Scaling Up Energy Access: Barriers to Entry for Microfinance Institutions and Energy Companies?
Dear all,
In addition to opportunities, let’s talk about barriers. So in this discussion thread we’re posting the question:
Question 2: What are the barriers to entry for Microfinance Institutions and Energy companies?
We look forward to hearing your experiences.
Kavita and Phyllis.
I think that a specific problem in Africa is the fact that only few MFIs have a serious rural outreach. Most MFIs work in a urban and peri-urban context - So offering small scale renewable energy products is not really adequate. Grid connections, back up systems or energy efficiency products might be the better offer, but currently I know only Equity Bank in Kenya offering this kind of loans.
Did you come across other exemples of MFIs offering grid-connection loans? What do you think why they are so few offering that?
Noara
Based on FINCA’s experience with energy loans in Uganda, the barriers were/are as follows:
1) Supply issues- we started with the intention to launch several different types of products, but ran into several supply chain issues and eventually decided to focus on just one product (solar) and bring it to scale and profitability before offering other products. Our program in Uganda formed partnerships with several suppliers to ensure timely installation, and after sales service. However, supply in more remote areas still remains a challenge.
2) We realized that we needed to build internal capacity in order to be able to scale up with energy loans because they require more aggressive marketing. We put into place a sales force (with technical training on solar home systems) dedicated just to the marketing/ education of benefits of solar home systems as well as after sales customer care. Anecdotally, we are now seeing a “demonstration effect”- once clients see how their neighbors system works, they want to purchase one. Or, once a client tests the waters by purchasing a small system, they buy another or want a larger one.
3) Profitability is also a challenge/ barrier. Energy loans, at least for the time being, are more cost intensive than a regular business loan because they require more intensive marketing and after sales customer care, etc. Also, most of the sales are of smaller systems that are not profitable/ less profitable. There is profitability potential with scale, especially if sales of larger systems can be increased to help “cross-subsidize” sales of smaller systems or the MFI can target new market segments that were not being reached before with business loans, but the program runs at a loss until that scale/ product mix can be reached.
Dear all,
It would be great if we could discuss a bit on how the financial crisis has impacted funding flows (for MFI inclusive) from developed to developing countries and how quickly both sides are willing to roll out and grow energy loan portfolios?
Kavita
Kavita,
Though not much experience about
international impact, locally it has impacted a lot. Due to financial crisis
funding to MFIs has been severely limited which is naturally affecting energy
lending as well. If funding (credit + TA) is made possible I believe more
number of MFIs will be gradually entering into energy space to help energy loan
portfolio grow.
Ramesh
Dear Ramesh et al.,
I've been following this forum for a while now but until now haven't found the time to contribute. Your post caught my attention as it particularly relates to a project I'm currently working on with PlaNet Finance Southern Africa (PFSA).
From Cape Town, South Africa we're currently piloting an innovative model integrating microfinance, energy efficient/renewable energy (EE&RE) solutions, and micro-franchising. Our goal is to establish a financially sustinable nation-wide (& potentially regional) micro-franchise made up of entrepreneurs (micro-franchisees) who retail EE&RE solutions to low-income households. Our current focus is peri-urban areas (townships), and the main products we are piloting are low-pressure solar water heaters and insulation (specifically insulated ceilings).
Our model harnesses microfinance at the demand side (through partner Housing MFIs) to finance customers, as well as supply side (through partner micro-enterprise lenders) to finance the franchisees. (On a side note, we'ree also making use of a number of supplementary financing mechanisms, including carbon clearance -VERs).
With regards to your post, I believe a key barrier to developing such a model in the past has been the lack of an entity in the position to coordinate support and financing to assist MFIs in the development of energy-specificn loans. PFSA's experience as a provider of technical assistance enables us to fulfill this crucial role, taking the burden off the MFIs' often overstretched operations and management.
Feel free to contact me with any questions or general comments about our project.
Regards,
Adam Stelle
Here are some points
Barriers for MFIs
- Risks – tied up with repayment issue mainly. Lack of insurance mechanism in place
- No separate credit fund for energy lending. Whatever fund they have tend to invest into their normal business/portfolio.
- Subsidized schemes, particularly on capital and interest rate
- Lack of motivation/commitment to energy lending as they are not going to benefit much as costs/risks associated with energy lending may outweigh the income from the business.
- Lack of awareness among MFI board members/senior management about the importance of energy related product to their clients and how they value in terms of benefits contributing to timely repayments
- Lack of capacity/confidence among MFI staff in product diversification
- Lack of coordination/partnership with energy product suppliers
- Lack of appropriate regulatory environment/support to MFIs to enter into this new market.
Barriers for Energy companies
- Lack of capacity/knowledge in terms of business development/growth by linking with microfinance
- Shortage of manpower to construct biogas plants in construction season
- Lack of fund to produce/purchase raw materials for energy product related equipment/accessories
- Late payments of govt. subsidy to companies (govt. subsidy to end user is channeled through companies in Nepal)
- Lack of credit facility from banks to such companies due to collateral issue or credit worthiness
- Sometimes unhealthy competition among companies focusing in limited geographical areas
- No supportive policy related issues to help motivate companies to enter into the market
- NO credit facility for end users due to reluctance of MFIs to lend on energy products thus thwarting marketing/promotional efforts of companies.
- Lack of standard quality energy products (similar product items imported from different countries/companies vary in terms of quality/price)
Ramesh Gautam
Ramesh,
About a year ago when I was in Nepal,
there were talks of MFIs getting into the space of end use consumer financing
for biogas. Has that happened at all? Despite subsidies, an active market and
well developed private sector, why are they still not in? Do they just not see
the opportunity?
What is your experience?
Thanks for the list of barriers!! They are
all totally relevant to all countries.
Kavita
Thanks Kavita for your concern!
As I mentioned earlier with some reasons, so
called big MFIs are still not entering into biogas market comfortably. Some
have started since last year, but due to liquidity crunch in the financial
market it has been hard for them to meet demand of their clients for regular
products. Thus biogas lending has been far from thinking particularly to (new)
MFIs unless some dedicated credit fund is made available along with some
incentive package for MFIs to enter into this market.
In my experience, if MFIs really internalize
biogas loan product it would be great for improved life of their clients. I
have noted that MFIs once introduce this product hardly they can pull back due
to ever growing demand from their clients with good repayment performance. But
full attention need to be paid if MFIs and construction companies go hand in
hand to deliver quality produc/services to satisfy the clients. I see lot of
scope, but not really from MFIs’ perspective yet. They are focusing more
on outreach and portfolio from their business as usual. Hope something can be
done to promote energy lending.
Thanks
Ramesh
While the discussion has largely centered on MFIs, another look at the Market map show that MFIs are Support - services to the Value chain, working within the enabling environment provided by the governments and the various policies at hand.
This points us to the fact that building credible businesses is important in that they will attract the Banks to fund them. However, if we are look at the barriers to achieving this goal, we have to analyse the current cultural givings existent in the people we want to reach. It would take a paradigm shift for them to be able to demand and hence access better energy services.
Businesses in energy currently are predominantly small and its a high order if they are to engage in the mass-market enlightment. This then goes to the Civil Society. These are the major cultural changers. However, energy has taken a back seat to many of them. Energy activities in the civil society in Uganda account for less than 2% of the budget.
With the Civil Society doing its work in the community, then supporting businesses to be stronger, the FIs will be able to gain interest in funding energy.
As it stands, lets build synergies all accross and develop a multi-pronged approach.
Bryan
Uganda
Dear all,
As it is a quiet start to the day, I
thought I should get this going with the experience we are currently facing
trying to link micro energy entrepreneurs to MFIs. Our experience in East Africa the last few months are showing that MFIs may
not necessarily be the most appropriate financing channel for entrepreneurs who
are often individualistic and have little time to be involved in the group
lending model that MFIs promote. A majority of these micro energy entrepreneurs
in rural and peri urban areas did not want to take loans from MFIs as they
could not leave their businesses to attend group meetings. Most of the
entrepreneurs were also far apart from each other and therefore, it would take
a lot of effort and funds to organize themselves regularly. The enterprises are
often managed by one person, in most cases the entrepreneur himself or herself!
Another common challenge they faced were the high interest rates which they
have to repay from the beginning. Businesses take a few months to take off and
thus, they were not necessarily making sufficient profits. Interestingly, many
of them had tried taking loans before from MFIs but it did not necessarily
progress their business… enterprise remaining status quo.
We have at the moment chosen to work with
Banks who were more open to financing individual entrepreneurs (albeit with a
guarantee at first), SACCOs, and other semi informal groups. We think that MFIs
still have a big role to play in financing energy consumer products but they might
need to rethink their lending models for financing entrepreneurs. We still have
to wait and see what unfolds but meanwhile, would be great to hear more about
your experiences, if any.
Thoughts and counter reactions welcome!
Hi Kavita,
Your experiences are interesting because they are so different to what we have experienced with the MFIs we work with. We have not seen a group loan yet (although I am sure we will eventually). The use of the loan is either for home use or business - and sometimes a mixture of both. Most of the loans we deal with substantially cut energy costs for the recipients, so having to worry about business success is less relevant (particularly for the home use loans)because the loan pays for itself with savings created.
Our MFI partners tend to provide at least a one month period before repayments start. Interest rates they are charging are roughly in line with other products they are offering, and are very reasonable.
On the other hand, I have found SACCOs to be more difficult to work with. We are currently talking with a large one in East Africa, but on the whole they have been far less sophisticated than our existing MFI partners, and that has meant it has been hard for us to partner with them.
Could it be that you just had bad luck with the initial MFIs you worked with?
Hugh,
Would be glad to share notes. Our findings were also coming from the entrepreneurs we work with! We have trained hundreds of micro entrepreneurs in East Africa and many do not want to take the route of MFI financing. This does not mean we are closing doors. We are still continuing dialogues with MFIs, and other Financial Institutions. Like I said in an earlier post, we are not there yet!
Best,
Kavita
Dear All,
Do you think that financial instituions (FI) were offered product development support in developing energy portfolio they can still divert funds intended for financing energy?
What other support do you think the FI require?
George
Phyllis & Kavita,
I believe that some of the reasons that have presented barriers to the entry of many FIs to finance energy are:
Energy is a fairly new frontier and their is lack of sufficcient information on energy financing. Additionally, most FIs are not bold enough to identify new opportunities and develop financial products for them but prefer to copy from the successful financing models. For example 10-15 years ago many FIs had shifted their focus to high net-worth clients and made it very touhg for the poor/low income clients yet when some FIs eased requirements and enrolled huge numbers now all the FIs are downscaling. Those charged with creating linkages between the customer and the FIs should develop strong training, marketing and promotion campaigns to create awareness amongst the FIs and the target market.
However its important to note that various energy technologies are unique and present risks that do not necessarily fall on the ordinary mainstream banking risks such as: completion risks, technology risks. As such FIs that are considering financing the various energy technology needs should engage/or get support from an energy expert to support the in developing an energy portfolio. This may present a challenge therefore the donor organisations should consider facilitating this area.
My two cents
George
