From South Asia to Sub-Saharan Africa, millions of customers are benefiting from the emergence of more inclusive asset finance business models. By leveraging new technologies and approaches to mitigating risk, businesses are finding new ways to overcome the obstacles that traditionally have kept asset finance out of reach for low-income households. These more inclusive business models offer donors and investors a potentially scalable approach to driving asset ownership at scale, with important implications for efforts to advance the Sustainable Development Goals (SDGs).
To begin with, asset ownership matters a great deal. A growing body of evidence suggests that assets help poor people capture opportunities and become resilient, with effects that advance several SDGs. CGAP dug into the evidence in a recent working paper, “Assets Matter to Poor People: But What Do We Know about Financing Assets?” Based on our review of the global literature, we conclude that asset ownership can help households in three ways:
Financial resources. Low-income households can use productive assets like farm equipment, sewing machines or livestock to generate income or serve as a store of value. Cows, for example, can serve both purposes.
- Human capabilities. Assets can increase households’ access to information and education, facilitate useful relationships within society and generally improve well-being. Mobile phones are one notable example, with ownership linked to better educational outcomes and greater access to market information.
- Physical capabilities. Assets also can connect households to markets, expand access to shelter and basic services and improve health outcomes. For instance, a solar home system can improve household health by reducing the indoor use of kerosene lamps.
Nevertheless, asset ownership remains unattainable for many of the world’s poorest households, trapping them in a cycle of intergenerational poverty. Recognizing the importance of assets, many governments and donors have promoted asset ownership through transfer programs such as the Graduation Approach. Yet despite demonstrating enormous impact, these approaches are costly and narrowly targeted.
Financing may offer a more sustainable and scalable approach by helping customers who are unable to afford an asset upfront to amortize its cost over time. But financial institutions often struggle to finance physical assets that require specially tailored loan terms and ticket sizes, in addition to complex distribution networks and servicing arrangements. And even specialized asset finance providers face considerable obstacles to serving low-income and rural customers, including high costs and complicated distribution, risk mitigation and after-sales service.
As CGAP notes in a new slide deck, “Innovations in Asset Financing: Unlocking the Potential for Low-Income Customers” (2020), innovations in asset finance business models may help providers to overcome these barriers to serving excluded customers. Looking to global examples from Sub-Saharan Africa, South Asia and Latin America, CGAP identified a range of providers that are leveraging solutions like agent networks, credit scoring, remote locking, microinsurance and skills training to power more inclusive asset finance businesses. These include new twists on old models like rent-to-own and asset-backed finance models, as well as entirely new approaches like pay-as-you-go (PAYGo) and asset-as-a-service models, which are explained in the deck.
What makes these business models so powerful is their explicit focus on low-income and rural customers. In India, rural e-commerce company BoonBox partners with microfinance institutions (MFIs) to provide their customers with buy-now-pay-later financing for products like refrigerators, televisions and air conditioners. BoonBox relies on MFI loan officers to show customers a catalog of products on a tablet or smartphone and place orders, which are financed by the MFI and delivered by BoonBox directly to the customer’s doorstep.
Even cow finance has benefited from innovation. Indian MFI Samasta recently began implanting RFID chips in the cows it finances, allowing it to take out microinsurance policies on each animal by reducing the moral hazard associated with fraudulent claims. The policies ensure that borrowers can repay even if their animal gets sick or dies, which is critical to mitigating risk.
Thousands of miles away in Mexico, Energryn is pioneering an asset-as-a-service business model that is expanding access to affordable hot water. Energryn customers can sign up to have the company install a solar water heater at their homes, after which they pay monthly for its use. Similar to PAYGo models, the company uses remote locking technology to shut off the water heaters if customers fail to pay.
Importantly, business model innovations are not limited to new technologies. CGAP previously highlighted the example of Tugende, a company that offers rent-to-own boda bodas (motorcycle taxis) in Uganda. While the company employs some technologies like digital payments and GPS tracking, Tugende’s true innovation lies in its approach to client screening and business skills training, which allows it to serve customers who would otherwise be turned away by banks and MFIs.
Still, despite the rapid pace of innovation and a proliferation of inclusive asset finance business models, few have seen widespread uptake. This raises an important question: Can these models scale sustainably while continuing to serve low-income customers?
The truth is that it is too early to say with any certainty whether this will happen on its own in the market. Most early-stage providers struggle to access the affordable capital required to scale and demonstrate viability. They also need technical assistance to help them adapt and refine their approaches as they grow.
Donors and investors can play an important role in addressing these challenges. By supporting early-stage business models and sharing their experiences with other stakeholders, funders can help to build a greater understanding of demand for asset finance and the key drivers of sustainability.