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| − | | + | = Title - Off-grid energy Companies and Financial Institutions - Need for Collaboration = |
| − | = Off-grid energy Companies and Financial Institutions - Need for Collaboration = | + | |
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| | = Off-grid Energy Companies (OECs) = | | = Off-grid Energy Companies (OECs) = |
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| − | Off-grid energy companies (OCEs) in this article refers to those companies in Africa that sell solar energy systems based on [[Fee-For-Service or Pay-As-You-Go Concepts for Photovoltaic Systems|PAYG model]] (i.e the total cost for the energy system is broken down into weekly and montly payments. The customers usually make a small downpayment in the beginning and then make small weekly and monthly payment for using the system and finally own the system. In case of failure to pay, the OECs remotely switch off the energy systems or in cases reposses them). <br/> | + | Off-grid energy companies (OCEs) in this article refers to those companies in Africa that sell solar energy systems based on [[Fee-For-Service or Pay-As-You-Go Concepts for Photovoltaic Systems|PAYG model]] (i.e the total cost for the energy system is broken down into weekly and monthly payments. The customers usually make a small down payment in the beginning and then make small weekly and monthly payment for using the system and finally own the system. In case of failure to pay, the OECs remotely switch off the energy systems or in cases repossess them). <br/> |
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| | These are the fastest growing companies with an average of 500 customers per day. | | These are the fastest growing companies with an average of 500 customers per day. |
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| | == OECS - Shift from Energy Providers to Consumer Finance == | | == OECS - Shift from Energy Providers to Consumer Finance == |
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| − | To increase their revenue and to keep ahead of competitiors, there is a natural tendeny for OECs to also provide secondary loans along with the PAYG model for the energy systems, to existing customers, for activities such as buying a motobike or other appliances. For the secondary loans also, the energy system will act as a control point for loan repayment. In case of failure to pay on time, the energy system is switched off and the secondary assests might also be repossessed. | + | To increase their revenue and to keep ahead of competitors, there is a natural tendency for OECs to also provide secondary loans along with the PAYG model for the energy systems, to existing customers, for activities such as buying a motorbike or other appliances. For the secondary loans also, the energy system will act as a control point for loan repayment. In case of failure to pay on time, the energy system is switched off and the secondary assets might also be repossessed. |
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| | Along with added revenue, the other benefits of providing consumer finance are: | | Along with added revenue, the other benefits of providing consumer finance are: |
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| | *For many customers in rural areas, buying energy services from OECs might be the '''first time they had access to financial services. Therefore the PAYG model sets the background for more financial activities.''' | | *For many customers in rural areas, buying energy services from OECs might be the '''first time they had access to financial services. Therefore the PAYG model sets the background for more financial activities.''' |
| − | *OECs '''promote mobile transactions''' for loan repayment reducing tthe transaction cost. | + | *OECs '''promote mobile transactions''' for loan repayment reducing the transaction cost. |
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| − | However, OCEs companies are not financial institutions and in many countries they are not allowed to offer secondary loans (except for energy systems). Therefore, there is a need as well as opportunity for successfull collaboration between OECs and Financial institutions to further one another's interest. | + | However, OCEs companies are not financial institutions and in many countries they are not allowed to offer secondary loans (except for energy systems). Therefore, there is a need as well as opportunity for successful collaboration between OECs and Financial institutions to further one another's interest. |
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| | = Financial Institutions = | | = Financial Institutions = |
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| − | Financial institutions in sub-saharan africa are classified by '''large loan size, high margin and low business volume''' which is the opposite of financial services to the base of the pyramid (BoP). BoP are '''assest-led, low balance, high-volume''' business.Therefiore, financial institutuions have not been able to establish a commercially viable channel to reach out to the bulk of the african markets mainly due to: | + | Financial institutions in sub-saharan africa are classified by '''large loan size, high margin and low business volume''' which is the opposite of financial services to the base of the pyramid (BoP). BoP are '''assets-led, low balance, high-volume''' business.Therefore, financial institutions have not been able to establish a commercially viable channel to reach out to the bulk of the african markets mainly due to: |
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| − | *Entry-level accounts for low-income clients are likely to have low balances, make few transactions and use of fixed physical infrastructure such as bank branches and automated teller machines (ATMS) which in end might result in loss rather than profit, <span style="font-size: 13.6px; line-height: 20.4px;">for the bank.</span> | + | *Entry-level accounts for low-income clients are likely to have low balances, make few transactions and use of fixed physical infrastructure such as bank branches and automated teller machines (ATMS) which in end might result in loss rather than profit, for the bank. |
| | *Due to issues like high-collateral requirement, time-consuming applications and inefficient cash management and inefficient cash management, financial institutions mostly focus on the salaried, relatively better-off segments of their markets. <br/> | | *Due to issues like high-collateral requirement, time-consuming applications and inefficient cash management and inefficient cash management, financial institutions mostly focus on the salaried, relatively better-off segments of their markets. <br/> |
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| − | | style="background-color: rgb(79, 129, 189);" | <span style="color: rgb(255,255,255)">'''Off-grid Energy Companies'''</span> | + | | style="background-color: rgb(79, 129, 189);" | '''Off-grid Energy Companies''' |
| − | | style="text-align: center; background-color: rgb(79, 129, 189);" | <span style="color: rgb(255,255,255)">'''Financial Institution'''</span> | + | | style="text-align: center; background-color: rgb(79, 129, 189);" | '''Financial Institution''' |
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| | | rowspan="6" style="background-color: rgb(219,229,241)" | '''Assets''' | | | rowspan="6" style="background-color: rgb(219,229,241)" | '''Assets''' |
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| | == Large Portfolio of loans == | | == Large Portfolio of loans == |
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| − | Most of the OECs started out as energy system retailers but with progress, have amassed a large portfolio of loans. Managing these large portfolio of loans is outside their core competence and requires skilled financial capabilities. The loan also has to be refinanced.<span style="font-size: 13.6px; line-height: 20.4px;">For example, if an installed system cost on average USD 150, then to reach 1 million consumers, OECs will have to raise around USD 150 million in consumer loans. As the sector expands the consumer loan will also increase.</span><br/> | + | Most of the OECs started out as energy system retailers but with progress, have amassed a large portfolio of loans. Managing these large portfolio of loans is outside their core competence and requires skilled financial capabilities. The loan also has to be refinanced. For example, if an installed system cost on average USD 150, then to reach 1 million consumers, OECs will have to raise around USD 150 million in consumer loans. As the sector expands the consumer loan will also increase.<br/> |
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| | Because of the possibility to remotely switch off the energy devices in cases of no payments, OECs loan have higher repayment rate than their borrower's profile will suggest. Therefore, OECs have the infrastructure to manage small loans offered to a relatively unknown customers. | | Because of the possibility to remotely switch off the energy devices in cases of no payments, OECs loan have higher repayment rate than their borrower's profile will suggest. Therefore, OECs have the infrastructure to manage small loans offered to a relatively unknown customers. |
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| − | On the other hand, financial institutions have the competence and infrastructure to mange consumer credit risk and to provide loans. <span style="font-size: 13.6px; line-height: 20.4px; background-color: rgb(255, 255, 255);">The OECs offer to increase the Bank's customer base but it will depend on the bank's ability to profitable serve those customers or not.</span> | + | On the other hand, financial institutions have the competence and infrastructure to mange consumer credit risk and to provide loans. The OECs offer to increase the Bank's customer base but it will depend on the bank's ability to profitable serve those customers or not. |
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| | == Access to Low cost Capital == | | == Access to Low cost Capital == |
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| − | Financial Instituions <span style="font-size: 13.6px; line-height: 20.4px;">can also fund a portfolio at a lower cost than that of OECs using long term deposits as compared to commercial debt. </span><br/> | + | Financial Institutions can also fund a portfolio at a lower cost than that of OECs using long term deposits as compared to commercial debt.<br/> |
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| − | <span style="font-size: 13.6px; line-height: 20.4px;">A study among MFI account in sub-saharan africa showed that the MFI accounts are mostly used for saving rather than borrowing. In 2015, the aggegate amount of MFI desposits in subs-Saharn africa was USD 5 billion. Should this amount be available to OECs, then this amount would be enough to finance consumer loans for </span>'''33 million TIER 2 solar home systems with a value of USD 150 each'''<span style="font-size: 13.6px; line-height: 20.4px;">.</span>
| + | A study among MFI account in sub-saharan africa showed that the MFI accounts are mostly used for saving rather than borrowing. In 2015, the aggregate amount of MFI deposits in sub-saharan africa was USD 5 billion. Should this amount be available to OECs, then this amount would be enough to finance consumer loans for'''33 million TIER 2 solar home systems with a value of USD 150 each'''. |
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| | For financial institutions, the energy portfolio has a good rate of return. | | For financial institutions, the energy portfolio has a good rate of return. |
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| | = Foreign Exchange Risk = | | = Foreign Exchange Risk = |
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| − | Most of the capital for OECs is raised in <span style="font-size: 13.6px; line-height: 20.4px;">hard currency such as USD or Euro from international equity investors </span><span style="font-size: 13.6px; line-height: 20.4px;">while the consumer loans are given out in the local currency. This exposes OECs to risks associated with currency exchange and in cases, the local currency is devalued, it will impose additionnal cost on the OECs which is unrelated to its business and operations.</span><br/> | + | Most of the capital for OECs is raised in hard currency such as USD or Euro from international equity investors while the consumer loans are given out in the local currency. This exposes OECs to risks associated with currency exchange and in cases, the local currency is devalued, it will impose additional cost on the OECs which is unrelated to its business and operations.<br/> |
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| − | <span style="font-size: 13.6px; line-height: 20.4px;"></span><span style="font-size: 13.6px; line-height: 20.4px;">A collaboration between OECs and the financial isntituties will allow it to tap into the consumer deposits which is in local currency. This will </span><span style="font-size: 13.6px; line-height: 20.4px;">migitage the risks associalted with currency exchange as both the consumer loans and the capital will be in local currency.</span>
| + | A collaboration between OECs and the financial institutions will allow it to tap into the consumer deposits which is in local currency. This will mitigate the risks associated with currency exchange as both the consumer loans and the capital will be in local currency. |
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| | <u>OECs obtain a Banking License: </u>OECs could apply for a banking license and build the banking business from the base. | | <u>OECs obtain a Banking License: </u>OECs could apply for a banking license and build the banking business from the base. |
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| − | Pro: Eventually, this will give OECs access to teh stable and cheap source of funding (via their customers' saving deposits) and to capture the entire value chain and resulting higher profits. | + | Pro: Eventually, this will give OECs access to the stable and cheap source of funding (via their customers' saving deposits) and to capture the entire value chain and resulting higher profits. |
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| − | Cons: Having a financiary arm would mean more management time and resources in developing this arm adn could result in less focus on the retail arm selling energy systems. Also to become a deposit-taking instituitons would take longer to operationalize | + | Cons: Having a financial arm would mean more management time and resources in developing this arm and could result in less focus on the retail arm selling energy systems. Also to become a deposit-taking institutions would take longer to operationalize |
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| | <br/> | | <br/> |
Off-grid energy companies (OCEs) in this article refers to those companies in Africa that sell solar energy systems based on PAYG model (i.e the total cost for the energy system is broken down into weekly and monthly payments. The customers usually make a small down payment in the beginning and then make small weekly and monthly payment for using the system and finally own the system. In case of failure to pay, the OECs remotely switch off the energy systems or in cases repossess them).
These are the fastest growing companies with an average of 500 customers per day.
To increase their revenue and to keep ahead of competitors, there is a natural tendency for OECs to also provide secondary loans along with the PAYG model for the energy systems, to existing customers, for activities such as buying a motorbike or other appliances. For the secondary loans also, the energy system will act as a control point for loan repayment. In case of failure to pay on time, the energy system is switched off and the secondary assets might also be repossessed.
However, OCEs companies are not financial institutions and in many countries they are not allowed to offer secondary loans (except for energy systems). Therefore, there is a need as well as opportunity for successful collaboration between OECs and Financial institutions to further one another's interest.
Therefore, the OECs present a unique opportunity for financial institutions to reach the low-income population in a viable and cost-effective manner.
The table below shows the simplified analysis of the resources of off-grid energy companies and financial institutions:
Most of the OECs started out as energy system retailers but with progress, have amassed a large portfolio of loans. Managing these large portfolio of loans is outside their core competence and requires skilled financial capabilities. The loan also has to be refinanced. For example, if an installed system cost on average USD 150, then to reach 1 million consumers, OECs will have to raise around USD 150 million in consumer loans. As the sector expands the consumer loan will also increase.
Because of the possibility to remotely switch off the energy devices in cases of no payments, OECs loan have higher repayment rate than their borrower's profile will suggest. Therefore, OECs have the infrastructure to manage small loans offered to a relatively unknown customers.
On the other hand, financial institutions have the competence and infrastructure to mange consumer credit risk and to provide loans. The OECs offer to increase the Bank's customer base but it will depend on the bank's ability to profitable serve those customers or not.
Financial Institutions can also fund a portfolio at a lower cost than that of OECs using long term deposits as compared to commercial debt.
A study among MFI account in sub-saharan africa showed that the MFI accounts are mostly used for saving rather than borrowing. In 2015, the aggregate amount of MFI deposits in sub-saharan africa was USD 5 billion. Should this amount be available to OECs, then this amount would be enough to finance consumer loans for33 million TIER 2 solar home systems with a value of USD 150 each.
Most of the capital for OECs is raised in hard currency such as USD or Euro from international equity investors while the consumer loans are given out in the local currency. This exposes OECs to risks associated with currency exchange and in cases, the local currency is devalued, it will impose additional cost on the OECs which is unrelated to its business and operations.
A collaboration between OECs and the financial institutions will allow it to tap into the consumer deposits which is in local currency. This will mitigate the risks associated with currency exchange as both the consumer loans and the capital will be in local currency.
Pro: Eventually, this will give OECs access to the stable and cheap source of funding (via their customers' saving deposits) and to capture the entire value chain and resulting higher profits.
Cons: Having a financial arm would mean more management time and resources in developing this arm and could result in less focus on the retail arm selling energy systems. Also to become a deposit-taking institutions would take longer to operationalize
