23 Replies Latest reply: Mar 6, 2014 8:51 AM by vdeodhar RSS

    E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances

    1231309 C4D Extraordinaire

      DESCRIPTION


      Efforts to provide energy access on a commercial basis to rural populations in developing countries face a range of challenges, including access to finance. Off-grid customers from lower income communities currently pay a high price for purchasing kerosene for basic lighting services and switching to renewable energy based systems would not only save them fuel-costs but also improve their overall quality of life. However, the high upfront cost of the renewable energy based systems (handheld devices and stand-alone systems) restricts them from making this switch. This is identified as a major barrier by all stakeholders committed to the delivery of energy access solutions in a commercially viable manner and at scale. Over the past decade, microfinance institutions, supported by the international development community, have played an important role in providing direct consumer finance for purchase of handheld devices and single home solutions. In addition to microfinance, a number of other innovative end-user finance schemes have emerged in recent years. Building on the findings from [USAID's Renewable Energy Microfinance and Microenterprise Program (REMMP) | http://www.arcfinance.org/remmp.html, and specifically the experience of Arc Finance, this 3 weeks long e-discussion will feature and discuss a number of mechanisms for downstream end-user finance and their integration into innovative energy access business models:


      Week 1 (Feb. 18 - Feb. 25):   Asset finance

      Week 2 (Feb. 25 - Mar. 4):     Microfinance and remittances

      Week 3 (Mar. 4 - Mar. 11):     Other innovative end-user financing models

       

       

      Expert Moderators

      Nicola Armacost.JPG

      Nicola Armacost – Managing Director, Arc Finance (USA)

      Nicola Armacost is the Managing Director of Arc Finance; formed in the spring of 2008 to expand access to finance for clean energy and water. Niki has over 19 years experience in development with a focus on financing solutions for the poor; from 1993 to 2008, she worked at Women’s World Banking, a global microfinance network where she held a number of senior management roles. Niki is an advisor to a number of finance and energy organizations globally and is the Co-Chair of the SE4all Investment and Finance Working Group of the Practitioner Network. She also serves on the Board of MISFA (the donor consortium for microfinance in Afghanistan). She has provided tailored technical assistance, presented papers, given lectures and run conferences and exchanges on financing mechanisms for clean energy all over the world. Niki holds a Bachelor of Arts degree in International Relations from the University of Toronto, Canada, an LLB from Queen's University, Canada and an LLM from the Osgoode Hall Law School, Canada.

      pbaldinger.png

      Pamela Baldinger – Energy Advisor, USAID (USA)

      Pamela Baldinger currently serves as Energy Edvisor in the Energy Division of the Bureau of Economic Growth, Education and Environment at USAID. She specializes in clean energy programs, designing and managing programs in such areas as renewable energy, clean cookstoves, and cross-sectoral programs involving health, humanitarian assistance, and economic growth. She is the USAID manager of the Renewable Energy Microfinance and Microenterprise Program (REMMP) implemented by Arc Finance, and helped create two Development Credit Authority guarantees supporting small-scale renewable energy devices.

       

       

      Supporting Material

      Watch the introductory webinar:          Consumer Finance for Small Scale Off-Grid Energy Webinar - Feb. 18, 2014

      Download the webinar presentation:    N. Armacost - P. Baldinger / Webinar Presentation - Feb. 18, 2014

       

      _____________________________________________________________________


       

      PART II: Microfinance and Remittences


      Expert Contributors

      Yara Akkari.jpg

      Ms. Yara Akkari, Remittances Specialist, Arc Finance (USA)

      Ms. Yara Akkari is leading the implementation of a business model to promote the use of remittances as a means to purchase clean energy in Haiti. Yara has spent her career in the development sector in a range of different capacities including governance, social development, microfinance, renewable energy and culture. Most recently, she worked at Eko Green, a company based in Nigeria, as a consultant. Her research and work at Eko Green contributed to the implementation of innovative organic farming and low cost ecological housing in Africa. Before joining Eko Green, Yara served as a project management and research consultant for various UN agencies. She worked for the UNDP in strategy development and institutional building for the Lebanese Ministry of Finance and the Investment Development Authority of Lebanon (IDAL) and in the promotion of cultural diversity in least advanced countries through management of projects at the International Fund for Cultural Diversity (IFCD) at UNESCO Headquarters in Paris. She also consulted for Women’s World Banking (WWB), a network of microfinance institutions, contributing to their research and communication initiatives. Yara began her career at Ashoka, an NGO that supports social entrepreneurship worldwide, where she managed fundraising, developed a newsletter on innovative solutions for social change, and supported Ashoka’s fellows in their efforts.  Yara received an MS in Development Studies from the London School of Economics and a BA in International Economics from ASSAS University in Paris.

      www.arcfinance.org

      Jose.png


      Mr. José Manuel González, Director de Negocios, Te Creemos (Mexico)

      Mr. José Manuel González, is a founder, a partner and the COO of Te Creemos, a regulated MFI based in Mexico. Created in 2005, Te Creemos provides financial services to more than 100,000 low income people. Te Creemos has 87 branch offices and 1,500 collaborators spread across the Mexican territory with US$60,000,000 in assets and a US$45,000,000 loan portfolio. Te Creemos was one of the first recipients of an ECOMICRO prize for MFIs in Latin American to support the development of a clean energy program. ECOMICRO, which was launched in 2012, was developed by the MIF-IDB/Nordic Development Fund.  From 2000 to 2004, José Manuel served as Commercial Director of BANSEFI (a National Popular Savings Bank owned by the Government). From 1985 to 1993, José Manuel was a Fund Manager at Operadora de Bolsa, a Mexican brokerage firm. José Manuel is Industrial Engineer with a degree from Universidad Iberoamericana, Mexico City.

      www.tecreemos.com

      Saiful Islam.JPG



      Mr. Saiful Islam, Microfinance Operations Specialist, Arc Finance (USA)

      Mr. Saiful Islam is Arc’s Microfinance Operations Specialist, and brings over 20 years of experience in the microfinance industry. Prior to joining Arc, Saiful was at Women’s World Banking (WWB) where he spent over 15 years working closely with some of the largest MFIs in Asia and Africa, providing strategic advice and technical assistance. His prior experience includes several years with the Shakti Foundation, a retail MFI in Bangladesh that he co-founded as well as at UNICEF Bangladesh where he served as a consultant in the Field Operations section. Saiful has spent his career supporting MFIs to improve and expand their operations, refining existing products and introduce new ones. Saiful is recognized as an expert on the group lending methodology and has successfully introduced individual lending to traditional group lending MFIs. He has also assisted several MFIs—CARD Bank (Philippines), ADOPEM (Dominican Republic), U-Trust (Uganda), KMB (Pakistan) and KWFT (Kenya)—to introduce voluntary savings. Saiful has authored several publications on savings and portfolio quality management, including a book called Introducing Voluntary Savings – A WWB How-To Guide. Saiful holds Bachelor’s and Master’s degrees in Finance from Dhaka University. www.arcfinance.org

      Suresh Krishna.jpg



      Mr. Suresh Krishna, Managing Director, Grameen Financial Services Pvt. Ltd. (India)

      Mr. Suresh K. Krishna has been at the helm of activities at Grameen Financial Services Pvt. Ltd. since its inception in 1999; he has over 15 years of experience in microfinance and entered the field of development in 1997. Under Suresh’s leadership, GFSPL has developed a focus on the double bottom line, ensuring high social impact and financial sustainability, and provides low income households with many non financial services along with financial services. GFSPL was the first MFI to introduce automation using the open-source technology, MIFOS. Under Suresh’s guidance GFSPL has received many awards and recognitions including 17th Best MFI in the world by Forbes in 2007, Pioneer award in 2006 from Grameen Foundation. GFSPL is amongst the first 3 MFIs in India to get certified by the Smart Campaign for meeting global client protection standards and the 2nd MFI to be certified by Truelift as “Achiever – Pro-poor MFI”. GFSPL has been rated mfr2 by CRISIL and alpha minus for social performance by Mcril. Suresh was instrumental in initiating the setting up of The Association of Karnataka Microfinance Institutions (AKMI) and was also part of the founding team which started microfinance industry associations including MFIN (Microfinance Institutions Network). He has served on the boards of Sa-dhan (the national body of MFIs) and FKCCI (Federation of Karnataka Chamber of Commerce & Industry). Suresh currently serves on the Board of Micro Finance Institutions Network India (MFIN) and AKMI, the Microfinance Industry Associations in India, and is also the Chairman of Microfinance Focus, and Managing Trustee of Navya Disha and GK Development Trust. He serves on the Boards of Buzz India Trust, Community for Open Source Microfinance (COSM), USA and Financial INclusion Improves Sanitation and Health (FINISH), Netherlands. Previously, Suresh worked for an NGO that focused on micro enterprise development, non-formal education and also on the promotion of women self-help groups. Suresh has also founded and run small business enterprises in computer education, industrial safety products and consultation in local area networks in companies. He has a Masters in Sociology and MPEFB from IIMB. www.gfspl.in

       


      Sateesh Kumar.JPG

      Mr. Sateesh Kumar, Managing Director - Global Consumer Finance, d.light Design (India/Global)

      Mr. Sateesh Kumar has 25 years of experience in varied industries including microfinance, insurance and retail in South Asia and the Asia Pacific region.  Sateesh’s focus has been building sustainable and progressive businesses through a strong combination of sales, operations and strategic orientation. During last three years as Executive VP, Operations at SKS Microfinance Ltd, one of the largest MFIs in India, Sateesh served as a senior manager and was responsible for the microfinance operations. Prior to this, he served as CEO of Royal Sporting House, where he developed a retail distribution business of sports goods and served as Regional Director of Aviva Life Insurance, where he increased the Bancassurance and business partnerships business multi-fold. Sateesh has international experience with and eight year-stint in Singapore in retail and international trading. www.dlightdesign.com

      Radhika Thakkar.jpgMs. Radhika Thakkar, VP Global Business Development, Greenlight Planet (Kenya/Global)

      Ms. Radhika Thakkar is currently based in Nairobi, Kenya where she oversees global business development at Greenlight Planet, a company that provides high quality, affordable energy solutions for developing markets. She joined Greenlight Planet's flagship office in Mumbai in 2009 to expand the company's presence in African and other Asian markets. Greenlight's Sun King solar lanterns are now available in more than 30 countries and have reached over a million off-grid households around the world. Prior to joining Greenlight Planet, Radhika built a career in business development and consulting in the healthcare sector in the US.  She also served as an Americorps VISTA volunteer focusing on public education reform in NYC.  Radhika holds a Bachelor of Arts in International Relations from Tufts University. www.greenlightplanet.com

      Raymond Serios.jpg

      Mr. Raymond Serios – Special Project Manager, NWFT (Philippines)

      Mr. Raymond Serios is the Special Project Manager at Negros Women for Tomorrow Foundation, an MFI based in Central Philippines. He handles new products, services and projects from the pilot to roll-out stages. He is currently in charge of NWTF’s energy loans, student loans and is also involved in NWTF’s association/community loans while also overseeing the back-office business process redesign, alternative financing and a few other social benefits that NWTF provides to its clients. Raymond is also involved in several technology-led projects at NWTF-among them mobile banking and ATMs. NWTF started providing energy loans, particularly solar lamps and energy efficient cookstoves in 2009. These products were initially offered to clients only, but as more and more people in the local communities became interested in these products, NWTF developed a special product that allows its microfinance clients to become agents that sell these products. Through this program, NWTF has substantially increased its volume of energy loans and the over-all energy loans program has become a sustainable project.

      www.nwtf.org.ph

       

      ...

      Please click on the following link to download the corresponding briefing notes:

        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
          C4D Connoisseur

          Hi everyone,

           

          We hope you’ve been enjoying Part I of this discussion series on Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy.  Week one was on “Asset Finance”, and based on the high level of engagement by all of you, The World Bank Institute team has decided to continue that debate throughout the three weeks of the e-discussion – please continue to post your questions, ideas and examples.  Part II of the discussion series will focus on remittances and microfinance. To get things rolling, I have a few questions for all of you:

           

          Remittances:

          1. In your country context, would it be viable to use remittances as a way to finance clean energy?  Please explain …
          2. Is there a specific business model (see Briefing Note for a description of three possible business models or describe your own) that would be more successful in your country?
          3. What do think would be some of biggest challenges in replicating the Haiti model described in the Briefing Note in other countries?

           

          Microfinance:

          1. Before starting an energy-lending program, what are the main risks that an MFI needs to address and mitigate?
          2. Most MFI-based delivery models for clean energy financing require a partnership between an MFI and an energy company, what are the keys to success in building a strong partnership?
          3. What are some of the operational challenges MFIs face in providing clean energy loans, and are there solutions for those challenges?

           

          Looking forward to another stimulating discussion!

           

          Best,

           

          Niki

           

          Nicola Armacost

          Managing Director, Arc Finance | www.arcfinance.org

           

           

            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
              C4D Explorer

              In Mexico, it is possible to finance clean energy, based upon remittances...

              We (Mexico) get millions along the year.

              The problem we had witnessed is that, clean energy is not at all a priority amongst low income population.

              Remittances will be used to fulfill other basic needs, much before they are considered to be directed to adopt a green tech device.

               

              The other problem we have to address is that, usually, finance of clean energy devices should engage long term (12-36 months) in order

              to make it possible to let the energy savings costs "pay" for the investment and financing. Remittances for such terms are usually uncertain.

              People sending the remittances, have unsecured jobs, usually performed in an illegal migration status.

              From an MFI risk point of view, we find it hard to consider long term loans based on remittances….

               

              I will add more commentaries on Microfinance in a separate note...

                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                  C4D Connoisseur

                  Dear Jose Manuel,

                   

                  You are right, while Mexico has very high remittance rates (over US$22 billion annually, but down 26% from the 2006 pre recession peak of US$30 billion) it also has high electrification rates (97%) which makes it more of a challenge to initiate a remittances-based model with a link to clean energy. However, there are 4 million Mexicans who don't have reliable access and most of them are concentrated in the poorer states of Guerrero, Oaxaca and Chiapas which are also among the highest remittance receiving states   so arguably while there is a potential market in Mexico perhaps using an MFI based model would not be the right approach.


                  As an MFI, even if you had a license to receive remittances, it would be challenging to develop a remittances-based model that "pulled" remittances from outside of Mexico to your organization. Although most remittances to Mexico come from Mexican migrants based in the United States (98%), unlike the case of Haiti where the Haitian migrants are concentrated in Miami and New York, Mexican migrants are spread all over the country. To reach all of these people would require a significant marketing campaign which would be expensive for a relatively small MFI to develop. For a large MTO with national coverage and the ability to institute a "push" marketing campaign targeted on senders it might be an interesting proposition to channel remittances into clean energy products or energy efficient devices. It might also be interesting for a company like Cemex that already offers in-kind remittances in the form of cement (Mexicans abroad can remit a bag of cement to use for home improvements "back home") and could "add-on" a clean energy product.


                  Another very real challenge that you mentioned is that remitters are reluctant to take on the responsibility of a loan for a relative in another country which is exactly what we found in our research in Haiti.  To address this we opted to offer products (d.light and Barefoot Power lanterns and Solar Home Systems) which cost about the same as the average remittance to Haiti (approx. US$150).


                  On the question of whether the purchase of a clean energy device is or is not a priority for poor people (irrespective of whether they are receivers of remittances) my view is that the best way to find out is to undertake thorough market research prior to initiating a project. I am always fascinated by what we find out - often we learn things we did not anticipate and sometimes we find our initial assumptions were wrong. Usually those insights lead to the most interesting discoveries!


                  I look forward to hearing your comments on microfinance!


                  Best,


                  Niki

                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                  C4D Enthusiast

                  Hi everyone,

                  MicamaSoley was very happy to partner with Arc Finance and SogeXpress on this remittance project.  We have found that partnering with different organizations on developing distribution channels is a good way to move a lot of product.  In addition to this partnership we are also currently partnering with Fonkoze (Haiti’s largest MFI), CARE working with savings groups and Plan International on a livelihood project.  Last month we sold our 100,000th solar lamp in Haiti.

                  SogeXpress’s network of flagship stores and other outlets were an ideal distribution network from our point of view. In addition to the orders for solar products coming in from Haitian Diaspora for their families in Haiti the products were prominently displayed to thousands of Haitians who had just received an ordinary money transfer.  One way or another, it was remittance money being used to purchase solar products.

                  We were glad that Arc Finance and SogeXpress decided to partner with us rather than just importing the lamps themselves but I do believe that we earned our keep.  Inventory management is not a core competency of many MTOs.  Many of the solar systems have batteries that need to be charged regularly otherwise you can lose the batteries.  We were able to help SogeXpress manage this problem by taking back products, charging them, testing them, recharging them then bringing them back to SogeXpress.  Also, it is difficult to anticipate which products are going to be asked for.  We had inventory in country so we were able to feed them different products as the demand presented itself.

                  We are also currently doing a pilot with another local MFI, ACME, on loans for renewable energy products so far this has worked very well for us, especially for moving larger systems such as the d.light design D20s or the BBOXX systems.  Most of the MFIs in Haiti are NGOs and they are not interested in providing consumer loans.  ACME made an exception to do a pilot for renewable energy. 

                  Tom Adamson

                  www.micamasoley.com

                  • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                    C4D Explorer

                    In our experience (at Greenlight Planet), there’s a strong opportunity to build in-country financing options for off-grid customers that don’t necessarily have international or domestic remittances to leverage.

                     

                    Many of our Sun King customers in South Asia, sub-Saharan Africa and Central and South America are members of MFIs or savings organizations.  However, we’ve found it’s not always easy to partner with an MFI to sell our range of affordable lights ($10-40 retail) because our products are often too affordable.  MFIs are used to lending lager amounts ($100+) either for a small business or the purchase of a larger asset.  The transaction costs are simply too high for a sub-$40 loan to make business sense. 

                     

                    With that said, in the last few years, we’ve developed a few large scale micro-financing partnerships in India and East Africa that have enabled us to extend access to an additional 200,000+ off-grid households.

                     

                    There’s a huge opportunity to scale access to reliable, safe, bright lighting products to more than a billion off-grid customers, it just needs to be structured well. 

                     

                    Here are a few of our insights:

                    1. Offer top up loans for Sun King lanterns to existing borrowers.

                    This is less risky, as it’s offered only to borrowers with existing track records, and for the MFI, a top up loan actually reduces the burden of the transaction cost on the initial small business or asset loan. 


                    2. Don’t expect the MFI to play the role of a sales-force. 

                    Loan officers are really good at managing loans.  Sometimes, they happen to be great salespeople too.  But MFIs certainly aren’t in the business of warehousing and distributing physical goods and managing after-sales customer care. It’s important to build a sales, distribution and after-sales structure in parallel.  Think about the MFI truly as the financing partner for a parallel sales channel.


                    3. Choose quality products! 

                    A few of our MFI partners have shared stories about solar products they had financed in the past that broke down and/or weren’t serviced.  In many cases, customers ended up defaulting on their loans and developed a bad perception of the MFI that ‘endorsed’ a poor-quality product.   These same organizations were drawn to our products because we back them with a warranty that far exceeds the typical 4-8 month break even period and we actually back that with reliable after-sales service.

                      • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                        C4D Connoisseur

                        Hi Radhika, Thanks for your helpful insights - each of the three items you raised is exactly right! We have seen quite few partnerships break down because the energy partner expected the MFI to do the distribution as well as provide loans and many MFIs are not prepared to take on that risk. Beyond the quality of the product, which is absolutely key, we have also seen partnerships breakdown because the energy company was not able to provide fast and effective service and maintenance for its products (as per Tom's comments above). I know that your warranty process is highly regarded among our MFI partners, and it would be super if you could describe the warranty and after sales process in more detail. It would also be great if you were also willing to describe your "village saathi" distribution model which I'm sure would be interesting to the group even though there isn't an MFI link there. Best, Niki

                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                            C4D Explorer

                            Thanks, Niki.  You are right, warranty is key - not just printing one on the box but actually making sure the end consumer can have it honored.  The most effective method we have found around the world is to honor that commitment to our customers through our channel partners, from the importer in a given market to the last mile distribution partner. 

                             

                            In the case of an MFI partnership, for example, loan officers are trained to do simple checks on the product to manage common consumer issues.  After a quick examination, the loan officer might find that the user hasn't been charging the Sun King properly and send it back. If the product turns out to be faulty, it's sent back the branch office for further examination, and a replacement product is delivered to the customer.  The branch office will then have the faulty product replaced by its local Sun King supplier, and that suppler will in turn have it replaced by its regional supplier, etc. all the way up to the level of the importer. 

                             

                            What's key in this system is thinking about what is easiest and quickest for the customer. 

                             

                            This system works best in our Direct to Village (DTV) system, which you alluded to in your mention of our 'Saathis' (or Sun King Business Associates).  DTV is our proprietary direct sales distribution channel.  To date, we have recruited and trained almost 6,500 Sun King Business Associates (SBAs) in just 3 states in India to be small business owners in their communities.  SBAs are commission agents that sell Sun King lights to their village and a 'territory' of 10-15 surrounding villages, making our products available locally through familiar and trustworthy community members.  The SBAs initially leverage their existing personal networks to convert homes from kerosene to Sun King lamps, and soon after word of mouth and customer referrals create an active pipeline of sales opportunities.  These commission agents earn above their typical full or part time work during the day, usually amounting to 40-50% of their monthly income.  The strongest SBAs earn 100% or more than their 'day jobs' provide.  And they report that they become immensely popular amongst their community members as the people that are literally bringing light to rural homes. 

                             

                            SBAs often make house calls to existing customers when they are on the hunt for new prospects simply to check in on their user experience.  This is usually the first step in catching after-sales issues, as they can see first hand if people have properly placed their solar panels, whether they are wiping dust off the surface of the panel, etc.  We find that customers are pleasantly shocked by this level of personal attention and service - so rarely are they treated with such personalized after-care, and less rarely are warranties actually honored in the areas they live!

                             

                            This direct sales channel has proven to be wildly successful. In just those 3 states (Bihar, Orissa and UP), our SBAs have reached 30-60% penetration rates in many villages and collectively sold over 650,000 Sun Kings!

                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                            C4D Explorer

                            Very interesting every idea placed by Radhika

                             

                            In our experience, we are starting the finance of 3  un-electrified communities in Chiapas, Mexico.

                            Yes, I agree,  we will never be the sales-force of the green devices. We are partnering with a company specialized, in producing solar panels, as well as commercializing them. We are partnering with them to pay for a group of  "Social Engineers" who are in the "convincing the community" part of the project, as well as in the technical part.

                            Quality is a must. We will keep those clients for as long as 12 months, al least. Any technical failure, will end up as loan default.

                            We are also including in the cost of a couple of years of a guarantee policy. It will enable us to: Have a stock of spare parts in stock, and to pay local technician some sort of (iguala) monthly fee, to assure they are aboard. It make sense when the volume is high enough.

                            For this project, each community is surrounding 300 families.

                            On our side, we designed a Village banking finance methodology. It will lasts 52 weeks. In such case, we are putting 20 families per group. Of course, they all know each other and we have a solidarity guarantee. If any member doesn't pay a weekly fee, then everyone else will share their part to complete the group quota.


                            The financing is around 1,000 usdlls per family. It will include the panels, installation, and the policies. In a second stage, we are planning to interconnect them all, so that they can compensate, different levels of consumption. A community center will be "fed" by the remainings. There will be a TV, a library, etc...


                            Finally, I agree. It is quite expensive for us, to finance such small amounts ($10-40). In fact it is not feasible.

                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                            C4D Explorer

                            Based on our field experience in Arc, I would like to highlight some of the risks that MFIs need to address before starting an energy-lending program


                            Energy Lending Risks for MFIs:

                             

                            MFIs need to strengthen their internal capacity to identify and anticipate potential risks, and to avoid unexpected losses and surprises. If MFIs ignore the risks they face, they’ll almost certainly experience declining profitability, erosion of capital, deteriorating institutional reputation, and, ultimately, poor quality provision of services to their clients.

                            Therefore, an MFI that is planning to start an energy-lending program should address the following risks:

                             

                            • Lack of Awareness: MFIs are well known by clients and within a community for giving small loans for income generating activities. Therefore, when the same MFI that has developed a longstanding reputation as a micro lender wishes to expand to offer an energy product the finance for that product, it can be quite confusing for both clients and staff. Moreover, an MFI’s history, institutional culture and brand, as well as its physical infrastructure and MIS are typically geared exclusively towards, and identified with, microcredit.

                             

                            • Ownership and Governance:An MFI’s directors and investors cannot offer the necessary support to a program if they don’t have the necessary awareness of it and its role within the vision for the organization. Investors may also think that an energy-lending program is a deviation or distraction from the core microfinance operations, and deem it risky as a result.

                             

                            • Legal: The legal structure of an MFI may restrict its capacity to run an energy-lending program. For example, in India, Central Bank regulations do not allow MFIs registered as Non Banking Financial Companies (NBFCs) to physically buy and sell third party products.

                             

                            • Operations (Human Resources): Most MFIs offer group or individual microcredit only. Therefore, significant training of staff in products, after sales support, sales and every other aspect of an energy-lending program will be necessary. MFIs should not cut corners; training is an investment.

                             

                            • Operations (Business Model): The business model for offering energy lending (compared to microcredit alone) needs to be re-engineered. The roles and responsibilities and internal processes at all level of the organization will have to be redefined

                             

                            • MIS/IT: The re-engineering or adding of MIS modules so that the MFI’s MIS can be capable of handling the complexities of an energy-lending program (sales, inventory, marketing, installment status, distribution, warrantees, after sales service) is important. The system needs to be in place to prepare sales reports, and examine the conversion ratio of marketing leads into actual clients.

                             

                            • Competition: In starting an energy program, MFIs may be entering a marketplace into which several energy companies offering what are often pejoratively described as “Chinese Products” are already established, offering cheaper prices, for inferior products, and strict competition.

                             

                            • Liquidity: Offering energy products may bring a whole new range of liquidity challenges for MFIs if they’re unaware of seasonal fluctuations in energy product demand.

                             

                            • Portfolio quality: MFIs may overleverage their clients by pushing a large and higher value product in order to meet the client’s aspiration demand (for example, the client wants a TV, light and fan) beyond their actual present repayment capacity. Therefore, MFI will have to make a trade-off between the client’s demand and their repayment capacity. One guideline is to keep the loan installments broadly within the same range that the client current pays for his or her energy services; that is, to maintain the client’s overall energy expenditure.

                             

                            • Products: If the clean energy product offers adequate services as per the client’s expectations, then the defaults will be fewer, as clients will not have any more grounds for non-payment. Therefore, product quality and prompt after sales service are key for managing risk.

                             

                            I feel that the perceived risk for offering energy lending by MFIs is greater than the actual risk which is mainly due to lack of experience and knowledge in the areas of energy lending. If MFIs can address some of the key risk areas addressed above, they should be able to develop a successful energy-lending portfolio.


                            Saiful Islam

                            Microfinance Specialist

                            Arc Finance Ltd.

                             

                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                            C4D Enthusiast

                            I'd like the opinions of any of the experts, my colleagues at Arc, as well as any of the participants:

                             

                            1) whether the bigger opportunity for renewable energy finance via remittances is in domestic or international corridors; and

                            2) which are the markets, in both categories, most ripe for targeting: that is, which countries or corridors have the regulatory environment, demand, network, and all the other ingredients for successful energy remittances?

                             

                            I'd also like the throw the following out there: which products, after Solar Portable Lighting, are most appropriate for this affordability mechanism and why?

                             

                            Thanks,

                             

                            Sam Mendelson

                            Arc Finance

                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                              C4D Explorer

                              Hi Guys, a couple of thoughts from our experience in the Philippines:

                               

                              1.  There are a couple of risk factors for the MFI to look at when going into energy lending such as the product quality, after-sales servicing, logistics and distribution.

                                   Most of these can be mitigated by either doing proper due diligence on the supplier, checking for adherence to standards/ accreditation or testing out the product itself.  Proper planning and spelling out the roles of the partner groups (MFI, Supplier, Distributor. etc) is also important that way most potential issues have planned solutions already.  

                               

                              2.  Partnerships really start with understanding the over-all direction and goals of the project.  Again, defining the roles & expected service levels of each one is important as well as regular monitoring and communication between partners.

                               

                              3.  Within MFIs the biggest challenge in implementing clean energy loans is really opening up the minds of the credit staff/ loan officers to offer the products to the clients.  Initially, people hesitate knowing this is additional work for them while there are other things they cannot control such as the quality of the product and necessary technical after-sales, however proper education on the product and the benefits it can bring to both clients and the credit staff, strong commitment & support from management and enough incentives has proven that it this hesitation can be solved.

                              One of the things we incorporate in our education modules for the staff is the opportunity cost of using the alternative vs the solar lamp/ systems.  This has proven to be effective for them as they are able to quantify, in credit people terms, some of the benefits of the product/s.  With this, we also add the benefits it gives the credit staff such as a higher portfolio without adding new clients, a better possibility of client retention - more contact with client and others.

                              I guess moving the loan officer from the traditional concept of one recruiting clients, assessing the loans, releasing and collecting it to one that really builds and maintains the relationship of the MFI to the client is one of the first things the MFI must make when deciding to go to clean energy finance.

                                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                                  C4D Connoisseur

                                  Hi Raymond, Thanks so much for your thoughts.  It would be super if you can expand on what benefits of the products seemed to make a real difference to clients. Was it more about the actual products themselves (cost, brightness, warranty, service etc.) or did you find that clients were equally or more persuaded by the long-term impact of the products, including the economic and financial benefits (income increases or cost savings on kerosene), social benefits (improved education, security and safety) or other factors such as environmental benefits?  Best, Niki

                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                                      C4D Explorer

                                      Thanks Guys!

                                       

                                      From what we have seen, the main benefits that the clients feel make the real difference are the economic and financial benefits.  Whether it be cost savings on kerosene or increase in income, microfinance clients have really gotten be practical financially.  Credit this to financial education and/ or the training they get from the loan officers on financial management, including loan assessment or even just the poor's survival instinct, when we point out these kinds of benefits to them they are able to understand this and it drives them to act on the offer.  Secondly, the different attributes of the product come into play (features, brightness, cost, servicing) especially in selecting which product they will purchase.  For our clients here, social, health and environmental benefits are quite hard to realize though these become added benefits to them or sort of makes them additionally "feel good" about their decision to purchase.

                                       

                                      For us, clients prioritizing the economic benefits of the product is really something great as it is something the credit staff are more familiar with and thereby, easier for them to understand and consequently, share to the clients. 

                                       

                                      Great ideas also there from Jose Manuel especially in bundling energy products with housing or home improvement loans.  Though this is very tricky --- needs rigorous training and constant education of the staff -- to implement, this is really something that would be the logical progression from providing basic lighting.  Integrating it into these kind of loan products allow clients to really maximize the benefits, especially the economic ones. 

                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                                      C4D Explorer

                                      Very interesting thoughts Raymond

                                       

                                      On our side, we ran a certificate program for suppliers.

                                      They are taking the sales role. We are working with them shoulder by shoulder.

                                      We have trained them to make the initial filtering of prospect clients. In fact, we have already provided them with our mobile technology, so that the can consult the Risk centrals' data base, and have a "go" or "stop" answer.

                                      We have chosen 4 devices in which we are concentrating:

                                      + Solar Panels

                                      + Refrigeration

                                      + Air conditioning

                                      + Tortillas machines.

                                       

                                      It has been incredible. Just by financing the adoption of new, more efficient refrigeration and Air conditioning devices, business will have savings of up to 70%.

                                      Those savings, leave excellent room to financing costs.

                                      Besides we have found parallel business'. For instance, it is quite common that small stores have COCA COLA refrigerators, since COCA COLA provides them it to them. Well, store owners are preferring to invest in their own, more efficient refrigerator than have COCA COLA provide for free. Why??

                                      Simple, when they have a COCA COLA refrigeration, they must fill it out with COCA COLA (or PEPSI, it doesn't matter) products. The margin of these products is limited, and more usual then not, they don't roll over the complete merchandise. They are preferring to bye their own refrigeration in order to get rid of the obligation to have COCA COLA products so they can put other brands with much higher roll over an mark ups. At the same time, the efficiency of the devices makes the save up to 40% on the electrical bill, as well as the environmental effect of it all..

                                       

                                      As a summary, by getting along with suppliers, we have found other niches, that they know, and that they must be financed in order to make it possible to adopt more energy efficient devices. It seems to be convenient to everybody. Win-win situation.

                                       

                                      The solar panels systems, we are now including them in our home and home improvement loans. Quite interesting...

                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part II: Microfinance and Remittances
                                      vdeodhar C4D Enthusiast

                                      Dear all,

                                      I find the thoughts and experiences shared by all of the Expert contributors really useful. I am from India and remittances and MFIs have been major tools for financing of renewable devices, initially in a unorganized manner but later quite streamlined.

                                       

                                      Currently I am working on exploration of innovative finance for renewable energy devices in Nepal. The RE devices we have considered are small ones (Improved cook stoves, Pico PV systems and community electrification systems) catering to poor households located in hilly remote villages. Their paying capacity is very limited. Remittances from diaspora located abroad, mostly in India but also in the Middle East are definitely important means of finance. However, it is not an organized practice and this is not well recognized by vendors and financial institutions. There are MFIs in Nepal but most are small and in nascent stage of development. Most of them are not involved in financing rural energy products. We found that there is not much awareness in rural population about MFIs. Many of them are Savings and Credit Cooperatives. Also, the MFI’s capacity in financing RE products is quite low and there needs to be a major capacity building initiative. In this, I agree with opinions of the Experts that MFIs cannot be considered as “sales force”.  It is very much essential to have a separate group working with MFIs whose members know the technical features, operation and other factors of the RE and the needs of the users.

                                       

                                      I would welcome the thoughts of the experts in the situation prevailing in Nepal.

                                      Thanks,

                                      Vinay Deodhar