In the context of global development, asset finance is about much more than enabling consumers to purchase expensive goods: it’s about helping people to afford the tools they need to improve their lives. Whether it’s a new mobile phone that helps a small business owner to sell her products online and generate income, or a solar home system that lights a family’s home and keeps smoke from other energy sources out of their lungs, the right asset can make a big difference in people’s lives. Traditionally, asset finance has been out of reach for people with low in-comes in emerging markets. However, that is changing thanks to business models emerging in places from Mexico to India. In the resources below, learn about these innovations and what funders, policy makers, and providers can do to harness them for development impact.
What is asset finance and why does it matter for global development?
Asset ownership is important for people’s overall quality of life, ability to generate income, and resilience in the face of shocks. However, many useful assets, from refrigerators to vehicles, are too expensive for low-income households to purchase in cash. To promote asset ownership, some governments and development agencies have set up programs that give poor households important assets such as cows. But funding constraints mean that these asset transfer programs are difficult to scale so as to reach everyone that needs them. Asset finance products like loans and leases help households to spread the cost of asset acquisition over time, allowing them to obtain assets they would otherwise be unable to afford. If scaled responsibly with appropriate consumer protections, new asset finance models could become sustainable pathways to widespread asset ownership in emerging markets. Alongside asset transfer programs, they could potentially narrow the $2.5 trillion annual investment gap for the SDGs.
What innovations are making asset finance more accessible to the world’s poor?
From pay-as-you-go business models that leverage digital payments and remote lockout technology to offer flexi-ble financing, to new e-commerce solutions that use financing to reach rural customers, nascent business models are gaining traction in emerging markets. Today, these models are being used to finance everything from low-cost phones to expensive, income-generating assets like tractors. What they have in common is that they use a mix of technology and novel approaches to lending to extend asset finance to households that have traditionally been un-served because they cannot make large upfront payments, lack collateral, or do not have credit histories.
What challenges stand in the way of these innovations reaching scale?
A new wave of providers is demonstrating that asset finance can be accessible to low-income households, but their business models are still in their early stages. These companies are often poorly understood by donors and investors who are more familiar with traditional microfinance, and not much is known yet about their viability at scale. At the same time, asset finance companies sometimes struggle to attract investment and professionalize their cred-it operations. Donors and investors should carefully evaluate opportunities to support early-stage business models, with a focus on encouraging and building capacity for sustainable lending practices. There is also an opportunity for donors, investors, and policy makers to establish consumer protection frameworks for this new generation of providers.
Rapid growth in credit sectors, even if motivated by a desire for social impact, can lead to overindebted customers and insolvent lenders. For funders, it is important to recognize that investing in asset finance is investing in risk management.
This set of 36 key performance indicators (KPIs) is intended to help pay-as-you-go (PAYGo) solar companies benchmark their performance and funders to better assess investments in the sector. It was developed with input from over 600 industry stakeholders.
One of the biggest challenges asset finance companies face as they scale is managing credit risk. Unlike banks and microfinance institutions, many asset finance companies do not have deep experience in this area. This technical guide offers de-tailed guidance to companies and their investors.