Adama keeps a small shop near Ziguinchor, Senegal, where he sells palm oil, lemons and wine. One day, someone came to his village from a company called Baobab+, which sells solar home systems on credit. Adama’s village has no electricity, so he was interested. But when the man mentioned that repaying his solar loan on time could make him eligible for a small business loan from Baobab Senegal — a microfinance institution (MFI) owned by the same company as Baobab+ — Adama was sold. Five months later, Adama paid off his solar ahead of schedule and opened an account with the MFI. He received a $30 loan, used it to buy more inventory and repaid the loan in four days. Shortly thereafter, he received a $35 loan and did the same thing. Then, he opened a savings account to deposit his extra profits. Adama wants to grow his business, and thanks to an unlikely yet effective partnership between this PAYGo solar distributor, this MFI and CGAP, he is getting that chance.
Baobab Senegal is an MFI working with almost 300,000 clients. Originally, the company served its clients through brick-and-mortar branches, which offered individual loans and took deposits. But over time, it realized that this way of doing business made it difficult to reach a much larger group of rural, low-income customers. Collections were expensive, assessment was difficult and customers were highly sensitive to price and rigid repayment terms. Baobab Senegal began to look for another business model to reach rural customers, and that is how it started one of the most exciting companies in the PAYGo solar sector.
In 2015, Baobab Senegal’s parent company, Baobab Group, created a subsidiary called Baobab+ and tasked it with reaching under-served populations with energy and digital products, coupled with financing solutions that would make these products affordable. By 2016, Baobab+ had begun to experiment with PAYGo solar financing, using off-the-shelf solar home systems developed by Greenlight Planet and device management software from Angaza. To Baobab Group, PAYGo was a new way of lending to poor households that had been out of reach. The PAYGo model's use of mobile loan repayments and communications removed the need to set up branches, its reliance on remote lockout technology to incentivize repayment removed the need for customers to muster collateral, and its flexible repayment schedules appealed to customers. Today, the Baobab+ subsidiary has financed and distributed more than 150,000 PAYGo units in Senegal, Cote d’Ivoire, Madagascar and Mali.
Baobab+’s CEO, Alexandre Coster, believes that PAYGo lending is not only critical for expanding access to clean energy but that it can also be an important part of low-income people’s financial inclusion journey: “You make people financially viable customers that were not so before,” he said.
From the beginning, Baobab Group’s MFI, Baobab Senegal, had planned to invite well-paying Baobab+ solar customers to become its clients, using new agent and digital channels developed to serve rural customers. Yet it is not easy for a PAYGo company and an MFI to work together and with each other’s customers, even if they have common ownership. PAYGo loans are flexible, whereas MFIs expect to be paid on time. Underwriting looks very different, with MFIs conducting detailed credit assessments and PAYGo companies mostly relying on upfront deposits to serve as a screening mechanism. And back-end systems look and function differently.
Pilot yields encouraging results but room for improvement
In July 2018, with help from CGAP, Baobab Senegal used its “Taka” product to automatically score 383 Baobab+ clients in the Ziguinchor region who had completed a PAYGo loan and to offer each of them a custom-sized line of credit. The Taka product encompasses both the automated scoring and the line of credit. Baobab originally developed Taka to analyze existing clients' loan repayment data and to offer credit lines to eligible customers. Customers repay in a bullet payment after up to 90 days, with limits increasing for clients who repay earlier. The data-driven approvals and flexible structure of the Taka product made it a good fit for Baobab+ customers, as opposed to expensive credit assessments and rigid term loans.
In this pilot, Baobab Senegal used Baobab+ PAYGo customers’ repayment data to calculate eligibility and loan offers. More consistent repayment behavior lead to higher offers. Clients who accepted a loan offer had to come to the Baobab Senegal branch to register for an account and return the next day to withdraw their loan. The multiple visits and long distances likely deterred some customers. In the future, account opening and loan disbursement could be done at all Baobab sales points (agent or branch) and via its mobile application.
Baobab Senegal was able to reach 261 eligible customers with loan offers, and the initial results were encouraging: 91 loans were issued to 56 customers, at an average size of $55. Customers took multiple loans, with half of the borrowers taking out a second Taka loan, five taking third loans and two borrowing four times by the end of the project. Conversion rates were similar to those of existing clients, but repayment rates will need to improve for this to be a commercially viable product. In future pilots, Baobab Senegal and Baobab+ plan to experiment with re-collateralizing the PAYGo unit (i.e., turning it off when clients are in arrears) and leveraging Baobab+’s agents to follow-up with delinquent clients. Both mechanisms should improve repayment rates.
What does this mean for PAYGo and for MFIs?
There are two stories here. One is about customer empowerment. PAYGo solar is bringing new people into the financial system and empowering them to access formal financial services by leveraging their repayment histories. Customers like Adama can access micro-loans, make deposits into savings accounts and grow their livelihoods. This pilot is a huge leap forward on that front, along with similar work done in Uganda with Brightlife and FINCA and India with Simpa and RBL.
But this is also a story about microfinance institutions having the courage to innovate and adapt. Most MFIs are embedded in the communities they serve. They are not used to evaluating and underwriting customers based purely on someone else’s data. As Cristiana Finotti, director of business development and marketing at Baobab Senegal, told us: “This is our first time lending to clients who we do not know.” It took a lot of work and not a little bit of faith for Baobab Senegal to offer a loan to Adama.
Both stories are early but positive developments for customers. Innovators and established players are finding ways to work together, to reinforce and magnify their respective value and to reach more people with impactful products. For Adama, this collaboration has meant access to capital and a safe place for his money. In the future, he hopes to borrow enough to buy a refrigerator, perhaps from Baobab+. Thanks to a combination of solar power and microfinance, he may not have to wait for long.