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MFIs and energy lending: 3 tips on common motivations, initial concerns, and lessons learned

A growing number of microfinance institutions (MFIs) have been successful in reaching new customers through service and portfolio diversification, making clean energy lending more and more common. What motivates MFIs to engage in energy lending in the first place? What common concerns prevent or postpone energy portfolios from going forward, and what decisions are crucial to early success? Interview surveys of four established microfinance institutions currently engaged in energy lending yielded the following insights:

1. Triggering influences and long-term goals
An initial commitment to energy lending is influenced by factors that are specific to the MFI and the context within which it operates. However, a few common drivers can be identified. Each of the survey respondents indicated that early interest arose principally from interactions with customers: either existing clients requested loans for energy products, or market research and staff observations brought the scope of the opportunity and potential impact into clear focus. Motivation is, however, also fostered at higher organizational levels as a response to global trends, often reflecting a new embrace of "triple bottom line" values by the MFI and also, importantly, governments and major sponsors. Indeed, as new funding sources for the support of clean energy emerge, MFIs will continue to reevaluate energy as a potential opportunity. Interest in energy lending can be predicated on different long-term objectives, resulting in distinct business approaches. For instance, some survey respondents seek to grow permanent energy sales forces within their organizations, and maintain focus on end-user lending. For others, involvement in marketing and sales early on is viewed mainly as a temporary strategic means of building markets and cultivating future business loan clients throughout an emerging local energy value chain.

2. Common barriers to energy lending
According to survey participants, the perception of risk can leave many MFIs struggling to convert initial interest in energy into new lending programs. Uncertainty concerning energy product quality and manufacturer legitimacy was cited as the leading factor postponing earlier portfolio development. MFI success depends on client trust, and therefore doubt surrounding long-term technical performance is often sufficient to preempt the take-off of energy programs. MFIs also recognize, correctly, that managing an energy loan portfolio is different, in several critical respects, from established small business loan practices. Energy program development requires technical know how and service capabilities that are beyond the core competencies of most MFIs. These uncertainties and gaps in experience can be overcome, but only with investments of both time and money—commitments that many institutions are not prepared to make. Importantly, all four survey respondents indicated that external support in the form of product subsidies, grants or loans to fund technical advisors, capacity building, or startup inventory was critical to the further growth of their energy lending programs.

3. Keys to early success
MFIs identified common factors related to customer, staff, and manufacturer relationships that contributed to the early success of their energy lending programs. First, each stressed the importance of determining the specific energy needs and preferences of customers through market research, and using research findings as a basis for selecting energy technologies and designing loan products. Additionally, product demonstration should be the centerpiece of an MFI's marketing strategy, since customers require exposure to products in order to gain confidence in their benefits. Additionally, sales messaging should prioritize cost savings and product capabilities over environmental impacts. Cultivating a sales force that is knowledgeable and enthusiastic about the product is critical, which means that investments in staff training and education are essential. Respondents also reported that new incentive structures for loan officers are necessary to overcome any resistance to promoting energy products based on perceived technical risks, added work load, and comparatively low returns vis-à-vis other forms of lending. Finally, MFIs cautioned that an absence of permanent systems to ensure long-term product maintenance and replacement parts constitutes a major threat to program viability. Therefore, cultivating active partnerships with quality manufacturers who can provide technical and logistical assistance both prior to and after product sales was considered indispensable. Furthermore, MFIs demand assurance that manufacturers will honor warrantees and prove dependable in supplying products to meet growing cus-tomer demand as their energy lending programs increase in scale over the long-term.

1 Faulu Advisory Services (Nairobi, Kenya); Negros Women for Tomorrow Foundation (Bacolod City, Philippines); Tujijenge Africa (Dar es Salaam, Tanzania); XacBank (Ulaanbaatar, Mongolia)

Christopher Neidl is an independent consultant specializing in energy microfinance.

Source: sun-connect 4 | November 2010 (p. 13)