Microlenders have long focused on financing income-generating assets like sows and sewing machines. But in recent years, the range of assets on offer has exploded, with new entrants to the space offering everything from motorbikes to microwaves on credit. Amid these encouraging signs that advances in consumer finance, leasing and pay-as-you-go (PAYGo) are expanding access to in-demand assets, the financial inclusion community is taking notice. But the growing range of assets and financial products on offer is also leading CGAP to revisit our understanding of the role that assets and financial services play in livelihoods, resilience and overall well-being, especially at the bottom of the pyramid.And if so, which assets and financing approaches hold the most promise?
Asset financing is growing fast in emerging markets, but the extent to which it is reaching low-income households is unclear
Innovations like digital payments, alternative credit scoring and the internet of things have unlocked new opportunities for lenders to extend credit for both productive and welfare-enhancing assets. Driven by these innovations, consumer durables loans last year emerged as the fastest growing credit segment in India, expanding by 83 percent to cover nearly 20 million borrowers (and data suggest that another 150 million people are eligible for retail credit). Meanwhile, the success of PAYGo financing models has allowed customers in Africa and elsewhere to electrify their homes by purchasing solar home systems on credit. To date, more than 3 million PAYGo solar home systems have been sold.
While strong economic growth in emerging markets, rapid urbanization, changing lifestyle patterns and a burgeoning middle class continue to drive the demand for asset financing, there is some question as to what extent financing is reaching customers at the base of the pyramid. Many consumer lending products are aimed squarely at the emerging middle class. Even PAYGo solar loans may not always reach the bottom of the pyramid. The larger question, however, is whether the financial inclusion community should encourage greater access to asset financing for poor households based on the impact it is having on their lives.
Small-scale studies point to positive impact on low-income households, but more research is needed
CGAP’s observations from the field in countries like Kenya, Uganda, Tanzania and Rwanda, where we have focused mainly on PAYGo solar, lead us to believe that financing assets, if done correctly, can have important benefits for low-income households. To see what evidence exists to support or contradict these observations, we recently conducted a review of the academic literature on assets and poverty. To our surprise, given the growth of asset financing, we found that relatively little has been done to study the impact of asset financing on low-income households.
The peer-reviewed academic literature that does exist focuses narrowly on productive assets, such as livestock, that are given to households as part of social protection programs or more ambitious graduation initiatives. Several studies find that productive assets delivered in these ways strengthen livelihoods and help to smooth consumption, build resilience during periods of hardship and offer pathways out of poverty. However, more research is needed on outcomes for households that purchase productive assets and welfare-enhancing assets on credit.
What we do have, at this point, are small-scale studies and anecdotal evidence suggesting that asset financing is improving lives, either by increasing incomes or improving quality of life. In Uganda, for example, Tugende claims that its drive-to-own motorcycle taxis allow borrowers to double their take-home earnings compared to what they would take home if they rented their bikes. CGAP’s research on asset financing has lately focused on PAYGo solar. A CGAP study of 138 PAYGo solar borrowers in four African countries found that low-income households value solar energy not because it makes them richer, but because it makes their lives better. One study participant in Kenya explained that financing a solar home system allowed the household to breathe easier by replacing its hazardous kerosene lamps:
“[The small kerosene lamp] produces soot, which by that time we saw it as a normal thing because we have been using it since birth. But now, I don’t want it. When that smoke comes near me I feel like it is something very bad that affects me. I start coughing. It means we were in danger all that time we used it.”
Ongoing CGAP work to fill gaps in the research on asset financing
The same impacts may or may not hold true for a range of other assets, both productive and welfare-enhancing. Of course, as innovations in asset financing break down barriers to borrowing, providers will need to take pains to ensure that their products do not overburden their customers with debt. As recent troubling signs in the U.S. subprime auto lending market demonstrate, loans for even the most in-demand assets risk trapping low-income borrowers in a cycle of debt. Recognizing the risks inherent in this type of lending, CGAP is setting out to research not only which assets beyond PAYGo solar are most valuable to low-income borrowers, but also how lenders can harness innovations to finance those assets responsibly and sustainably.