Advances in solar technology and innovative financing schemes are accelerating access to energy for many poor and rural households. This is particularly true in sub-Saharan Africa where a wave of entrepreneurs is enabling access to electricity through financed home solar systems that people pay for over time. Because providers can remotely disable use of the system and allow payments under a flexible pay-as-you-go (PAYGO) scheme, lower-income households effectively gain access to energy assets that they otherwise would not have been able to afford. This model is becoming the fastest-growing segment in private electricity provision in Africa.
Over time, providers of PAYGO energy services use payment history to finance additional assets (primarily durable goods) or to offer nonsecured loans. Some of the more mature companies that started as retailers of energy systems (e.g., M-KOPA in Kenya) have evolved into diversified consumer loans firms. Households traditionally outside the reach of microfinance institutions and banks are gaining access not only to electricity but also to a formal source of financing.
Despite the proven benefits and profitability of this model, the scale and diversification of these companies’ services are constrained by the lack of access to commercial debt financing. Mechanisms used today are inefficient, scarce, and costly. Financial institutions in local markets would be the natural source of such debt financing, but the unsecured nature of loans in PAYGO portfolios makes them too risky to finance. Yet leveraging local financing could help established financial institutions achieve accelerated growth into segments below their traditional target, and at low cost.
This paper analyses the synergies in the distribution of energy and financial services. It describes how an integrated approach could enable financial institutions to profitably serve low-income populations, thus enabling a significant source of growth. It also explains how under proper licensing schemes, energy providers could grow into full deposit-taking financial institutions. It uses the experience of retailer-led banks in Latin America to illustrate the ways in which similar models could evolve in African markets. Because the mechanisms explained in this paper can be applied in a diverse set of contexts (ranging from clean stoves to access to sanitation, health, and other basic services), the implications for expansion of locally financed development are important.
By explaining these opportunities, we hope providers will experiment with these new models and accelerate the pace at which poor households gain access to a range of valued financial and nonfinancial services.