Financing Mechanisms for Cookstove Dissemination

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Introduction

In the world of business, ‘financing’ is a necessary link between products and services, as both the supply side and demand side need to the required capital to either invest in business infrastructure or buy goods. Financing is needed for monetary cash flows, support activities that enhance the quality and reduce the cost of products and services, increasing customer awareness, and building market share.
For the product supply, availability and the cost of financing determines whether it is feasible to start up a business, and the price demanded for the offered products and services. Strategies to address supply side financing include direct subsidies as start up grants, soft loans, and measures to reduce production costs. Production costs include material costs, and the design and efficient production process and technology.

On the demand side, the willingness and capacity to pay will strongly influence the effective demand for the product. Strategies to address demand side financing include direct subsidies as buy down grants, awareness-raising and product promotion campaigns, and micro-credits schemes.

 

‘I like your stove – but I cannot afford to buy it. It is too expensive for me!’

 

Access to financing is a key factor in enabling target groups to purchase modern cooking energy in development countries.
Many have come across this statement in the process of developing a programme for the promotion of improved cookstoves. Often there is a perfect stove that fits the needs of the target group perfectly, and yet they say they cannot afford it.

If you meet this statement, you have several options:

• a) Analyse the statement: Perhaps ‘I cannot afford to buy your stove’ is just the socially accepted way of saying ‘I do not like your stove’ (maybe because it is not perceived as a good stove or maybe the access to firewood is not a ‘burning issue’ to the person in the household who is controlling the cash).
• b) If the statement is really true, you might consider simplifying your stove design to compromise between performance and cost. Even the best stove – if used by only a few households – will not contribute to development as much as a stove with medium efficiency used by many thousands of households.
• c) Often this is the point at which the issue of financing comes on the agenda. Providing financial assistance to the producers or the users of the stoves may assist in removing barriers for access of the target groups to improved cook stoves.

There is a comprehensive debate on subsidies for stove producers, as well as stove users, usually focussing on aspects such as their impact on sustainability, or the feasibility of direct targeting.

Any development programme is designed to spend money for the promotion of a change process. By definition, this money is a subsidy to the development initiative, as the beneficiaries do not pay for the services rendered to them by the programme. The subject of lively debate is therefore not the subsidy of development processes as such, but the ‘IF’ and the ‘HOW’ of direct or indirect subsidies to the producers or users of Improved Cook Stoves.

Firstly, the topic of subsidies is outlined in a systematic manner, with a listing of commonly perceived opportunities and challenges in the use of direct subsidies for consumer goods and other end products.

If , as outlined above, a development programme is a sort of indirect subsidy to a specific change process, it is following not following the same rationale as a commercial banking decision. A loan from a development agency is commonly perceived as a grant rather than something to be repaid. The financing of a cookstove programme will benefit from collaboration with a micro-finance institution, because this will visibly and organisationally distinguish between aid and business.

Financial assistance for stove producers and commercial stove users (such as restaurants) adopts a similar manner to that used by micro-finance institutions. The beneficiary of the loan is earning money with stoves (production or use) and can use the profits to repay the loan.

Much more controversial is the use of loans for households, so that they can buy improved cookstoves. It is only in a fully commercialised fuel market that the fuel savings can be used to repay the loan. It is difficult to prove that ‘time saved’ through reduced wood collection, less washing and cleaning, and faster cooking, translates directly into more cash income. This makes it more difficult to prove the case with micro-finance institutions for supplying finance for improved cookstoves for household use.

Secondly, many aspects of using micro- finance especially micro-credit for improved cookstove promotion (in collaboration with micro-finance institutions) are discussed in more detail.

Purchasing improved stoves through microfinance

Introduction to microfinance

This section defines the key expressions used in microfinance, and the main concepts needed to understand how it works. Later, it describes the principal mechanisms for accessing micro-credit for improved energy access, and how to develop a project with a microfinance institution. The article ends by discussing the potential of microfinancing, and the limits to its use in disseminating improved cooking technologies.<o:p></o:p>

Microfinance definitions<o:p></o:p> Microfinance <o:p></o:p> This term describes the provision of sustainable high quality financial services to poor or low-income clients for productive purposes or for buying goods or services. It includes micro-credid, savings, insurance and fund transfers.<o:p></o:p> <o:p> </o:p> Microfinance Institution (MFI) <o:p></o:p> This can be an NGO or a regulated bank that offers microfinance services like micro-credit, insurance or savings. The main roles of the MFI are to:  assess whether the clients are credit worthy, disburse the loans, collect the installments, and follow up those who default on their repayments. A number of methodologies have been developed in the microfinance industry to support the MFIs so that they become economical sustainable entities.<o:p></o:p> <o:p> </o:p> Micro-credit <o:p></o:p> This is a microfinance instrument that facilitates very small loans to poor or low-income clients whom the banks do not consider viable as customers. In general these individuals lack collateral and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. For this reason, micro-credit is often disbursed via a group guarantee, as a group loan, where group members guarantee for each other. More wealthy clients that can offer a small collateral can also qualify for an individual loan.<o:p></o:p> <o:p> </o:p> The majority of MFI clients are women. In most cultural contexts, men do not accept the group lending principle, so they have to qualify for an individual loan. Experience has shown that they are less reliable in repaying the debt. <o:p></o:p> <o:p> </o:p>

The year 2005 was declared the United Nations Year of Microfinance. In 2006, Muhammed Yunus and the Grameen Bank got the Nobel Price of Peace in 2006. Since that time, microfinance has become a well known, successful tool to reach those living in poverty in regions with weak infrastructure and low incomes. <o:p> </o:p>

Can microfinance play a role in expanding access to improved cooking stoves (ICS)? <o:p></o:p>

 Microfinance splits high investment costs into affordable monthly rates, offered through Microfinance Institutions (MFI). MFIs develop a whole network of close relationships with their customers.

<o:p> ·         Credit clients have to be assessed<o:p></o:p>

·          Credits have to be disbursed<o:p></o:p>

·         Installments have to be collected <o:p></o:p>

·         Failures have to be followed up and, in this case, guarantees have to be recovered

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Note: ‘Microcredit’ needs an institution in the background. It is not a tool by itself.<o:p></o:p>

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