Microfinance

Overview

Small-Scale Renewable Energy Technology Projects

This category of financial instruments relates specifically to small-scale RET projects, in par- ticular household and community-level systems for off-grid electrification. Such projects are generally developed by small suppliers and serve low-income communities with limited ability to pay up front. Consequently, they face even greater problems than other RET projects in raising the necessary capital to make initial investments.

The instruments below are more specific to small-scale RET projects, but other instru- ments can obviously be used to support these as well. In particular, the use of RBF can be effectively combined with appropriate busi- ness models to create appropriate incentives for developers. One example of this is the linkage of payment of subsidies for SHS installations to the continued operation of those installations, under an OBA model. This creates incentives for suppliers to provide continued maintenance for these installations to be able to collect the full subsidy.

Microfinance

One mechanism that has been pursued is that of channeling funds through microfinancing institutions (MFIs) to provide loans to house- holds, either directly or via the equipment supplier, who can then use this to pay for at least part of the capital costs of RET systems. The need to collect repayments also provides an incentive for the supplier to maintain and ensure the continuing operation of the systems postinstallation. MFIs are characterized by
their focus on lending to households and small businesses—generally for productive invest- ments (such as cottage industries) or to support agricultural activities (such as the purchase

of fertilizers ahead of harvests). Most MFIs have a relatively narrow focus in geographi- cal, product, and sector terms (the well-known Grameen Bank in Bangladesh is somewhat

of an exception). Loans are typically made at relatively high interest rates and for short peri- ods, to be repaid from the additional revenues generated by the investment or from the future sale of crops. Longer-term lending for appli- ances where repayment depends on household incomes, as is the case for the purchase of SHSs, is therefore a change in business model for many MFIs. In Bangladesh RBF has been used in combination with microfinance activity to refinance MFIs after they have been verified to have carried out appropriate installations, thus freeing MFI funds for further lending.

Public financing of such MFI initiatives can be provided through a variety of instruments. These can include the provision of credit lines

to increase available funding and lower the costs of customer loans, the provision of grants or subsidies for a similar purpose (often on
a RBF approach), or the provision of guaran- tees to cover MFIs against part of the losses they might sustain from loan defaults—either directly or through the failure of
supplied equipment.

MICROFINANCE
Uses	Pros	Cons
Provides customers with credit to pur- chase RET hardware (typically SHS).	A means of allowing RET developers to receive payment on installation of systems, reducing need for up-front financing.	MFIs may not exist or may be unwilling to lend for purchases of RET hardware, as loan terms are longer than typical MFI loans and repayment is dependent on household incomes rather than revenue generation. Transactions costs are high, although MFIs are able to reduce these compared to alternative financing arrangements. Microfinancing still requires RET devel- opers to find significant working capital to fund initial purchases of RET systems ahead of first sales.
Source:Adapted from The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds

Further Information

• Microfinance Institutions - Financing Renewable Energy
  
• Use of Microfinance Institutions (MFI) for Renewable Energy Technolgies
  
• Energizing Microfinance Workshop Documentation
  

References