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Off-grid energy Companies and Financial Institutions - Need for Collaboration
Introduction
Off-grid energy companies (OCEs) in this article refers to those companies in Africa that sell solar energy systems based on PAYG model. They are the fastest growing companies with an average of 500 customers per day.
Challenges for OECs and Role of Financial Institutions
Large Portfolio of loans
Most of the OECs started out as energy system retailers but with PAYG model 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, the sector will have to raise around USD 150 million in consumer loans.
will have to be raised in consumer loans and as the sector expands the amount in consumer loan will also increase.
Foreign exchange Risk
Most of the consumer loan are in the local currency while the capital to finance OECs is raised in hard currency such as USD or Euro:> greater risk in the system
Lack of expertise to handle consumer loan portfolios
Potential of merging between oecs and financial institutions.
Oecs have ideal small loan delivery channel with highly automated, cashless accounting and significant leverage over the borrower. In a nutshell, they have the infrastructure in place to effectively manage small loans offered to a relatively remote and unknown customers.these factors also contribute to their high repayment rates as opposed to what the borrower's profile might suggest.
On the other hand they lack large scale funding at a reasonable cost and the abilities to manage a portfolio of loans.
They 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
Financial institution in sub-saharan africa are classified by large loan size, high margin profile and low volume business which is the opposite of financial service to the base of the pyramid (BoP)
