What if the institution that financed your business could also light up your house? Microfinance institutions (MFIs) have mostly stayed out of the pay-as-you-go solar (PAYGo) space, but that may be changing — creating both new opportunities and challenges for financial inclusion, as it brings MFIs into consumer financing.
In recent years, we have seen non-traditional lenders such as M-Kopa and Fenix International emerge in the PAYGo space, installing more than 800,000 solar home systems and offering follow-on loans to many of those customers. Traditionally, PAYGo providers have striven to be vertically integrated companies that do hardware and software design, sales, distribution, service and financing all under one roof. While many of these companies have excelled at three or even four of these competencies, offering one- to three-year financing has created obstacles to growth. PAYGo companies are not financial intermediaries, so their portfolios are typically funded with hard currency loans. Since customers pay for solar over several years in local currency (Kenyan shillings, Ghanaian cedis, etc.), PAYGo companies can find themselves with significant working capital shortages and foreign exchange risk (the Ugandan shilling fell 30 percent against the dollar in 2015 alone).
MFIs are arguably better positioned than PAYGo companies to finance pay-as-you-go solar. As deposit-taking institutions, they have more local currency and less foreign exchange risk. They also have an existing customer base and loan distribution network along with the ability to offer a wider variety of follow-on products to good-paying customers, such as unsecured loans, savings and insurance. For years, PAYGo companies adhered to the vertical integration model, excluding financial intermediaries. But now a diverse set of companies, including solar manufacturers, local distributors and financial intermediaries, is disaggregating the value chain by forming synergistic partnerships. Companies like Angaza, for example, are providing PAYGo hardware and portfolio management software to potential financiers. Angaza's Vice President of Global Strategy, Victoria Arch, believes strongly that disaggregation is the future: "We believe that specialization across the value chain will be critical as the energy access market matures. Capitalizing on partnerships keeps cost structures low and allows companies to focus their time, resources and energy on what they do best."
These partnerships have the potential to deliver PAYGo to customers at greater scale and lower cost, and more MFIs are now coming to view PAYGo as a secure means of reaching new, poorer customers with a variety of products. Some notable examples include:
MicroCred. In Senegal, Madagascar, Cote d'Ivoire and Mali, MicroCred has created a distinct subsidiary, Baobab Plus, that uses the MicroCred network to sell life-changing products (tablets, water filters and solar units) on credit, financed by MicroCred. Until recently, these products had been aimed at existing clients, with 35,000 solar units sold in 2016 alone. More recently, Baobab Plus began to offer PAYGo solar home systems to new customers in rural areas. The products are sold by dedicated Baobab Plus agents who use the Angaza smartphone app to record activation and initial payments. The lockout technology provides security for MicroCred, which enables it to lend to poorer, largely unknown clients with the goal of establishing a long-term financial relationship. MicroCred could also use the historical data on payments for loan scoring analysis. Per Alexander Coster, Director of Baobab Plus, "If we want to reach non-MicroCred clients in rural areas, pay-as-you-go is the only solution to provide solar products but also for financial inclusion."
FINCA International. FINCA International has done something similar in Uganda with Bright Life, creating a product called Flexipay that provides low-income households with solar electricity or clean cookstoves on credit. Customers pay using mobile money, which is more widely adopted in Uganda than in Senegal (where users pay over the counter), and they have the choice of paying over four to six months. FINCA is also working with customers to create savings and build wealth. The loan is deliberately over-long in tenor, creating a borrow-to-save experience where the customer receives some of his or her solar payments back as savings at the end of the loan. Follow-on loans are offered and approved digitally based on repayment behavior.
Each of these financial institutions is using off-the-shelf components and sophisticated management software to move rapidly into a new type of lending. They are also learning from PAYGo operators, incorporating digital payments and other digital financial services to lower their operational costs. Several of these players are building out their own distribution and servicing capacity, undermining some of the efficiency gains. In the future they could partner with existing distributors to handle sales and service, and the value chain could become even more disaggregated.
We have long known that there are potential synergies between energy and finance at the bottom of the pyramid. In Bangladesh alone, government-supported financing led to more than 4 million solar home systems being sold in 10 years. MFIs do have real advantages over pure PAYGo players, as discussed above, but there are also potential stumbling blocks. What is happening now is reminiscent of an era in microfinance (MF+) when MFIs moved out of their core competency, an experiment that did not always yield optimal results.
PAYGo loans may end up mobilizing long-term household savings, but these loans are not income-generating, meaning they bring microfinance into consumer financing. Becoming a financier of household products could change the MFI’s relationship with the borrower and bring the potential to create credit bubbles. PAYGo technology mitigates this risk by giving the lender a unique form of leverage, but it can only increase borrowers’ willingness to repay, not their ability. In short, PAYGo’s potential to create new opportunities to reach customers is exciting, but MFIs must be cautious in their adoption and implement proportional safeguards for this new growth area.