Many potential customers without access to electricity have trouble mobilizing sufficient capital to buy solar products. Microfinance loans for solar products can increase sales and allow solar enterprises to reach clients with low or irregular incomes.
Arc Finance, a US-based non-profit organization, focuses on addressing many of the challenges to scaling energy lending.
At present, roughly 1.6 billion people do not have access to electricity and over 2.5 billion people do not have access to clean cooking options. Most of the people without modern energy access also lack access to financing that would enable them to purchase cleaner energy services. People on low incomes in developing countries typically spend a large proportion of their income on energy. For many rural customers, buying and installing a solar home system typically costs at least US$ 250 (depending on the system size and where it is in the world), but can provide light and electricity for many years with minimal ongoing costs aside from routine maintenance and occasional battery replacement. However, experience has shown that most potential customers without access to electricity have trouble mobilizing sufficient capital to make a lump-sum cash payment for solar products. As such, it is often easier for solar enterprises to serve higher income people who can purchase products on a cash basis rather than find ways to target lower income people.
Potential for energy-lending underutilized
Lack of affordable, appropriately designed loans and other financing options is a key barrier limiting wider access to clean energy products and services. Without end-user finance options available for their customers, it can be difficult for most solar energy enterprises to achieve significant scale. Microfinance institutions (MFIs) have demonstrated that providing credit to micro entrepreneurs and households can be efficient, responsive, and profitable to both the borrower and institution. If appropriately designed, loans offered by MFIs can provide clients with access to high-quality modern energy services by closely matching loan payments to existing energy expenditures or income flows.
Such loans can offset the high upfront costs associated with cleaner, more efficient energy technologies, including solar. Despite its being the largest expenditure in many poor households, the potential for energy lending is currently underutilized, due in large part to a knowledge and resource gap between consumers, MFIs, and energy providers. However, evidence suggests that access to modern energy can be greatly enhanced with access to innovative lending and microfinance options and can provide a new, profitable product line for both microfinance institutions and the larger financial community.
For many sustainable energy enterprises, market potential is limited to customers who are able to purchase products and services on a cash basis. The potential market for solar energy can be transformed into actual customers if end users are able to access financing for the purchase of energy products and services from microfinance institutions. Building strong linkages between MFIs and energy enterprises can benefit many stakeholders.
Households and small businesses are able to purchase solar products and services that bring economic and livelihood benefits otherwise out of reach if they were required to pay on a cash-only basis. Microfinance loans for solar products can increase sales and allow solar enterprises to reach clients with lower incomes or irregular income streams. For MFIs, the introduction of special energy loans offers the potential to increase client retention, diversify product offerings, increase competitiveness, and ultimately expand the client base while having added social and environmental impacts.
Experience has shown that linking energy and microfinance can be effective, but requires serious commitment on the part of both the MFI and energy enterprise. For example, partnering with an MFI may require a solar enterprise to invest significant financial and human resources in client and loan officer training beyond core operations. As many MFIs can have a nation-wide reach, solar companies may also find that a new microfinance partnership often requires a rapid expansion of installation and after-sales service coverage to currently underserved geographic areas.
On the MFI side, energy loans need to be designed carefully and may require technical training of loan officers, modifying operations, introducing energy-specific monitoring and evaluation processes, and identifying dedicated capital to fund an energy portfolio. Finally, the structure of a partnership agreement between energy enterprises and MFIs must clearly outline roles and responsibilities of each stakeholder, communication and coordination channels, warranty and after-sales service provisions, and training requirements.
Many MFIs and energy enterprises find it helpful to seek technical assistance in one or more of the above processes. Arc Finance is a US-based non-profit organization focusing on addressing many of the challenges to scaling energy lending. Founded in 2008, Arc Finance now has operations in seven countries in Africa, Asia, and Latin America developing and scaling energy lending portfolios with microfinance institutions and energy enterprises.
Arc Finance offers a comprehensive package of technical advisory services and technical expertise to financial organizations, particularly microfinance institutions, as well as to energy enterprises that are interested in introducing energy-lending programs. These services include market research and energy needs assessments, technical assistance for designing business models and energy loan products, facilitation and development of partnership arrangements with energy enterprises, and design and evaluation of pilot programs.
Arc Finance also assists financial institutions with building the capacity of staff and management, client training and awareness-raising, and establishing monitoring and evaluation systems. For those financial institutions with some experience in lending for energy services, Arc Finance offers a comprehensive scale-up package aimed at identifying obstacles, refining processes, diversifying product offerings, and reaching scale.
By Jacob Winiecki, Senior Program Specialist,
This article was first published in the Partnership for Clean Indoor Air bulletin, January 2010 issue 22