Off-grid energy Companies and Financial Institutions - Need for Collaboration
Off-grid Energy Companies (OECs)
Off-grid energy companies (OCEs) in this article refers to those companies in Africa that sell solar energy systems based on PAYG model. These are the fastest growing companies with an average of 500 customers per day.
Natural Progression from Energy Provider to Consumer Finance
To increase their revenue and to keep ahead of competitiors, there is a natural tendeny for OECs to also provide secondary loans to existing customers, for activities such as buying a motobike or other appliances. For the secondary loans, the energy system will be switched off in case of failure to pay on time and the secondary assessts might also be repossesed.
Along with added revenue, the other benefits of providing consumer finanance are:
- For many customers in rural areas, buying energy services from OECs might be the first time they had access to financial services
- PAYG also promote mobile transactions reducing tthe transaction cost.
However, OCEs companies are not financial institutions and in many countries they are not allowed to offer secondary loans. Therefore, there is a need as well as opportunity for successfull collaboration between OECs and Financial institutions.
Financial Institutions
Financial institution 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-volumen business.They have not able to establish a commercially viable channel to reach out to the bulk of the african markets mainly due to:
- 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 for the bank rather than profit.
- 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. Therefore, the OECs present an opportunity for financial institutions to reach the low-income population in a viable manner.
Resources of Off-grid Energy Companies and Financial Institutions
The table below shows the simplified analysis of the resources of off-grid energy companies and financial institutions.
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Off-grid Energy Companies
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Financial Institution
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| Assets
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Agent network
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Branch network
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IT system for account management
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customer relationship
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| Cloud-based customer relation management (CRM) systems
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banking expertise
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| Leverage over customers
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credit assessment
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|
banking license
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| Financial products
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Loans
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|
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Saving accounts
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|
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Money transfer services
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| key strengths
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Ability to reach lower-income populations at scale, profitably with financial services
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Banking license and know -how
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| key weakness
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banking license and know-how
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Ability to reach lower-income populations at scale, profitably, with financial services
|
Reasons for working together
Large Portfolio of loans
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, the sector 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. They 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.
Access to Low cost Capital
Financial Instituions can also fund a portfolio at a lower cost than that of OEC 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 aggegate amount of MFI desposits in subs-aharn africa was USD 5 billion. Imagining this amount was 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.
For financial institutions, the energy portfolio has good rate of return.
Foreign exchange Risk
Most of the captal 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 will expose OECs to currency exchange and should the local currency be devalued, it will imposed additionnal cost to the OECs which is unrelated to its business and operations.
A collaboration between OECs and the financial isntituties will allow it to tap into the consumer deposits which is in local currency will result in both the consumer laons and the capital in local currney and will help to migitage currency exposure.
How to work together?
Through a close partnerships: OECs and financial institutions can forge a close partnership where both the parties focus on their close competencies ie. the OECs focuses on retail sale of energy services and the financial institutions take care of consumer finance.
Considering both the parties are ready to form a partnership, the following points will have to consider:
- Who underwrites the loan and which regulations are followed?
- Identifying your consumers and the rules for account opening
- Integrating OECs and financial systems' payment technologies
- How to manage customer relation? What brand do they see, how to communicate with them?
Reference
This article is based on the following publications
