Where Do We PAYGo from Here? PAYGo Beyond Solar
For the world’s poor, the right asset can mean a pathway out of poverty. For others, it can dramatically improve their quality of life. And thanks to innovations in asset-based financing, financially excluded customers at the base of the pyramid may soon gain access to essential assets like water pumps, motorbikes and even smartphones for the first time.
Asset-based financing models like leasing, rent-to-own or even Islamic finance’s murabaha products are as old as finance itself. Providing assets on credit offers a unique opportunity to collateralize the loan based on the value of the asset itself, thereby reducing risk for lenders. In such arrangements, customers receive an asset on credit and pay for it in small increments. In the event of delinquency or default, the lender has the option of repossessing the asset and can either choose to re-lend it or resell it on secondary markets. Globally, these models have been used to offer capital-constrained customers access to everything from automobiles to televisions.
But just as traditional financial services providers have long struggled to serve the poor, asset-based financing remains out of reach for many of the world’s financially excluded people. In addition to lacking credit histories, the low value of assets demanded by many poor borrowers and the high cost of repossession mean that these customers are often left out.
Pay-as-you-go (PAYGo) financing has emerged as one potential answer to ongoing exclusion in the asset-based financing space. For years, CGAP has partnered with and written about companies using a PAYGo financing model to provide solar home systems to poor customers living outside the reach of traditional electrical grids. This led us to wonder whether the same innovations that are helping to electrify households around the globe could also be applied to other asset types. As it turns out, there are already interesting examples of PAYGo being used to finance a range of assets beyond solar home systems.
In Kenya, startup SunCulture is using a PAYGo approach to sell solar-powered water pumps to smallholder farmers. Only 4 percent of cultivated land in Sub-Saharan Africa is irrigated, leaving farmer livelihoods vulnerable to unpredictable seasonal rains. By offering its pumps on credit, SunCulture provides these farmers with the means to cope with drought and grow crops year-round. Like its counterparts in the solar home system space, the company uses a combination of remote digital payments and lockout technology to reduce the cost of servicing loans and increase borrowers’ willingness to repay. In this model, customers pay for their pumps digitally over time in small, regular increments. And when customers miss an installment, SunCulture can remotely switch off the pump until the customer makes her next payment.
Of course, financing a productive asset is not the same thing as financing a solar home system. On the one hand, the revenue generated by the asset increases a customer’s ability to repay, making these assets more attractive candidates for financing. But this same revenue-generation capacity also raises important questions about the viability of the PAYGo model for productive assets. Locking a productive asset like a water pump in the event of nonpayment, while potentially increasing willingness to repay, also threatens to negatively impact customer cash flows and render customers less able to pay and more likely to default. Furthermore, the cyclical nature of livelihoods like agriculture, in which farmers earn income only months after planting their crops, means that the regular (e.g., weekly) installments typically used in PAYGo financing may not be viable for some types of productive assets.
Another example of where we see PAYGo expanding beyond solar energy is financing for smartphones. While we may not think of them as tied to our livelihoods, many of us could not imagine living without our smartphones. Indeed, these powerful pocket computers can have an enormous impact on the quality of life. Yet despite their increasing prevalence, smartphones remain out of reach for many poor customers — particularly in regions like Sub-Saharan Africa where penetration stands at only 34 percent. That may soon change thanks to companies like PayJoy, which is bringing PAYGo financing to smartphones in Latin America, Asia and Africa.
By partnering with retailers and financial institutions, PayJoy allows customers to purchase a smartphone on credit and pay in installments over time. Each payment provides the customer with 30 days of use, after which the company’s “lock” app deactivates the phone until the next payment is made. Similar to the model used by PAYGo solar providers, the lockout technology allows PayJoy to leverage the value customers place in their phone to motivate loan repayment. In addition to offering access to mobile computing and the internet for the digitally excluded, this approach to financing smartphones also has the potential to unlock new types of credit. To this end, PayJoy is testing the use of repayment data to help build its customers’ credit history while allowing customers in some countries to use their paid-off smartphones as collateral for loans.
The rapid proliferation of asset financing models in Africa and beyond holds enormous potential for the financial inclusion of base of the pyramid customers. It also presents an incredible opportunity for the financial inclusion community to understand what lessons these emerging approaches hold for financial services providers, investors and others looking to engage in this evolving space. As CGAP explores innovations in asset-based financing, we hope to answer several important questions with implications for the future direction of the industry. For example: How does the nature of a given asset (e.g., productive vs. nonproductive) influence lending models? How can strategic partnerships allow companies to leverage their comparative advantages in technology, distribution and financing to sustainably serve the poor at scale?
Most importantly, we want to understand what other types of assets could benefit from advances in financing models. Fortunately, from Tugende’s “drive-to-own” boda bodas in Uganda to financing for equipment like deep freezers provided by Zambian company Rent-to-Own, there is no shortage of examples to choose from. Like a solar panel that depends on the sun to generate energy, when it comes to innovations in asset-based financing, the sky really is the limit.