service. It can function as a rent-to-own or an energy-as-service model. The former gives customers an incentive to maintain an asset they will later own but is costlier compared to the latter, which also has a lower risk of technology change. This model reduces the upfront costs to the customer and allows them to use as much as they can pay for. It also lowers the risk of non-repayment for the entrepreneur because they can simply block access to service if customers do not pay. If a system is unused for a period of time, the entrepreneurs can transfer it to another customer for little cost.
From the MFIs’ perspective, the major advantage of supporting PAYG solar entrepreneurs is the opportunity this model opens up for MFIs. For many end-users who have never received formal financing, a PAYG system helps develop a history of making payments for a service, makes them aware of the benefits of using solar products and improves their economic activity. They can then qualify for micro-credit to further scale-up their income generating activity. MFIs have a new base of clients who have already been indirectly trained in prudent financial management.
The micro-energy industry has some way to go before it matures, but rather than waiting for other pieces to fall into place, MFIs can adapt as some notable examples have shown. Through innovation, they can stay true to their sustainable lending model and also help provide energy access to those most in need. By Utsav Dhoj Adhikari, Research Associate