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How to put together a successful solar loan portfolio – 5 tips for MFIs

Dozens of MFIs around the world have introduced special loans for solar energy products and services. However, many solar lending portfolios struggle to grow beyond the pilot phase and some even fail within a short time. The following is a list of five key success factors when setting up and growing a solar loan facility for microfinance clients:

1. Plan carefully

This may seem intuitive, but experience has shown that proper planning prior to piloting a solar loan product can be critical. MFIs should spend time studying their clients’ existing energy needs and current expenditures, and conducting an analysis of available solar products and local solar enterprises. As many MFIs do not have energy expertise in-house, it is often helpful to seek external technical assistance in understanding the energy market and opportunities.

2. Offer high-quality products and services at the client’s doorstep

Experience has shown that successful solar energy loan portfolios include a focus on high-quality solar products, packaged with after-sales-service and maintenance, and flexible financing options delivered to the clients’ doorstep. On the technology side, MFIs should ensure that solar products deliver the energy services marketed to clients, that they have been adequately tested with end-users, and meet user acceptance criteria. MFIs should also make sure that spare parts are available and a full line of after-sales service and maintenance support is offered by the energy partner(s). On the financing side, it is important to create innovative lending products. MFIs need to go beyond standard lending methodologies and design products that are flexible in terms of repayment schedules, collateral requirements, loan tenure, and eligibility criteria. MFIs also need to explore the possibility of offering parallel loans or packaging energy loans with other, larger loans (for housing or agriculture, for example).

3. Understand the productive uses of solar energy

Many MFIs view energy purely as a consumptive product that clients take advantage of in addition to enterprise loans. While this is sometimes true, there are many ways that solar energy services can improve productivity of a microenterprise and significantly reduce household and business expenses on energy, freeing up income to repay energy loans. Due to a lack of information, many MFIs are not aware of the many applications of solar energy that can have significant income-generating opportunities. Access to even limited amounts of lighting and electrical services for microenterprises in off-grid areas can play a critical role in the establishment and growth of these businesses. For example, solar applications can improve productivity of microenterprises by 1) extending operating hours, 2) improving working conditions, 3) increasing consumer draw, 4) delivering reliable power, 5) helping preserve products for export or retail, and 6) enabling access to communications.

4. Understand and mitigate risks[1]

Financing for energy systems and products calls for innovative risk mitigation strategies. In energy lending, the spectrum of risks involved is much broader since it includes not only credit risk, but also risks due to failure of technology, unanticipated change or access to a better technology, and absence of (or unreliable) service infrastructure. Technical risk mitigation requires different strategies. Signing a standard memorandum of understanding with the energy partner (e. g., energy company, NGO, donor) can clearly define the roles and responsibilities of different parties involved, outline the terms and conditions of equipment buy-back and recovery in case of loan default or technology breakdown, and stipulate product quality specifications. In some situations, collaborating with an insurance company to cover the technical risk provides the best coverage. However, if this is not possible, the MFI can set up its own internal insurance product where liability is restricted to the value of the insurance fund mobilized. Partnering with other energy companies in the region is useful to avoid overlap (among other benefits), and can help ensure the most efficient use of resources to expand the outreach of energy access.

5. Pilot the solar loan products prior to launch

This is another tip that seems intuitive. However, it is surprising how many MFIs do not conduct adequate pilot testing—and, more importantly, evaluation of the pilot tests—prior to rolling out solar energy loans. Piloting and testing of the energy-lending pilot is an essential step, which allows MFIs to experiment and learn from experiences with a small number of customers. This kind of experimentation can allow MFIs to test solar products in a somewhat controlled environment prior to investing in full-scale implementation. In most cases, MFIs will want to rigorously test the products and processes, learn lessons to inform modifications, and solicit feedback from stakeholders.

Jacob Winiecki is an independent consultant specializing in energy and microfinance.

[1] Adapted from “Using Microfinance to Expand Access to Modern Energy Services” by Morris et al; 2007; The SEEP Network, Citi Foundation, and United States Agency for International Development.

Source:  sun-connect 2 | March 2010 - (p. 8)