How to Scale Up Green Microfinance? A Comparative Study of Energy Lending in Peru
Presenter: Natalia Realpe Carrillo, (MicroEnergy International,Germany)
Rapporteurs: Sherry Wu and Austin Cappon
| Among the green microfinance initiatives, energy lending still appears to lack long-term sustainability, and therefore remain difficult to up-scale. In the rollout of these programs, implementing a two-hand model approach – where microfinance institutions (MFIs) partner with energy suppliers – becomes a challenge for both parties. Obstacles entail the access to technical assistance, and the development of efficient supply chains and profitable business models. In this paper, a comparison of the energy diversification process – from a pilot phase towards a large commercialization – of the Peruvian MFIs Fondesurco and CMAC Huancayo is presented, highlighting their experiences, challenges and discusses opportunities to build from their lessons learned in order to innovate green microfinance..
► Please see the presentation.
- Green microcredits can be provided for climate change and mitigation efforts as well as energy loans. Ms. Realpe described 3 different models of energy loans:
- Leasing schemes: A microfinance institution partners with an energy supplier who provides products to clients. At a certain point, ownership of products is transferred to clients.
- One-hand model: The microfinance institution provides loans and technology.
- Two-hand model: The microfinance institution only provides financing; the clean energy supplier only provides technology. This model requires alignment of interest from both sides, capital, and favorable external conditions.
- Ms. Realpe compared two-hand model experiences via Peruvian microfinance institutions: Fondescuro, which has only 18 branches, and Caja Huancayo, which covers 1/3 of the country and has more than 52 branches. Caja Huancayo also covers clients with a range of incomes; microfinance is only a part of their lending portfolio. Both have received financial and technical assistance; both are supported by ADA. The project undertook the following:
- Provided assistance to scale: Microfinance institutions were not pushed to select any specific energy technology; an energy needs assessment was performed and technologies and suppliers were selected accordingly. The goal was to tackle obstacles to internal capacities to develop profitable business models and efficient supply chains.
- Developed green loans: The development of green loans for water heaters and ovens was performed in coordination with Fondescuro (Fonde Energía). Green loans for solar heaters and solar coffee dryers was performed in coordination with Caja Huancayo.
- Set up: The pilot project was evaluated according to its scalability; the goal was to start expansion without knowing whether commercial suppliers would actually be able to expand. The project worked solely with microfinance institutions; technology suppliers were strictly suppliers, not partners. There was also an Energy Technical Adviser who was able to learn about microfinance through the course of the pilot
- Green Loan Disbursement: Microfinance institutions have different methodologies to support clients; with microenergy, it’s even harder to provide client support. Microfinance institutions need to have loan officers and clients need the appropriate incentives to use technology.
- Loan officer motivation – Caja Huancayo is a large institution, where there may be a high turnover rate among loan officers. It is difficult to maintain a high level of motivation, and also difficult to get them to commit to learning about a product.
- Cash purchases – Caja Huancayo’s clients include microfinance consumers as well as middle-income households; some clients wanted to buy products outright using cash, not credits. This did not align with the microfinance structure, which uses green energy credits, not upfront sales.
- Disbursement complexity: It was difficult to measure the capacity of the solar water heaters that should be provided. Should it depend on household size or other factors?
- Institutional commitment: The regulation process for loans was considered risky. Fondescuro had to learn about loans by doing them. This challenge was also similar to Caja Huancayo’s, where loan officers were trained, but there was a high risk of attrition, which led to wasted time and difficulty in building trust with suppliers.
- Supply chain design: It was not feasible for Fondesurco to make large commitments, as there were problems managing stock. Caja Huancayo faced similar challenges; they also faced an additional challenge in that market for renewable energies is nonexistent in their location in Peru. Caja Huancayo had to market products, train people to create demand, and bring suppliers in to fulfill demand. Caja Huancayo also faced challenges with the availability of reliable suppliers
- Client Response: There were costs to raising awareness among clients. Among the interested parties, several were interested only cash sales rather than green energy credits.
- Proposal to practitioners:
- Practitioners need to concentrate on providing external support for microfinance institutions and energy partners. Financial and technical assistance important. Access to finance important for energy suppliers. Ms. Realpe suggested implementing train-the-trainer approaches for better knowledge transfer
- Consolidate green programs within microfinance institutions’ internal structure and governance. That is, roles such as Energy Technical Advisers (ETAs) may be absorbed into microfinance structures. ADA currently finances half of an ETA position; afterward, it’s up to the microfinance institution to support. By calling it a program rather than a project, practitioners can better build stakeholder support.
- Capacity building and empowerment – practitioners should link microfinance institutions and energy suppliers with right business models, provide tools for market assessment, and encourage stakeholders to share knowledge.
- A large proportion of population in India does not have access to electricity. The goal of the Jawaharlal Nehru National Solar Mission is to have at least 20,000 MW produced through solar energy systems by 2022. At least 2,000 MW should be provided through off-grid applications, which are financed by banks.
- An initiative to finance off-grid applications was started by a rural bank in India; under this initiative, a subsidized credit scheme was formulated and subsidies to the bank were routed through National Bank for Agriculture and Rural Development (NABARD). This is in part because the National Bank has tagged solar lighting and heating as a priority. By the time of writing, 200,000 units have been financed.
- Innovating products:
- The goal of the study was to consider group-based financial products to address rural areas and see how to source funding. Within NABARD, there is the Rural Innovation Fund (RIF), which is also supported by the Swiss Agency for Development and Cooperation (SDC). Two types of group-based structures were considered
- Joint Liability Groups (JLGs) of 4-10 members where members had savings in the group. A lot of capacity-building and mobilization efforts were required.
- Self Help Groups (SHGs) were provided group loan guarantees.
- Findings for JLGs:
- JLGs were used at girls’ hostels in west Bengal, which did not have grid connections and depended on kerosene lamps. A local NGO wanted to use solar LEDs, but there was no suitable financial product available.
- NABARD provided 50% of the cost as loan and 30% as grant from RIF. The balance (20%) was shared by the local NGO and JLG. Monthly payments per student were linked to the number of units in each hostel and ranged from $0.50 to $1.00. Although a 5-year repayment option was given, most opted to repay the loans in 4 years.
- Another application was with solar microgrids. 13 microgrids, which covered 7-10 households each, provided each household with 3 LED lights and 1 charging station. Each microcluster was managed by a JLG. 50% was loan with a repayment period of 4 years, and 50% was grant from RIF. The local NGO covered the cost of forming and organizing JLGs.
- Findings for SHGs:
- Solar home lighting schemes were tried in Bihar, but did not take off in Bihar due to suppliers’ limited ability to access each area was limited. Originally, the initiative to provide solar lanterns with charging stations was taken up by ASSEFA (an NGO). This initiative was also supported by Lighting a Billion Lives, an initiative of the Energy and Resources Institute of India (TERI).
- A typical solar lighting system had 50 lanterns, 5 panels, and junction boxes. Lanterns provided (dim) light for 5-6 hours. Rent collected was used for operations and maintenance of stations and battery replacements. The program set up 40 stations, which covered 50 families each. 85% of the cost was provided as a loan, 10% given as grant under UPNRM (also part of NABARD). 1-2 women from each SHG took responsibility for implementation.
- The problem with this project was that expectations did not meet reality. Only 250 families were covered; community management was diffused, as 3 SHGs worked with each station. Villagers also expressed dissatisfaction with the quality lighting and preferred CFLs instead of LEDs.
- Afterward, the program pivoted; the 1750 remaining households were provided with individual panels and CFL bulbs. The loan amount was also revised downward, since there was no longer need for so much financing.
- 93% of units are still working condition.
- These efforts required the involvement of many stakeholders; unless we spend a lot of energy and effort building up the social capital, these schemes’ effectiveness is limited. The projects’ success was based on the ability to leverage different funds and bring in many different institutions and entities.
- Though people are ready for group financial products, they may not be ready for group physical products
- This study disproves the need to subsidize interest rates for poor. The loan portion for these projects was provided at market interest rates; no interest subsidies were involved at all. This demonstrates people’s willingness to pay market rates for loans.
Q & A
1. The bundling of users seems to be a strategy to reduce risk from transaction costs. Is this correct? Does bundling users provide credit with lower rates than commercial rates provided by other microfinance institutions (i.e. below 20%)?
- “In our first agreements with suppliers, we diminished transportation costs for suppliers after 5 orders. Bundling products did not work, especially since users would have had to wait for other users to sign up before they could get the system. In this project, we had no control over the rates charged to the clients.”
2. Big and small micro finance: How to motivate each?
- Fondeserco: For Negotiating with funders for favorable conditions of loans, particularly if able to convince with enviro concerns.
- Want to be leaders; marketing comes into play
- Caja (larger): More difficult as they received money from govt.
- In the case it was a “champion” who was willing to come forward and assume the role as the player who was willing to connect players
3. Bundling of users seems to be a strategy to reduce risk, is it?
- People are not interested in having to wait for other people to have to come on board to get something (like a solar heater)
- Consequently they end up paying high interest rates (3% monthly!)
- ↑ How to Scale Up Green Microfinance? A Comparative Study of Energy Lending in Peru. Natalia Realpe Carrillo