PayGo vs. MFIs: What Works Better for Energy Access Consumer Financing – And Does it Have to Be Either/Or?
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The United Nations Capital Development Fund (UNCDF)’s CleanStart programme supports low-income households and micro, small and medium enterprises to make a jump-start on using clean energy. We know that affordable access to clean energy requires investing in financial solutions for low-income end-users to be able to purchase quality products, and for energy enterprises to sustainably provide products and services to the last mile.
This informs our market development approach, and it’s why we invest in grants, concessional debt and technical assistance for early stage, innovative business ideas from both energy enterprises and financial institutions. Our hope is that these businesses can make a significant improvement in the accessibility, affordability and reliability of modern energy for underserved people in developing countries.
We’ve taken two main approaches to supporting companies and financial institutions in financing energy access: We’ve helped some partner with microfinance institutions to get loans to customers, allowing them to purchase energy products. And we’ve helped others adopt and optimize pay-as-you-go (PayGo) as an end-user financing option for clean energy solutions.
Which works better? Below, we explore the merits and challenges of each approach.
The MFI-Led Model
Our programme began with the idea that providing incentives to financial institutions would encourage them to structure energy lending products for end-users. Many financial institutions, especially microfinance institutions (MFIs), were reluctant to take on energy lending on their own. They needed technical support to understand clean energy technologies. They also needed to see a business case showing the profitability of energy lending as part of their portfolios.
The results were positive in some countries, such as Nepal, where we worked with four financial institutions (two commercial banks, one development bank and one MFI). These institutions tested models in which vendor finance was provided from the bank to energy service providers, along with other models where the banks partnered directly with MFIs, giving them technical support and wholesale credit to begin consumer energy lending. The results were remarkable. Over 120,000 households and small enterprises were able to access and pay off renewable energy technologies. They used clean energy for household use, to power small businesses, and to increase productivity on farms.
Prior to this programme, the global off-grid energy sector had somewhat lost faith in the MFI-led model of delivering energy access. This was especially the case when compared to the rising success of the PayGo model. That’s why the result in Nepal, showing that an MFI-led model can achieve scale, is significant.
However, the MFI model did not take off in all markets. CleanStart’s other flagship market, Uganda, has some of the lowest energy access rates in the world. It also has some of the highest rates of growth in the number of energy enterprises present in the country. Early on, CleanStart tested the MFI model there, but unlike in Nepal, the microfinance market is not as competitive, or supported by government.
Uganda did have two other advantages, though: a population quickly adopting mobile money, and an increasing number of energy companies providing credit to end-users.
The PayGo-Led Model
Seeing these developments, we adapted our approach. We now not only focus on providing funding to financial institutions, but also on investing in energy enterprises to test and scale their innovative models. Many of these models include end-user financing options, such as PayGo applied to various clean energy solutions
This was the right move for UNCDF CleanStart. Now, 80 percent of our portfolio in Uganda is comprised of energy enterprises. These businesses are directly providing products and, at times, end-user finance to low-income customers.
In our current portfolio, we are happy to see the PayGo financing option added to products beyond the commonly used solar home systems, such as for liquid petroleum gas cooking solutions, solar irrigation systems, solar refrigerators, improved cookstoves, and solar milling machines for productive use. Why? These enterprises acknowledge that providing products on credit means that they are able to open up a whole new, often lower-income customer base. These customers can afford products that can range from $130-$1,000, which include technologies that have high income generation potential.
For unbanked clients, PayGo products can offer the first entry-point to microfinance and financial inclusion. But PayGo can also be costly for enterprises to set up and operate. Many energy enterprises have no background in handling credit, and some do not have liquidity to provide in-house credit. Thus, these energy enterprises are looking for MFI partners who can help provide local currency capital and service loans – a model we saw implemented through our partner, FINCA-Brightlife.
Collaboration, Not Competition
So, who will reach new customers first, the MFIs or the PayGo energy enterprises?
We’ve learned over the last few years of investing that this is not a race. Both MFIs and energy enterprises can together drive down the prices of energy solutions by offering the most affordable credit options to end-users.
Notably, we are observing energy enterprises offering their own PayGo options, while also building up MFI partnerships that could improve or expand upon financing options to a wider base of clients, such as what is seen with our Uganda-based partner, Village Power. This has also been happening in Nepal, where CleanStart is funding JBS Urja to help it become a premier PayGo provider, while it is still receiving support from its sister company, the microfinance provider and former CleanStart partner Jeevan Bikas Samaj MFI.
Now more than ever, energy enterprises – even some that already offer PayGo – are asking us to help them broker partnerships with local MFIs to provide energy credit to existing MFI customers, or to new customers they bring in. This would allow the energy enterprise to focus on installations, servicing products and after-sales services, while the MFI takes care of credit management, repayments and providing customers with further financing opportunities once they have paid for the products in full.
If we see PayGo enterprises and MFIs partnering more, a number of value-adds will be possible, including:
- Further extension of energy services by piggy-backing on extensive MFI networks, where available.
- Increased energy product uptake by MFI clients, as a result of the technical knowledge and sales skills of PayGo and energy enterprises that build trust in new products.
- Reduced cashflow burden on energy enterprises, thereby allowing them to grow their outreach and raise further capital.
- Energy lending portfolio growth for MFIs, which can be an advantage in countries that have government-mandated energy lending-related targets.
- More diverse data points from both PayGo systems and MFI credit histories. This allows customer profiling, credit scoring and product pricing to improve and better meet low-income end-users’ needs.
As the clean energy sector strives to reach universal energy access targets by 2030, CleanStart believes that, soon, we will see many more hybrid PayGo and MFI partnership models. If you’re interested in this topic and plan to come to this week’s European Microfinance Week in Luxembourg, stop by UNCDF CleanStart’s session, “Microfinance, energy and PAYGO: financing clean energy one day at a time,” featuring BrightLife (FINCA Plus LLC), MicroEnergy International, Mobisol and Villager Power.
Teresa Le is a Partnerships – Energy Finance consultant at UNCDF.
Image courtesy of organization.